Energy Technology Transfer to China

September 1985

NTIS order #PB86-113008

Recommended Citation:U.S. Congress, Office of Technology Assessment, Energy Technology Transfer to China—ATechnical Memorandum, OTA-TM-ISC-30 (Washington, DC: U.S. Government PrintingOffice, September 1985).

Library of Congress Catalog Card Number 85-600570

For sale by the Superintendent of DocumentsU.S. Government Printing Office, Washington, DC 20402

Foreword

This technical memorandum responds to requests by the Senate Committee on Bank-ing, Housing, and Urban Affairs and the House Committee on Energy and Commerceand its Special Subcommittee on U, S. Trade with China. It is the result of the first phaseof OTA’s assessment on Technology Transfer to China, which is scheduled to be com-pleted by the end of 1986. Both committees requested that an interim document on energytechnology be provided because of the immediacy of the agreement on nuclear cooper-ation and the importance of energy to China’s modernization plans.

This memorandum examines the opportunities for the transfer of various energytechnologies to China. It reviews the motivations for U.S. companies and other institu-tions for transferring technology and the vehicles for doing so. It also surveys China’sneeds for energy technologies and its ability to assimilate them.

Some implications of energy technology transfer are clearly important to U.S. in-terests. Certain technologies could enhance China’s ability to compete against the UnitedStates in the world market or contribute to an increased military capability which couldbe of concern if relations deteriorate, On the other hand, technology transfer could bea major element in improving relations between the two countries, as well as an impor-tant component of increased U.S. trade with China.

Nuclear technology is given special attention in this memorandum because of theimportance of exports to the U.S. nuclear industry, the potential impact on U.S. non-proliferation and strategic goals, and the interest of Congress in the nuclear coopera-tion agreement.

The memorandum also examines policies for controlling and promoting technol-ogy transfer to China. It analyzes changes that might improve the effectiveness of thesepolicies.

The memorandum is based on discussions at a workshop held on April 18-19, 1985,on five background papers commissioned for this workshop and on OTA staff research.The five papers and additional information are contained in a separate volume.

OTA appreciates the assistance provided by the workshop participants; reviewersof this document; and the many individuals, companies, and agencies contacted duringthe study.

JOHN H. GIBBONSDirector

.,.I l l

Related OTA Reports

Technology Transfer

● U.S.-Soviet Cooperation in Space.OTA-TM-ST1-27, July 1985. GPO stock #052-O03-O1004-6.

● Technology Transfer to the Middle East.OTA-ISC-173, September 1984. GPO stock #052-O03-O0962-5.

● Technology and East-West Trade: An Update.OTA-ISC-209, May 1983. GPO stock #052-003-00908-l.

● Technology and Soviet Energy Availability.OTA-ISC-153, November 1981. NTIS order #PB 82-133455.

● Technology and East-West Trade.OTA-ISC-101, November 1979. NTIS order #PB 80-119381,

Energy

● New Electric Power Technologies: Problems and Prospects for the 1990s.OTA-E-246, July 1985. GPO stock #052-003-01005-4.

● Nuclear Power in an Age of Uncertainty.OTA-E-216, February 1984. GPO stock #052-003-00941-2.

● Industrial and Commercial Cogeneration,OTA-E-192, February 1983. NTIS order #PB 83-180547.

● Industrial Energy Use.OTA-E-198, June 1983. GPO stock #052-003-00915-3.

● Nuclear Proliferation and Safeguards, Summary.OTA-E-148, March 1982.

● Direct Use of Coal: Prospects and Problems of Production and Combustion.OTA-E-86, April 1979. NTIS order #PB 295797,

NOTE: Reports are available through the U.S. Government Printing office, Superintendent of Documents, Washington, DC 20402,(202) 783-3238, and the National Technical Information Service, 5285 Port Royal Rd., Springfield, VA 22161, (703) 487-$650,

OTA Project Staff for Energy Technology Transfer to China

Lionel S. Johns, Assistant Director, OTAEnergy, Materials, and International Security Division

Peter Sharfman, International Security and Commerce Program Manager

Alan T. Crane, Project Director

Martha Caldwell Harris, Senior Analyst

Richard P. Suttmeier, Senior Analyst

Joanne Seder, Analyst

Craig Allen, Research Assistant

Administrative Staff

Jannie Coles Dorothy Richroath Jackie Robinson

Energy Technology Transfer to China Workshop

Kenneth AngellOverseas Private Investment Corp.

Baruch BoxerRutgers University

Hugh DonaghueControl Data Corp.

Warren DonnellyLibrary of Congress

Thomas FingarStanford University

Wendy FriemanSAIC

Ronnie Lee Goldberg*New York Chamber of Commerce and

Industry

Dixon HoyleWestinghouse Electric Corp.

Richard L. HughesFluor China Inc.

Eric LarsonPrinceton University

Kenneth LieberthalUniversity of Michigan

Jonathan D, Pollack*Rand Corp.

Thomas W. RobinsonGeorgetown University

Richard RowbergOffice of Technology Assessment

Allen S. Whiting, ChairmanUniversity of Arizona

Denis Fred Simon*Massachusetts Institu

Leonard SpectorCarnegie Endowment

Roger Sullivan

Cathy RuckleshausOverseas Private Investment Corp.

e of Technology

for International Peace

National Council for U.S.-China Trade

Richard Peter Suttmeier*Hamilton College

Amy WilsonNational Academy of Sciences

Kim Woodard*China Energy Ventures, Inc.

Reviewers

William J. CheronesHarnischfeger Corp,

Peter ClausenUnion of Concerned Scientists

David DennyNational Council for U.S.-China Trade

Eldon V.C. GreenbergGalloway & Greenberg

Paul L. LeventhalNuclear Control Institute

S.0. OgdenIsland Creek Coal Co.

Department of State

Department of Commerce

● Authors of background paper prepared for OTA

vi

Contents

Page

CHAPTER l: Introduction. ,, ,,, 3

CHAPTER 2: Technology Transfer and U. S.-China Relations ., ... 7

The Foreign Policy Context for TechnologyTransfer, ,. . . . . ., ..,,,....,,, 7

Long-Term Opportunities and Risks ., 8Opportunities ..., 8Risks. . . . . . . . . . . . . ....,,.10

Technology as a Tool of U.S.Foreign Policy . . . . . . . . . . . .......13

CHAPTER 3: Energy Technology Transfers ....17Resources. . . . . . . . . . . . . . .....17Trends in Energy Production and Use... .....19

Petroleum . . . . . ,. ...,19Natural Gas . . . . . . . . . . . . . . . . . . . . . ...,,..19Coal . . . . . . . . . . . . .......20Electricity . . . . . . . . . . . . . . . . . . . . . . . .......20Projections ..., . . . . . . . ..., ..21Energy Use . . . . . . . . . . . . . . . . . . . ., . .......21

Trends in Energy Technology Transfer .. ...,.22Petroleum Exploration and Production .....22Petroleum Refining and Petrochemicals, ,. ..23Coal Mining and Transportation . . . ..,,...24Electric Power . . . . . . . . . . . . .......24Conservation . . . . . . . . . . . . . . . . . . . . . . . ,...24Soar, . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .25

China’s Problems With Technology Transfer ..25Finance, . . . . . . . . . ..., . . . . . . ..25Manpower, ..., ..., . . . . . . ..., ..., ,26Internal Transfers . . . . . . . . . . . . .......26Decisionmaking . . . . ..., ..., . ......,27Conclusion . . . . . . . . . . . . . . . . . . . . . . . . .....28

CHAPTER 4: Nuclear Power and the ProposedCooperation Agreement . ................,31

Present Capabilities, . . ..., ..., ..., ..., ..33The Role of Imported Technology . . . . .......33Proliferation Concerns ., . . . . . . . . . . . . .......35Other Military Concerns . . . . . . . . . . . . .......38Nuclear Cooperation Agreement. ..,.. ., ...,.39

CHAPTER 5: U.S. Policy: Tools for Controllingand Promoting Energy TechnologyTransfers ., . . . . ..., . . . . . . ..., ..., ..,47

Page

Controls on Nonnuclear Energy Exports ......48The Rationale of U.S. Export Controls. .48Problems With the System ., ....50Possible Improvement in U.S. Export

Controls. . . . ,, 53Congressional Review of Nuclear Cooperation

Agreement, . . . . . . . . . . . . . . . . . . 54Promoting Energy Technology Transfers ,,...55

Limited Scope of U.S. PromotionalP r o g r a m s . . , , . . . , , , , . . , . , . . . . , , , . . . , , 5 5

Selection of Energy Development Projects ..58Possible Improvements in U.S. Promotional

Programs .,,.....,,. . . . . . . . ,,.59Balancing Control and Promotion ,,60

APPENDIX: Nuclear Cooperation Agreementand Supporting Documents . . . . . ...65

List of TablesTable No. Page

1.

2.3.4.5.6.

7.

8.9.

10.

11.

Petroleum Production by Region, ,..., 19Natural Gas Production by Region ,..., 19Coal Production . . . . . . . . . . ..., 20Electric Power Production. . . . . . . . . . . . . . . . 20Projected Primary Energy Production. . 22Estimated Values of U.S. TechnologyTransfer to China . . . . . . . . . . . . . . . . . . . . . 23Nuclear Test Chronology, October1964 to January 1981 . . . . . . . . . . . . 37Export Applications for the PRO . . . . . . . . . . 50Energy-Related Science and TechnologyAgreements With China, . . . . . . . . . . . 55U.S. Government-Supported EnergyDepartment Projects in China . . . . . . . . . . . . 57U.S. and Japanese Trade, Aid, andInvestment in China, 1983 . . . . . . . . . . . . . . . 57

List of FiguresFigure No.

1. China’s Energy2. Nuclear Policy

Organization

Page

Resources . . . . . . . . . . . . 18Decisionmaking. . . . . . . . . . . . . . . 34

vii

Chapter 1

Chapter 1

Introduction

Since the normalization of relations between theUnited States and China in 1979, exports of U.S.energy-related equipment, services, and technol-ogy have increased dramatically. U.S. policies re-flect the expectation that deepening ties can serveU.S. security interests in the region, while at thesame time providing market opportunities forU.S. firms and opening doors to mutually enrich-ing cultural and educational exchange.

Some observers, however, worry that thefloodgates have been opened too quickly, permit-ting transfers that the United States or China maycome to regret. As Confucius once said: “TO gobeyond is as wrong as to fall short .“ Others, how-ever, see delays in U.S. export administration andother policy-related problems as obstacles to U.S.firms competing in the China market and as evi-dence that we lack a clearly defined strategy forpromoting Chinese energy development. Thismemorandum addresses the central question ofwhether (and how) the flow of U.S. energy tech-nology to China can help to serve U.S. foreignpolicy and commercial interests.

The transfer of technologies that China needsto develop its energy resources requires muchmore than the sale of equipment. Technologytransfer is a process, involving at least two par-ties, whereby the Chinese firm or organization at-tains an improved capability to design or producegoods and services. 1 It involves people in a fairlyintimate and extended dialog. In this process anumber of commercial transactions occur, oftensimultaneously. These include payments forlicenses and patents, provision of sophisticatedequipment in which technology is embedded,training, and information exchanges betweentechnical professionals in the China and abroad.

If the Chinese are to effectively select and useenergy technologies developed abroad, their engi-

.1 see U S Congre+s, Olflce of Techn(]log>r Assessment, Technoi-

OgIr Tr~ndcr to the ,\lIJdle LIsf ( \l’~shington, DC: U, S Chvern -m;nt I)r\nt]ng Otflce, September 1 Q84 ), OTA- ISC- 173, Chapter 2Analyzlng Technolo~y Trad(’ .]nd Tr~nsfer. ” See also K]m W’mdard,Back~round I’aper 1, “TcchnoloH}” Tran\tcr and China s Ener8} In-du;trie~, ‘ prepared I or the Ott Ice (JI Technolog)r As\es\ment, Apr.18, 1~85, Ior a detailed outllne (){ the mechanlsm~ lot- technolo~}”tran~ter to C’hlna, I nc 1 udln~ train ln~ pr(>grams, ~()]n t managementdnd product] on,

neers and technicians will need specialized know-how to run these energy industries. They will alsoneed to adapt the technology to China’s environ-mental and industrial milieu. Much of the neededknowledge is not in cutting edge high technol-ogies. 2 Instead, it is often more mundane, suchas the knowledge needed to make appropriateselections among the more than 30 kinds of pipeconnections used in the petroleum industry.

China’s need for foreign energy technologies(including management skills) is illustrated by thefact that, in spite of abundant energy resources,the country is experiencing electricity shortagesso severe that at times 20 to 30 percent of its in-dustrial capacity remains idle. ’ As the discussionbelow documents in some detail, although thecountry has an extensive resource base, its futureeconomic development will be directly and stronglyaffected by its success in meeting energy produc-tion goals. Imports of foreign technology couldprovide the avenue to accomplish what wouldtake many more years if China had to go it alone.U.S. firms have been world leaders in develop-ing most of the technologies that China needs,though other countries can also supply them. ’

There is a clear complementarily between U..S.technological capabilities and China’s require-ments for developing its energy resources, butdifficulties have nonetheless arisen in attemptingto match these needs and capabilities. In the past,for example during the Cultural Revolution,China sought to limit its purchases to foreignhardware, underestimating the need for ongoinginvolvement with foreign suppliers. More re-cently, foreign firms were disappointed by the

2China is probably the largest buyer of used American miningequipment. See Thomas N, Thompson, “Selling Used Mining Equip-merit, ” The (“hina Bus~ness Revieh, May-]une 1985, pp lt3-17,

‘See, for example, David Dennyr “Electric Power and the Chi-nese Economy, ” China Business Review, July-August 1985. See also,Lu Qi, “Energy Conservation and Its Prospects, ” Beijin g Re\,iewr,.No, 46, November 1984, tor an estimate of 20 percent underutili-zation

4Secretar}~ of Commerce I’Vlalcolm Baldrvge has indicated that theChinese woLIld prefr L~ S. technologies over those of the Soviet Unionor lapan. See ‘ Chinese Technolog}r Nlart Touted, ” lournal of Cormrnerc e, Nlayr 31, 1 Q85, p 1.

3

4 —

scaling back of Chinese plans in the early 1980sand were also surprised by China’s hard bargain-ing tactics.

The expectations and interests of the U.S. andChinese enterprises directly involved in the trans-fers, as well the governments and other affectedparties, sometimes diverge. For the U.S. firm withtechnology to sell and for the Chinese firm thatneeds the technology, the commercial rationalefor technology transfers may be clear, at least inthe short run. But from a U.S. Government per-spective, questions of national security are raised,particularly when the transfers involve technol-ogies with potential military applications. The po-tential long-term effects—commercial as well asstrategic—must be carefully assessed in develop-ing U.S. export control as well as promotionalpolicies.

The pending agreement for cooperation in nu-clear energy between the United States and Chinaembodies many of these policy dilemmas. Therisks as well as the opportunities associated withpossible nuclear technology transfers have poten-tial implications not only for the United States andChina, but also for global trends in the prolifera-tion of nuclear weapons, Congress has an impor-tant role to play in reviewing the proposed ac-cord, and in helping to shape the policy contextfor conventional energy technology transfers toChina.

Two congressional committees requested thatOTA provide an interim report on energy tech-nology transfers to China. The Senate BankingCommittee, one of the requesters, plays a lead-ing role in export policymaking and Members of

the Committee are particularly interested in theproposed agreement for nuclear cooperation be-tween the United States and China. The HouseEnergy and Commerce Committee and its Spe-cial Subcommittee on U.S. Trade with China haveasked OTA to examine how the U.S. Governmentmight facilitate energy technology transfers whileat the same time ensuring that national securityinterests are upheld.

Because of the keen interest in the area of energytechnology transfers to China on the part of therequesting committees, OTA turned to these is-sues in the first stage of a major research projecton “Technology Transfer to China” that will dealwith a number of technologies. This memoran-dum is not meant to be definitive. Instead it raisesa number of broader issues concerning U.S.-Chinarelations that will be analyzed in more depth inthe full report. The major OTA study was initi-ated in the spring of 1985 and is scheduled forcompletion in December 1986,

This memorandum is based on the research ofOTA staff and the proceedings of a 2-day work-shop held in April 1985 that included experts fromacademia, industry, and research institutes. Theparticipants are listed in the front of this memo-randum. The report is designed to present the pol-icy issues that Congress will confront as it looksat the long-term risks and opportunities associ-ated with transferring energy technologies toChina. Five working papers that were commis-sioned for the workshop and other documents thatprovide additional information on the subject areincluded in a separate volume, available upon re-quest to OTA.

Chapter 2

Technology Transfer andU.S.-China Relations

——

Chapter 2

Technology Transfer andU. S.= China Relations

The normalization of diplomatic relations be-tween the United States and China that occurredin 1979 set the stage for rapidly expanding tech-nology transfer and trade. The two countries havesigned 25 protocols for cooperation in science andtechnology. More than 12,000 students from thePeople’s Republic are now studying in the UnitedStates. The United States is China’s third largesttrading partner, after Japan and Hong Kong.

Energy has been a major focus of economic in-teraction between China and the United States.In the first quarter of 1985 U.S. firms sold $64.8million in mining and well drilling equipment toChina. Occidental Petroleum recently signed an

agreement to develop an open-pit coal mine inChina that will be one of the world’s largest. Anagreement for cooperation in nuclear power, a pri-ority energy development sector for China, wasinitialed in 1984 and recently signed on July 23,1985.2 This chapter examines the role of technol-ogy transfer in the bilateral relationship, and high-lights opportunities and risks from the U.S. per-spective.

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

made public i n ]uly 1985. Congress is current]}’ re\~iewing the d<)c-ument. The agreement may become effective in the fall ot I ~85, un-less Congress adopts a joint resolution of dlsappr[)~al (See chapter5.)

THE FOREIGN POLICY CONTEXT FOR TECHNOLOGY TRANSFER

The United States and China are importantcountries whose expanding relationship is poten-tially significant in global geopolitics. Officials inthree U.S. Administrations have concluded thatthe United States and China share parallel inter-ests in many areas. It is also true that their goalsand approaches naturally diverge in some cases.While Taiwan, arms transfers, and textiles remainareas of disagreement, Washington and Beijingmay be able to pursue complementary policies inKorea, Indochina, and other parts of Asia.

U.S. policies toward China are based on the ex-pectation that closer relations can contribute toeconomic progress in China and peace and sta-bility in Asia. ’ Although rapprochement in theearly 1970s was stimulated primarily by the threatof Soviet expansion in Asia, other, more positive,themes of U.S. China policy emerged during theCarter and Reagan Administrations. In additionto counterbalancing the Soviet Union, major goalsof U.S. policies include assisting China in its mod-ernization efforts, opening trade opportunities to

‘See Atlantic Council, Ch]na I’oIIc} for the Next Decade (Wa~h-Ingtt)n, D(- 1~83~, p 2 0 .

U.S. firms, and establishing rapport with the nextgeneration of Chinese leaders.

On the surface, these goals complement China’sown concerns about Soviet hegemonism in Asiaand the PRC’s economic modernization aims. Inorder to modernize its economy, China has in-stituted sweeping domestic economic reforms toimprove economic decisionmaking that also in-crease local and even individual enterprise, Chinahas also opened the door to foreign participationby setting up special economic zones, enacting apatent law and approving joint ventures, morethan 700 in 1984 alone.4

But there are also points at which Chinese andU.S. interests seem to diverge, as one would ex-pect for two countries with different economic andpolitical systems. China’s policies toward both theUnited States and the Soviet Union have gonethrough twists and turns. Taiwan remains a prob-lem in relations with the United States, ’ and some

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

Trade News, May 1Q85, p 3.‘See Robert Sutter, “The United States, ‘ Chinese Defense Pt~/-

lc~’, Segal and Tow. (eck. ) ( C h i c a g o : Un[\rersitv ot Illinol\ I’ress,1~84), ch. 13,

7

8 ———

Association of Southeast Asian Nations (ASEAN)countries friendly to the United States viewChina’s modernization with apprehension. Thevery success of China’s modernization poses newchallenges to the U.S.-PRC relationship. Conflictover trade in textiles is a notable example. WhileChinese leaders stress their enduring commitmentto independence as the cardinal principle in theirforeign policy, they have also expressed their viewthat technical cooperation with the United Stateshas not yet reached the desired level.’ All thewhile, China insists that it cannot be “bullied” byforeign countries that hope to force political con-cessions in exchange for advanced technology.7

Despite its growing involvement with foreigncountries and firms, China continues to value self-reliance.

During the past 6 years, expectations for a wid-ening relationship have run high in the UnitedStates. In spite of considerable achievements,translating the general objectives of U.S.-Chinapolicy into concrete measures has, at times,proved difficult. U.S. export controls illustratethese difficulties. The United States loosened itscontrols on exports of dual-use technologies (withmilitary and civilian applications) in 1983 by mov-ing China to category V on the Commodity Con-trol List (CCL).8 As a result, the process of license— . — —

‘Chen Muhua, State Counselor and Minister of Foreign Relationsand Trade, made this statement in “Prospects for Sine-U. S. Eco-nomic Relations, ” Beijing Review, No. 17, Apr. 23, 1984.

‘See Zheng Weizhi, “Independence is the Basic Canon –An Anal-ysis of the Principles of China’s Foreign Policy, ” Beijing Re}’ie\t,No. 1, 1985.

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

review was to be expedited. But, as discussed inmore detail in chapter 5, disagreements continueboth within the U.S. Government and amongCocom 9 countries about the guidelines for suchexports. U, S. exporters and the Chinese as wellhave complained about delays and uncertaintiesin U.S. license reviews. U.S. energy technologytransfers to China have, nevertheless, grown froman estimated level of $20 to $30 million in 1973-80 to $100 to $125 million in 1980-85. 10

In the wake of a dramatic transformation inU.S.-China relations during the past few years,the time may be ripe for a more careful defini-tion of areas of mutual and competing interest inrelations with China. U.S.-PRC cooperation inenergy development is one area where such a re-assessment may be particularly timely, Energyproblems are a major constraint on China’s mod-ernization program, and the energy sector there-fore is of strategic importance. The United Stateshas considerable expertise to assist China in de-veloping its energy resources and may make sig-nificant gains as a result, In addition to opportu-nities for benefits, however, there are also risks.Both the long-term opportunities and risks asso-ciated with energy technology transfers thus mustbe evaluated.

‘C<)com (the Coordinating Committee) is the ini orrnal multilateralorganization through which the United States, Japan, and West Euro-pean countries contro] exports of technol(>gy and strate~ic goodsto the Communist world.

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

LONG-TERM OPPORTUNITIES AND RISKS

Assessments of risks and opportunities associ-ated with energy technology transfers hinge onperspectives concerning trends in Chinese eco-nomic development and prospects for U.S.-Chinarelations. During the past 30 years there have beendramatic changes in both areas. Whether Chinesereform policies succeed, China’s ability to absorbU.S. technology, and the capabilities of China’sown R&D system are some of the questions thatinfluence assessments of opportunities and risks.

Such assessments are also contingent on whetherChina is viewed by the United States as a poten-tial ally, a friendly nonallied nation, an unpre-dictable neutral country, or a potential enemy.

Opportunities

U.S. policies are today predicated on the no-tion that the United States has much to gain fromtransferring energy and other technologies to

.

9

China. Expanded cooperation in the energy sec-tor has been seen as a key avenue for the UnitedStates to participate in, and even help shape,China’s economic modernization. At the sametime, the United States restricts exports of tech-nologies that have significant military applica-tions, such as certain nuclear technologies andvery powerful computers.

1. Contribution to Friendly Bilateral Relations

Cooperation in the energy sector is a symbolicas well as a practical demonstration of U.S. ex-pertise and commitment. Because energy devel-opment is intimately connected with economicand social change throughout China, it is an areawhere U.S. influence may be particularly impor-tant. Energy, in other words, holds a key to Chi-nese economic development, and U.S. technol-ogy can contribute to the modernization process.The Chinese, furthermore, clearly want U.S. tech-nologies.

Opting out of Chinese energy developmentwould at best disappoint the Chinese and at worstcause serious problems in U.S.-China relations.Other Asian countries could also be affected bysuch developments. Japan, for example, expandedits relationship with China after U. S .-China re-lations began to improve. A stable, working U. S.-China relationship is an important element inJapan’s own strategic policies. ” In light of theseand other factors, forgoing participation in China’senergy development hardly seems a viable alter-native for the United States.

2. Trade Opportunities

The China market may not be the bonanza oncehoped for, but it is now a significant one, andholds the potential for expanded imports of energyequipment, services, and technologies in the yearsahead. In a period of rising U.S. trade deficits,China offers opportunities for expanded exports. ”Unlike many developing countries, China has aforeign exchange surplus, and although the sur-

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

Transter to China: The Downside Risks, ” prepared for the Officeof Technology Assessment, Nlay 17, 1985, p, 28.

“In 1984 [l, S.-Ch]na trade was in balance, with exports from theUnited States of $3,4 bllllon and imp<)rts to the United States of $3.3billlon (olflcla] Department of Commerce statistics, July 1~85),

plus is diminishing, China is still able to pay forits imports.

In fact, China is making significant strides indeveloping its energy resources and will undoubt-edly continue to do so with or without U.S. help.In most cases Japan and West European countriescan supply similar energy exploration and pro-duction equipment, services, and technology ifU.S. firms do not. U.S. technology is apparentlyhighly regarded by the Chinese, but U.S. firmscompete for contracts with other suppliers suchas Japanese firms that have considerable experi-ence in the China market and official financingsupport. In some cases, such as hydropowerprojects, the availability of supplier governmentfinancing can be a key factor in selection of for-eign participation.

3. Potential Geopolitical Gains

There are also geopolitical benefits from closerU.S.-PRC cooperation in energy. In an earlierperiod, China cooperated with the nations of theSoviet bloc in energy, and conceivably could doso again if its technological needs cannot be metby the West. For instance, China and the U.S.S.R.have discussed the sale of nuclear powerplants toChina. While such sales need not compromiseU.S. interests, it may be more in the U.S. inter-est to reinforce the trends of the last decadetoward fuller Chinese involvement in the West-ern energy system.

4. Asian Energy Supplies

If China is successful in developing its energyresources, it can also make a contribution to re-gional energy supply stability. The availability ofChinese energy resources to other nations in theregion could provide greater assurance of suppliesfor energy-poor countries in the Pacific, andwould offer an opportunity for these countries todiversify their supplies. China’s ability to meetmore of its requirements with domestic resourceswould also lessen its competition with the energy-poor nations for regional energy resources.

5. Technical Exchange

Finally r as a people-to-people process, technol-ogy transfer provides avenues for mutually en-

10

riching cross-cultural exchanges. As Chinese tech-nicians visit U.S. laboratories, assembly lines, andlibraries and as U.S. professionals travel to China,they have the opportunity to form long-lastingrelationships that forge ties between representa-tives of this core industry in the two countries.U.S. firms and organizations involved in Chineseenergy development have the opportunist y to helpChina shape its economic future, and possibly fur-ther improve their technology and perfect theirexpertise in international technology transfers.

Risks

The United States stands to gain much in energytechnology transfers to China if these potentialopportunities are realized, but there are also cer-tain risks or uncertainties that pertain to nationalsecurity as well commerce that must be considered.

1. Diversions to Military Applications

The ultimate risk is that a future China thatmay be hostile to the United States would bene-fit militarily as well as economically from certainenergy-related technologies transferred by theUnited States today. Concerns for Chinese mili-tary benefits are associated with the transfer of“dual-use” technologies (some of the seismic, cali-bration, and computer technologies used in energydevelopment) and aspects of nuclear technology(discussed separately in a later section).

China’s current leadership appears committedto domestic economic reform and to opening it-self to foreign investment. China has stated thatit values cooperation with the United States aspart of this process. It is, however, difficult if notimpossible to predict policy shifts that might oc-cur a decade in the future. U.S. policymakers musttherefore take into account the possibility thatdramatic shifts could occur, since under such cir-cumstances we could regret the dual-use transferswe make today.

We know enough about the organization ofChinese R&D, and China’s considerable scienceand technology capabilities, not to be carelessabout dual-use transfers. Some Chinese scientists

and engineers who have studied in the UnitedStates will return to serve in China’s military ortheir know-how will benefit military developmentindirectly, Over the long run, it is impossible to“compartmentalize” technologies in terms of theirimpacts on an economy.

In the near term, however, there are a numberof factors that limit the military risks associatedwith civilian energy technology transfers toChina. Many energy technology transfers do notinclude sensitive dual-use items, and therefore donot directly pose problems for U.S. national secu-rity. China’s ability to apply such technologies isalso limited by the slow pace of Chinese militarymodernization. In the intermediate term, how-ever, China will be able to absorb increasinglysophisticated dual-use technologies. Therefore, ifeconomic modernization proceeds apace, over thelonger term China’s growing technological exper-tise can be expected to make significant contri-butions to its military.

In theory, the U.S. export control system pro-vides a mechanism for constraining the transferof sensitive technologies, The United States canand does attach conditions on the transfer of dual-use equipment (leasing, operation by U.S. citizens)that limit the diffusion of sensitive technologiesto the military sector. Such controls are costly,not welcomed by the Chinese, and certainly donot completely rule out the possibility of diver-sions, China can also obtain (and reportedly hasin some instances) U.S.-manufactured dual-usetechnologies in Hong Kong and third countries.

Another possibility is that dual-use technologiestransferred to China might fall into the hands ofunfriendly countries. But China today has littleincentive to transfer sensitive technologies tocountries such as Vietnam or the U.S.S.R. becausedoing so would create security problems on itsown borders. In addition, U.S. firms set limits onretransfers through written contracts (which theChinese seem to honor) and through their optionto forgo further transfers if violations occur. Inthe case of nuclear technology, there are specialproblems (discussed below) surrounding retrans-fers to third countries related to the potentialspread of nuclear weapons.

17

2. Geopolitical Risks

If China succeeds in modernizing its economythrough the application of imported technology

and other means, it will be in a position to playan increasingly important role in Asian politicsand markets. Some observers in ASEAN coun-tries, as well as Taiwan and other Asian coun-tries, view this prospect with concern. A vibrantChina could exert considerable influence throughnonmilitary means on its neighbors. In light oftraditional animosities and current military con-flict between China and some countries such asVietnam, there is a legitimate concern that China’semergence as a regional and even global powercould create new and aggravate old conflicts inAsia.

There is also a potential for regional conflictin Asia as China develops its energy resources.Territorial disputes have impinged on offshore oiland gas development. There have been reportsthat the U.S. firms ARCO and Pennzoil explor-ing for oil in the South China Sea have been har-rassed by Vietnamese gunboats.13 While conflict-ing territorial claims may not be sufficient toprovoke military conflict, political and militarydisputes between China and Vietnam, for exam-ple, may be played out in a struggle over poten-tially energy-rich territories.14

Particularl y relevant from the U.S. perspectiveis the fact that private companies participating injoint ventures in China incur investment risks.These firms could suffer financially if China wereto scale back its development plans (as it did afew years ago). U.S. firms involved in China’s off-shore oil and gas development have made largepreliminary investments, indicating considerablefinancial risks, but such investment risks are pri-marily the concern of the firms. The U.S. Gov-ernment, however, insures some U.S. firms invest-ing in China against political risks through theOverseas Private Investment Corporation. TheU.S. Government also provides information to

U.S. investors concerning domestic political andeconomic developments in China.

3. China Trade Competition and the Alliance

The United States has commercial interests atstake in energy technology transfers to China.China is both a significant market and potentialcompetitor. Today, competition among suppliersfor shares of the China market poses more im-mediate and significant U.S. policy issues thandoes China’s growing role as an exporter of ener-gy-related commodities, equipment, and services.

As firms from many countries compete for salesin China, supplier governments may be temptedto provide extraordinary support for domesticfirms, through financing, aid programs, and rep-resentation of business in negotiations. This canalso happen when Cocom members attempt tomanipulate the process to the benefit of their owndomestic firms. While there is room for legitimatedisagreement in many instances about whether ornot such government actions provide “unfair” ad-vantages, the result is to raise the stakes of sup-plier competition.

From the U.S. perspective, these problems arereflected in debates about Export-Import Bankfinancing, U.S. approaches to Cocom, and U.S.export controls. At stake here, among otherthings, is the capability of U.S. firms to competefor sales in the China market.

4. The Terms of Technology Transfer—Intellectual Property

As U.S. firms transfer energy technology toChina there is the potential risk that technologydeveloped in the United States may be appropri-ated without adequate compensation to the origi-nator. China’s recent enactment of a patent lawand recent promulgation of technology transferregulations, however, are positive signs of its in-tent to honor technology transfer agreements. Thelaw, however, does not cover software and cer-tain chemical processes, and it is not yet clear howChina will implement the new legislation.

5. China as an Economic Competitor

It does not appear likely that Chinese energy-related exports will seriously compete with those

12

from the United States, There is no energy tech-nology or equipment area in which China will bea significant exporter in the near term. China,however, is selling small-scale hydropower tech-nology and may be exporting some energy equip-ment after 1995. In the next century China couldemerge as an exporter of large reactors and coalconversion technologies, but this is only conjec-ture. More likely, China’s ability to satisfy itsenergy demand through the use of U.S. technol-ogy will enhance the performance of its economygenerally, and the export sector in particular. Thepossibility of China becoming a competitor in cer-tain industries such as consumer electronics is nolonger far-fetched.

China is already an actor in Asian energy trade,and may become a major energy exporter duringthe next decade. Chinese oil exports can help tooffset the dependence on OPEC of some countrieslike Japan. At the same time, China will certainlycompete with other countries in Asian energymarkets. To cite one example, both China andthe United States want to sell coal to Japan. Ja-pan is helping China develop its coal resourcesand has long-term coal and oil supply agreementswith China. While China has not met its targetsfor coal exports to date, its coal exports will jumpif just one of the major coal development projectsis completed. To cite another example, China isalready exporting more than 500,000 barrels perday of oil and may increase exports significantly

during the next decade .15 Indonesia’s oil industrysees itself as competing with China in oil sales toJapan.

No importer of Chinese energy, Japan included,is likely to become dangerously “dependent. ”16

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

“See Fereidun Fesharaki, et al., Critical Energy Issues in Asia andthe Pacific (Boulder, CO: Westview Press, 1982), p. 36, for a fore-cast that China will be exporting 500,000 to 1.5 million barrels perday of petroleum by 1990.

‘“Japan imported 4.4 percent of its total coal imports and 5.2 per-cent of its crude oi] and refined products from China in 1983. SeeRichard K. Nanto and Hong Nack Kim, “Sin(>Japanese Relations, ”CRS Paper, November 1984. For a detailed projecti[~n of Chineseenergy production, see Kim Woodard, “Devek>pment of China’s Pe-troleum Industry, ” prepared fc~r East-West Center \Vorkshop onChina Energy, Apr. 25-2~, 1Q85. Woodard concludes that it willbe difficult for China to sustain the current level of crude and productexports through the end of the decade, let alone increase exportsby significant margins.

velopment may not seriously jeopardize energydevelopment in other Asian countries, but it willcertainly compete for investment capital and otherresources. A major area of uncertainty is China’sfuture role in regional markets and institutions, ’7the nature of its integration into the Pacific Basin.

The logical outcome of technology transfers isthat China will more efficiently produce energy,equipment, and services for both its internal mar-ket and for export. Some U.S. firms may find thatsale of proprietary technology through licensingand patents is their only avenue for participatingin the China’s energy development. More com-monly, the U.S. firms that transfer energy tech-nology also sell equipment and technical services.Over the long run, U.S. firms that transfer energytechnologies will need to further develop theseand other technologies in order to remain com-petitive.

6. U.S. Policymaking Inadequacies

There are also potential risks stemming fromthe U.S. policymaking process itself. Each high-level U.S. Government mission is challenged tobring back tangible evidence of success in the formof new protocols and agreements. At the sametime, disputes among various parts of the U.S.Government (and even within departments) re-flect the absence of a clear U.S. strategy on ex-port controls. The danger is that as U.S. policiesconcerning technology transfer are built on a case-by-case basis, we may lose sight of overall U.S.goals. Furthermore, there is evidence that U.S.policy declarations raise Chinese expectationswhich are then dashed at the policy implementa-tion stage.

7. Technology Transfer Failures

Although there are risks associated with par-ticipating in China’s energy development (includ-ing the possibility that the United States might beblamed for projects that fail), the risks to theUnited States could be even more significant ifChina fails to meet its energy development goals.An economically stagnant China could see domes-tic political instability and might play a hostile

‘“The Asian Development Bank has not admitted China, but theissue is under debate,

13

role in the Asian region. Foreign technology maynot be the key variable in China’s energy equa-tion, but foreign assistance could significantly helpChina to meet its goals.

The gains associated with energy technologytransfers appear clear and compelling, as discussedabove. In contrast, the risks are in some instancesvague and uncertain, particularly over the longterm. But while the gains outweigh the risks asso-ciated with transferring U.S. energy technology

to China, there are significant risks to be man-aged. These include the risk that the dual-use tech-nologies (including nuclear) that the United Statestransfers to China could be used in ways that posesecurity problems for the United States. Intensecompetition among supplier firms and govern-ments to outdo one another in financing also in-volves risks to the U.S. Government. Uncertain-ties associated with China’s entry into Asianenergy trade also pose challenges to U.S. policies.

TECHNOLOGY AS A TOOL OF U.S. FOREIGN POLICY

Science and technology have already been usedas tools of U.S.-China policy. Since the CarterAdministration, science and technology have beenhighlighted in U.S.-China relations. There has,however, been no explicit or coherent strategy forthe use of technology as a tool in U.S. policiestoward China.

Identifying the instances where technology hasbeen an important instrument for U.S. policiestoward China could be a first step in improvingpolicies. In the face of the opportunities and risksdiscussed above, the question now is how tech-nology can be used more effectively as a tool offoreign policy.

The ability of the U.S. Government to extractpolitical or other concessions from China by deny-ing sales of U.S. energy technologies is quitelimited, even where U.S. firms hold a technologi-cal lead (oil and gas exploration, for example).This is because Japan and West European coun-tries are ready and eager alternative suppliers, andU.S. technological leads (where present) in energytechnologies are not so great that other supplierscannot compete.

Sequencing (gradual expansion of trade in tech-nology as bilateral relations improve and experi-ence deepens) is another approach that might beeffective if pursued systematically. In some cases,sensitive dual-use technologies may make up onlya minor portion of the dollar value of an energydevelopment project, but these technologies canbe absolutely critical to the project. Under the ex-port administration system, decisions to loosen

restrictions on export of the more sensitive energytechnologies are made within the executivebranch, and have oftentimes been controversial.Interagency reviews and low key dialog with Chi-nese end-users to check the strength of their com-mitments to abide by U.S. stipulations, if prop-erly pursued, can ensure that risks associated withdual-use transfers have been taken into accountand steps taken to minimize them. But, in prac-tice, disagreements within and between variousbranches of the U.S. Government (and withinCocom) have precluded the systematic implemen-tation of a technology sequencing strategy.

Most of the technologies that China seeks todevelop its energy resources are not sensitive dual-use technologies. In these areas, technology trans-fers could serve U.S. interests by contributing toChina’s energy development and economic mod-ernization. Private sector U.S. firms are the lo-cus of this technology, and they have generallybeen willing to provide it independently of anyU.S. Government programs. But some of the tech-nology that China needs is not being provided be-cause U.S. suppliers are not informed about theseneeds or because they do not see these as attrac-tive business opportunities. Efforts by the U.S.Government to further encourage private sectorparticipation in Chinese energy developmentwould be viewed positively by the Chinese andprobably contribute to friendly relations. Tech-nical and management training programs sup-ported by the U.S. Government, such as the onein Dalian, are another avenue for positive par-ticipation.

14

Among the primary explanations for the diffi-culty of using technology as a finely tuned instru-ment of U.S. foreign policy is the fact that the pri-vate sector rather than the U.S. Government isthe holder of the technology. Export controls, themajor mechanism for controlling the internationalflow of technology, have been used to limit cer-tain kinds of U.S. trade with China. But techni-cal exchange and technology transfer are less sus-ceptible to such regulations. The Government’sability to manipulate technology transfer to serveforeign policy goals in particular cases is oftenquite limited. However, conditional access to tech-nology has been used as an element of U.S. pol-icies toward other developing countries when astrong consensus exists on a U.S. policy goal (suchas nuclear nonproliferation) and when other sup-pliers have been willing to cooperate.

Our ability to use technology as an instrumentof foreign policy is often dependent on how tech-nology is “packaged” with other enabling re-sources. In the energy area, financing is a particu-

larly important example of the latter. Energydevelopment in China is a mammoth andtremely costly undertaking. Helping to financecosts of this development may be necessary iffull benefits of technology in foreign policyto be realized.

ex-thetheare

Over the long term, technology can be an im-portant asset to U.S. China policies, but perhapsnot a finely honed tool. Government-to-govern-ment science and technology cooperation agree-ments, for example, set the stage for technologytransfers by private sector firms. But it is virtu-ally impossible to isolate the effects of such gov-ernment policies and programs on China’s energydevelopment. In this sense, the transfer of U.S.energy technologies to China generally supports(and derives from) increasingly friendly bilateralrelations. While the U.S. Government is notdirectly involved in most of these transfers, its pol-icies are nevertheless critical because they set theparameters for U.S. technology transfer.

Chapter 3

Energy Technology Transfers

Chapter 3

Energy Technology Transfers

China’s present energy shortages appear incon-sistent with its vast and varied energy resourcebase. Some of the shortages can be alleviated byexpanding present capabilities, for instance open-ing more coal mines, but much of the resourcebase will be unavailable without improved tech-nology. Sophisticated techniques are required toexplore for oil and gas offshore or in remote re-gions. Coal is plentiful, but bottlenecks preventenough from reaching the market, and the envi-ronmental impacts of burning large quantities aresevere in some areas. The best potential hydro-electric sites are far from load centers, requiringlong-distance, high-voltage transmission systems.Nuclear energy, known to the Chinese throughtheir military programs, requires a quite differ-ent approach for power generation. Energy canalso be used much more efficiently.

RESOURCES

Reliable data for China’s oil and gas reservesare not available, but much can be pieced to-gether. Most exploration has taken place in thenortheast corridor, and that is where the giantfields and 75 percent of the reserves are located.Proved and probable reserves in the northeast areestimated at 10 to 15 billion barrels.1 Cumulativeproduction has been 10 billion barrels, and addi-tional discoveries and advanced technology mayadd an equivalent amount of oil resources.

Petroleum reserves in the western part of thecountry are much less certain because explorationhas been much less intense. Perhaps 3 to 5 bil-lion barrels will be produced there. Offshore re-serves are even more speculative because exten-sive exploration began relatively recently, andmuch of the exploration has been disappointing.Offshore reserves of 20 to 30 billion barrels area commonly accepted projection. Thus the ulti-

While China may be capable of developingthese technologies indigenously, the process canbe speeded considerably and made more efficientby the importation of foreign technology. Muchalready has been imported, and the Chinese havean intense interest in expanding this access.

This chapter reviews the resources available toChina and present trends in energy productionand consumption. Then the role that technology,both domestic and foreign, might play is evalu-ated in light of constraints on the Chinese system.Further detail, and the basis of much of this dis-cussion can be found in the background paper“Technology Transfer and China’s Energy In-dustries. ”

mately recoverable petroleum reserves are 50 to70 billion barrels. China’s proved reserves are lessthan those of the United States though the poten-tial for further discoveries is greater.

Known natural gas reserves are only 4.6 tril-lion cubic feet, a much lower energy resource thancrude oil reserves. However, gas has been a lowerpriority fuel because it is difficult to transportwithout an expensive pipeline system, and thereis little export market. However, recent offshoredrilling in the South China Sea has resulted in acommercially exploitable find in the range of 3to 7 trillion cubic feet. Basins in western Chinaalso show promise of very significant gas re-sources. These finds may stimulate interest inbuilding the required infrastructure and search-ing for more gas.

Coal deposits are gigantic, over 7.50 billiontons, 2 and may be double that. Actual recover-able reserves

18

same class with the United States or the U. S. S. R.,which have the largest in the world, At the presentrate of exploitation, this coal would last hundredsof years. Most of it is reasonably good qualitybituminous grade. Pockets of coal occur practi-cally everywhere in the country, but the majorseams are in the central and north central regions,far from the major industrial regions near thecoast.

x

●

SOURCE

Hydropower resources are also huge, poten-tially as much as 380,000 megawatts (MW).3 Only22,000 MW have been exploited. About 60 per-cent of the potential is in the Southwest, a greatdistance from population centers.

Figure 1 shows the location of the major energyresources.

‘Ibid.

Figure 1 .—China’s Energy Resources

Major 011 fields

Proposed major nuclear power facilities

Major coal producing regions

Major hydroelectric projects

Major cities

Office of Technology Assessment

— —

19

TRENDS IN ENERGY PRODUCTION AND USE

Petroleum

Crude oil production rose rapidly in the 1970sto over 2 million barrels per day in 1979 (theUnited States produces 8.6 million). By 1980,however, production flattened out due to thematuring of the biggest fields and a rapid declinein one unusual formation. Output in most fieldshas now stabilized or is increasing slightly, butat the expense of ever-increasing water injectionto maintain pressure. Production data are shownin table 1. The fields that are mature now are ex-pected to decline in a few years.

This situation has developed largely because ofa lack of exploration. The fields in the northeastappeared to be so large that little attention waspaid to the rate of depletion and the need to de-velop new fields. Even now that the situation hasbeen recognized, China is spending only about $2to $3 billion on oil exploration and development,about what a moderate size U.S. company wouldinvest for a tiny fraction of China’s production.

In effect, China has been producing itself out ofbusiness.

This has led to an extensive reevaluation of pe-troleum policies in China. The Ministry of Petro-leum Industry has shifted from “self-reliance” andis allowing foreign oil companies to participatein offshore exploration. More recently, as the fo-cus of exploration has shifted to the northwest,which has a huge potential but harsh conditions,China has sought help from foreign companies inseismic surveys and exploratory drilling. Foreignoil companies may be invited to participate in ex-ploration and production activities in 10 provincessouth of the Yangtze River under arrangementssimilar to the offshore concessions.

Natural Gas

Natural gas production is limited to one basinin Sichuan and as a byproduct at the major oil-fields. Production has been declining significantlyas shown in table 2, largely because of a severe

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

Year

Region 1970 1978 1980 1982 1983 1984

Northeast . . . . 447.4 1,120.8 1,171.8 1,163.8 1,181.0 - 1,235.2North. . . . . . . . . . . . . . . . . . . 20.4 408.0 382.2 285.4 270.2 268.8East . . . . . . . . . . . . . . . . . . . . . 93.4 395.0 358.4 380.6 434.8 547.2Northwest . . . . . 45.8 98.8 121.2 124.0 135.4 141.4Central-South. . . . . . . . . . . . . 5.4 56.6 83.2 84.4 96.0 96.0Southwest . . . . 0.6 21.8 2.0 2.0 2.0 2.0

Total . . . . . . . . . . . . . . . . . 613.0 2,101.0 2,118.8 2,040.2 2,119.4 2,290.6SOURCE China Energy Ventures, Inc

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

Year

Region 1977 1978 1979 1980 1981 1982 1983

Northeast . . . . . 0.169 0.183 0.189 0.193 0.157North . . . . . . . . . . . . 0.028 0.030 0.034 0.029 0.026East. . . . . . . . . . . . . . . . . 0,043 0.053 0.057 0.053 0.044Central-South . . . 0.001 0.001 0.001 0.002 0.002Northwest . . . . . . . . . . . . . 0.009 0.011 0.012 0.014 0.016Sichuan . . . . . . . . . . . . . . 0.192 0.224 0.238 0.231 0.212 0.191

Total a . . . . . . . . . . . . . 0.442 0,501 0.530 0.521 0.456 0.434 0.419.—aTotals may not add due to rounding

SOURCE Ministry of Petroleum

20

undercapitalization (especially in exploration) anda failure to acquire modern technology compara-ble to the oil industry. There are few gas pipe-lines in the country to get the gas to market evenif production can be increased. The gas discov-ered by ARCO in the South China Sea might beconverted to fertilizer at coastal plants.

Coal

Currently, coal represents 74 percent of China’senergy production. While the share is dropping,actual production has risen fairly steadily at anannual rate of 7 to 8 percent as shown in table3. Future production will be a function of the levelof investment in mines, other facilities, and trans-portation infrastructure. The stated target for 2000is 1.2 billion tons, about double the rate in 1980.Almost half of this goal would be met by small,local mines, but annual additions to large minecapacity will have to be 10 to 12 million tons peryear. The mine at Pingshuo in Shanxi Province,to be developed by the Island Creek Coal Co, (adivision of Occidental Petroleum), will have a ca-pacity of 15 million tons per year. At present,almost all mining is underground, but some of thebiggest new mines will be surface mines. Opera-tions at most coal mines are inefficient. On theaverage, less than a ton is produced per man-day,versus about 10 tons for underground mines inthe United States.

Very little coal (about 10 percent of output) iscleaned before shipment. In- many mines, non-combustible matter significantly increases ship-ping costs and causes problems in boilers whenthe coal is burned. It is likely that beneficiation(coal cleaning) plants will become more common,but progress has been slow.

Transportation is a major bottleneck. Coal al-ready represents about 40 percent of all rail ship-

Table 3.—Coal Production (million metric tons)

ments. Many lines are being upgraded, but theprocess is slow and expensive. China intends toexport more coal, which will depend on ports be-ing upgraded in addition to the lines to the ports.Japan is a natural market for Chinese coal andis financing mine and port development, but theslumping price of coal on the world market hasreduced the incentive to make these improvements.

Electricity

The electric power industry has been growingrapidly as shown in table 4. Present total capac-ity is 81,000 MW, of which 68 percent is fromsteam plants (mostly coal) and the rest is hydro-power. There are six major regional grids andmany small local grids. Twenty-two long-dis-tance, high-voltage transmission lines have beenbuilt. 4 Others have been announced, including a1,300 kilometer direct current line from Qinghaito Hebei,

Despite the growth, there is a severe shortageof electricity. It is estimated that only about 80percent of the nation’s industrial capacity can beoperated at any one time because of inadequateelectric capacity.5 The current shortfall is about10,000 MW. At peak consumption hours, somecustomers are cut off or restricted. In addition tolost production, blackouts can damage equipment.

There are 18 large hydropower stations andanother 11 under construction for completion by1990. The largest potential project, the “ThreeGorges” on the Yangtze River, could produce12,000 MW, but it is still in the planning phase.This project, estimated at $9 to $12 billion, would

4Fujiko Kitani, “Electric Power in China, ” China Newdetter, No.56, JETRO.

5Lu Qi, “Energy Conservation and Its Prospects, ” Beijing Review,No, 46. November 1984.

Table 4.—Electric Power Production (billion kWh)

Thermal H ydro Total

1970 . . . . . . . . . . . . . . . . . ...............353.91978 . . . . . . . . . . . . . . . . . ...............617.91980 . . . . . . . . . . . . . . . . . ...............620.11981 . . . . . . . . . . . . . . . . . ...............621.61982 . . . . . . . . . . . . . . . . . ...............666.01983 . . . . . . . . . . . . . . . . . ...............692.01984 . . . . . . . . . . . . . . . . . ...............772,0

1970 . . . . . . . . . . . . . . 95.4 20.5 115.91978 . . . . . . . . . . . . . . 212.0 44.6 256,61980 . . . . . . . . . . . . . . 242.4 58.2 300.61981 . . . . . . . . . . . . . . 243.8 65.5 309.31982 . . . . . . . . . . . . . . 253.3 74.4 327.71983 . . . . . . . . . . . . . . 263.5 84.5 348.01984 . . . . . . . . . . . . . . 289.1 85.5 374.6

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

.— .- .—

rank among the world’s largest construction proj-ects. Figure 1 shows some of the major hydro-power sites. There are also over 100 midsized (12to 250 MW) hydropower stations. China is theworld leader in the development of mini-hydroplants, with over 80,000. This represents over one-third of all hydropower capacity, and is an im-portant part of the rural electrification strategy.

There are about 65 large thermal plants in thecountry, mostly in industrial areas. Thermalpower will represent the bulk of additions to theelectric power system for the foreseeable future.The plants are mostly indigenously built, and theyare significantly less efficient (28 percent) than newU.S. coal plants (about 40 percent). Powerplantsconsume over 15 percent of petroleum supplies,which is a significant loss of potential exports oralternative use in the economy.

Projections

Estimated primary energy production through2000 is shown in table 5. These projections arebased on a computer simulation done in early1984 and are included for illustrative purposesonly. Actual 1984 production for coal was 772million metric tons anlion metric tons.

Energy Use

China uses all of tcussed above except

d for petroleum, 114 mil-

he energy production dis-for the export of about

500,000 to 600,000 barrels per day of oil (includ-ing refined products) and 7 million tons of coalper year. Much of this use is quite inefficient. Ar-tificially low energy prices and a shortage of cap-ital have resulted in a vast amount of equipmentand processes that was not designed to minimizeenergy use. It is now clear that demand for energyservices will increase rapidly as the economy andstandards of living rise, but that producing greatamounts of additional energy will be very expen-sive, polluting, and in some cases, impossible.Therefore, to meet economic goals, increasing theefficiency of energy use will be necessary.

In the 1970s, China launched a major programto increase efficiency and conserve energy, a sig-nificant departure from past practices. This pro-

21—

gram has had considerable success, saving theequivalent of several tens of million tons of coaleach year (cumulative). Further conservation willrequire increasing investment as the easy meas-ures are taken, but it is likely that saving energywill be at least cost competitive with producingenergy for many years.

In the industrial sector (which uses 72 percentof China’s total primary energy), only about 40percent of the energy is converted to useful serv-ice.’ Improving this record would have a doublebenefit: reducing the cost of production and free-ing the energy for other purposes. Prioritizationof energy allocation is an important inducement.The most efficient plants are assured a supply ofenergy, while the least efficient ones are closedin times of shortages. Not only does this meanthe most efficient plants operate the longest, butit provides incentives for plant managers to fixtheir problems. Fuel switching from oil to coal isalso encouraged to reduce energy costs, especiallyin facilities that changed from coal to oil in the1960s and 1970s. So far, however, conversion hasbeen slow, as it has been in the United States. Im-proved energy management is another priority,using audits, energy measurement instruments,and analysis to identify conservation opportuni-ties. Old equipment and plants are being reno-vated (e. g., with insulation or air preheater) oreven replaced to achieve large savings. Cogener-ation and residual heat recovery are being empha-sized. The recent emphasis on light industry is alsohelping slow the growth rate of energy demand.

The commercial/residential sector used only 14percent of China’s total commercial energy. ’ Coalis the major fuel for cooking and heating. In ru-ral areas, noncommercial fuels (wood, crop by-products, biogas) are very important, but it is pos-sible that this dependence will drop as incomesrise and more convenient fuels become available.In any event, neither technology nor equipmentis likely to be exported by the United States. One-third of the peasants have no electricity. s It is anational goal to electrify all rural villages by 2000.

“’Energy Conser\ration, ” The China Business Reviet\r, lanuaryFebruary 1982, p, 12.

‘Ibid., p. 18.‘Ql, op. c i t . , p, 20.

22

Table 5.— Projected Primary Energy Productiona

CoalBaseline Plan

Year (mmt) (mmt)

1975 . . . . . . . . . . . . (484)1980 . . . . . . . . . . . . (620)1983 . . . . . . . . . . . . (692)1985 . . . . . . . . . . . . 743 7001990 . . . . . . . . . . . . 821 8501995 . . . . . . . . . . . . 895 1,0002000 . . . . . . . . . . . . 966 1,200

Crude petroleum Natural gas Hydropower Total energy

Baseline Plan Baseline High Baseline Plan Baseline Plan(mmt) (mmt) (bcm) (bcm) (bkWh) (bkWh) (mmtce) (mmtce)

(77) (9) (47) (472)(106) (14) (58) (620)(106) (12) (84) (671)109 117 12 14 100 713 698115 132 12 19 123 140 771 838122 156 16 27 175 210 847 999131 210 21 38 228 300 924 1,245

aThese projections are based on a computer simulation done in early 1984 and are included for illustrative purposes only Actual 19&l production for coal was 772mmt and for petroleum, 114 mmt

SOURCE China Energy Ventures, Inc

In the transportation sector, demand for liquid part to reduce fuel consumption. This one stepfuels is expected to rise rapidly. Railroads are be- is estimated to save 60,000 barrels of fuel pering electrified, but the increasing number of diesel year. ’locomotives, automobiles, airplanes, trucks, andbuses will put considerable pressure on the oil in-dustry. The Ministry of Transportation is retrofit- “’Refit Gives More Power to Old Trucks, ” China Daily, Mar.ting most of the older engines in its trucks, in large 14, 1985, p. 2.

TRENDS IN ENERGY TECHNOLOGY TRANSFER

Technology acquisition has been a central fea-ture of China’s energy programs for many years,but until 1980, direct sales of equipment and evenentire factories were far more important than tech-nology transfer. In some cases, China tried reverseengineering (reproducing a finished product with-out access to design and manufacturing informa-tion, such as was done with oilfield equipment).Many of these efforts were not very successfulthough some products are being used. The Chi-nese petroleum industry, at least, has decided itis less costly and more effective in the long runto procure technology directly.

Petroleum Exploration and Production

The offshore oil exploration projects have stim-ulated petroleum technology transfers, includingtraining, joint technical services, and joint man-agement. Many of the smaller U.S. oilfield serv-ice companies are now participating. Contractsfor licensing to manufacture equipment have beenrare for offshore technology production, largelybecause the market is limited (only 19 rigs were

active in 1984, and this number will not grow inthe next year or two).

The situation is reversed onshore, where for-eign participation has been limited to specializedservices and equipment supply. Onshore activ-ity is much greater, with about 800 to 900 activerigs. All of China’s production has been onshore.Licensing arrangements have been more attrac-tive than for offshore technology, especially asa way of gaining access to the market. The primeexample is the drill bit factory established undera licensing contract by the Hughes Tool Co. Hugheswas paid a fee for the transfer and still receivesroyalties for the production. In addition, it is al-lowed to sell large quantities of U.S.-made drillbits in China because far more are needed thanthe factory can supply (although some appear tohave been exported).

The total commercial value of technology trans-fer and training programs in the 1980-85 periodis estimated to be $100 to $125 million. While thismay appear small compared to the $1 billion spentby foreign companies for exploration offshore, or

23

the $250 million imports of equipment and serv-ices for the onshore market in 1984 alone, thetechnology transfer component has major long-term implications. Furthermore, contracts signedbut not yet implemented are not included, andthere are many contracts being negotiated, a long-term process itself, Estimated values for the next5 years are $500 to $900 million, as shown in table6. Key items are likely to be:

advanced geophysical technology such asseismic equipment and computer hardwareand software;manufacturing technology for land drillingrigs, downhole completion equipment, andpressure control equipment;steam injection and enhanced recovery tech-nology; andinstrumentation.

U.S. companies will be in a strong position tocompete for this business (which may diminishin the 1990s as the Chinese increasingly masterthe technologies). The Chinese are also particu-larly interested in technology to meet materialsrequirements for the manufacturing capabilitiesthey are purchasing, such as high-grade metal-lurgy, specialized rubber, and other elastomers.It should be noted that all these basic materialstechnologies have military as well as energy ap-plications.

Petroleum Refining andPetrochemicals

China is a net exporter of refined petroleumproducts, including $300 million of gasoline to theUnited States in 1984. ’0 The need to earn addi-

IOThis may drop to zero next year because the phasing out of leadin U.S. gasoline makes the low octane Chinese gasoline useless evenfor blending. The Chinese are likely to resent the loss of a majormarket.

tional foreign exchange (which is crucial to thepurchase of more foreign technology to continuethe modernization program) is a strong motiva-tion for accelerated technology acquisition to im-prove refineries. Import substitution is the moti-vation in the case of petrochemicals and fertilizer.China spends about $2 billion annually in foreignexchange on these items.

Licenses for chemical processes are now increas-ing because SINOPEC, the corporation with con-trol over China’s refineries and related facilitiesis engaged in a $3 billion refinery modernizationprogram. If production of offshore oil starts, con-struction of coastal refineries is likely, possiblyunder joint management or even as joint ventures.The worldwide glut of refining capacity arguesagainst any near-term construction of much ad-ditional capacity, however. License agreementshave been signed for the manufacture of variouspieces of equipment for chemical plants, but thecombined value of the licenses is probably onlyabout $5 million, 11 Specific technologies of interestinclude:

●

●

●

u.

secondary refining technology, such as hydro-crackers;process licenses for specialized petroleumproducts, pesticides and agricultural chemi-cals, and synthetic materials such as elas-tomers; andengineering and construction technology forplant design and pipelines.

S. companies have a long record of involve-ment in this-area of the Chinese market. They arelikely to make significant sales, perhaps $50 to$100 million over the next 5 years, not includingsales of equipment.

Ilwoodard, op. cit., P. 16.

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

1973-80 1980-85 1986-90

Petroleum exploration and production . . . . . . . . . . . . . . . . . . . . . . . . marginal $60-70 million $300-500 millionRefining and petrochemicals . . . . . . . . . . . . . . . . . . . . ... ... ... .. .$15-20 million $15-20 million $ 50-100 millionCoal . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . marginal $10-15 million $ 50-100 millionElectric power . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . marginal $20-25 million $100-200 million

Total . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . ... .$20-30 million $100-125 million $500-900 millionaEstimated values, do not necessarily total Includes only money actually spent by China or its foreign Companies on technology transfer and training during periodsin question.

SOURCE: China Energy Ventures, Inc

24

Coal Mining and Transportation

China produces almost as much coal as theUnited States, but its coal mining technology con-tinues to lag, U.S. companies are becoming in-volved in every level of the Chinese coal indus-try including large mine development, engineeringcontracts for mines and transportation, andlicenses for mining and beneficiation equipment.

U.S. technology transfer for coal developmenthas generally lagged behind that for oil, despitethe considerably greater importance of coal inChina’s energy system. This is because coal ex-ports create relatively small foreign exchangeearnings ($500 million in 1984, or 10 percent ofthe earnings from oil exports) and because coaltechnology is not as esoteric. Another reason fordelays in coal technology transfer is that themimes that will be opened by U.S. companies arethe subject of protracted negotiations, as is muchof the foreign investment in China.

Meeting the goal of 1.2 billion tons of coal by2000 will require an expansion of capacity ofabout 50 percent or about 30 million tons peryear, On the average, at least one very large mine,several medium-sized ones and a lot of small lo-cal mines must be added each year, as well as avast infrastructure of beneficiation plants, trans-portation systems and port facilities. Technologiesthat are already being imported or discussedinclude:

● engineering for large open-pit mines;c slurry pipelines and unit trains;. mine safety technology;. manufacturing licenses for equipment; and● beneficiation technology,

U.S. companies have an edge on surface min-ing and short wall underground mining equipmentand beneficiation plants. Most long wall miningequipment is still made in Europe. Total value oftechnology transfer from the United States overthe next 5 years may be $50 to $100 million.

Electric Power

U.S. technology transfer in the electric sectorhas been concentrated in a few large contracts formodern generator and boiler technology, These

licensing contracts are intended to improve theefficiency and increase the size {from 250 to asmuch as 600 MW) of China’s standard generat-ing plant. China has also begun importing elec-tric transmission technology from U.S. firms, andthis is likely to increase as the voltage of the linesincreases. Important technologies are likely toinclude:

boiler retrofits and other thermal efficiencytechnology;design and engineering technology for largepowerplants and particularly for hydropowerstations (and also tidal powerplants);high-voltage transmission and switchgearand control systems; andpollution control equipment.

U.S. companies will be competitive in thesemarkets. Total value could be $100 to $200 mil-lion from 1986 to 1990. Nuclear power technol-ogy is also a possibility that is covered in the nextchapter of this technical memorandum.

Conservation

Technologies to improve the efficiency of en-ergy use can be sold in their own right or as partof a larger package, such as a steel mill, a power-plant, or an oil refinery. The largest gain in effi-ciency comes when a completely new plant isbuilt, incorporating the best of modern technol-ogy. This is also a very capital-intensive approachwhich normally cannot be justified simply on thegrounds of energy efficiency. As demand for pro-duction increases, however, new manufacturingfacilities will be required, and average efficiencywill improve, but most gains in the near-term willcome from retrofits, China’s program to increaseefficiency has had considerable success, but afterthe easy housekeeping measures (simple insula-tion, adjusting combustion conditions, cleaningsteam traps, etc. ), identifying opportunities andimplementing solutions becomes much more dif-ficult and costly. This next stage of energy con-servation may provide many opportunities for thesale of equipment and the transfer of technologies.Some of the technologies are:

● monitoring equipment;● air preheater and heat recuperators;● process controls;

●

●

●

●

●

cogeneration equipment;high efficiency motors and pumps;energy management techniques and systems,including instrumentation and control equip-ment;energy auditing techniques and analysis; andhigh efficiency lighting.

No estimate is available for the potential valueof such technology transfer because it covers sucha wide range, and each sale might be relatively

small. In some cases no single company hasenough vested interest in the technology to war-rant marketing it in China, or there is no clearcustomer. In many of the industrial applications,however, U.S. companies would be competitive,

25

company is discussing the possibility of setting upa manufacturing plant in China. Other solar tech-nologies are either not competitive or are alreadybeing implemented in China (e.g., flat-plate col-lectors). The technology that has been developedin the United States over the past 10 to 15 yearswould probably be helpful, but it is not clear ifit will be economical for industry to provide itto China. This may suggest a greater role for theDepartment of Energy. China is also exploring thepossibility of tapping its geothermal resources.This could be a significant area in the future, sincethe United States has done considerable R&D aswell as limited exploitation.

Solar

The only solar technology that is likely to beat all significant is photovoltaics. At least one U.S.

CHINA’S PROBLEMS WITH TECHNOLOGY TRANSFER

The discussion above indicates China’s need forforeign energy technologies, and its intense driveto acquire technology. China’s ability to choosetechnologies wisely, assimilate them, and diffusethem are also questions which have concerned stu-dents of technology transfer to China. These aregermane questions in light of China’s modernhistory–its quest for technology since the 19thcentury, its concerns about the corrupting influ-ences of foreign material culture which accompa-nied that quest, massive technology imports fromthe Soviet Union which occurred in the 1950s, andthe confused technology policies of the govern-ment in the post-Mao period.

Finance

In comparison to other developing countrieswhich are recipients of transferred technology,China has both distinctive advantages and dis-advantages in dealing with technology from theinternational economy. First, as noted elsewherein this memorandum, China is in a relativelyfavorable position in terms of its foreign exchangeholdings, and has in its energy resources for ex-

port a source of foreign exchange earnings (thelatter accounts for 20 percent of China’s foreignexchange earnings). But China’s energy needs areso great that it is difficult to find the necessaryfinancial resources. Foreign exchange reservescould be dissipated quickly with major purchases(e.g., nuclear powerplants), and the uncertaintiesof the export potential of the energy industry forthe remainder of the century in the face of risingdomestic demand induces caution in the use offoreign exchange.

China’s energy sector remains severely under-capitalized in spite of the fact that it receives 45percent of industrial investment. This affectsChina’s ability to solve the technological needsof its energy sector through technology transfer.While the energy industry is a foreign exchangeearner, reportedly only 10 percent of the foreignexchange it generates is reallocated to the energysector for its foreign procurement uses. Thus,financing is an important constraint on energy de-velopment, but it is one with a differential im-pact. Chinese investment decisions favor foreignexchange earners, and exportable energy sources—oil and coal—also have attracted private funds

26

I

~

II

,II

I

from abroad. Financing is a greater constraint inthe electric and hydropower areas, where the Chi-nese have sought and are receiving concession-ary loans from abroad.

Manpower

A second constraint facing many developingcountries is a shortage of technical manpower,and a lack of a scientific tradition. These prob-lems affect a country’s ability to absorb foreigntechnology. China does have something of a man-power problem, and it also has technology ab-sorption problems in the energy sector. Yet inabsolute terms, China has a large pool of scien-tists and engineers (over 2 million). ’2 Even thoughthe quality of training received by those in thepool varies a great deal, and the distribution oftalent by region and economic sector is unbal-anced, China does have a cadre of technicalspecialists to facilitate technology transfers.

China is also rapidly expanding the technicalmanpower ranks through its own new educationalpolicies, and by taking full advantage of educa-tional and training opportunities offered abroadby institutions of higher education, companies,and foreign governments. Thus, while manpowerinadequacies do appear in the context of technol-ogy transfers, China is also preparing itself forassimilating technology and benefiting fromlearning curve effects.

In contrast to many developing countries,China has an established energy industry, and anextensive R&D network. Thus, in the energy area,all sectors have research, design, and educationalinstitutes which typically have more than 25 yearsof experience. Many of these had experience withtechnology transfers from the Soviet Union in the1950s, and all of them had experience with tech-nological self-reliance since 1960. This R&D sys-tem was terribly disrupted during the CulturalRevolution, and its capabilities were reduced. Butit is important to recall the evolution of this sys-tem since 1949, and the many achievements it hasmade. It is a significant resource which should aid

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

and Engineering Manpower in the People’s Republic of China, U.S.House of Representatives, Committee on Science and Technology,October 1983.

China in assimilating foreign technology, andavoiding technological dependency. China’s tech-nology absorption problems, thus are likely to beshort-term problems; its technical community isextant and must be brought up to world levels.It does not have to be created de novo.

Ironically, the existence of an established energysupply industry and R&D system at times worksagainst technology transfer. The domestic indus-try has a vested interest in domestic supply, andthus China is faced with “make or buy” questionswhich would not trouble other developing coun-tries. In addition, China’s domestic industry hashad trouble converting the results of its researchinto serially produced new products. Moreover,there has been a resistance to innovation on thepart of Chinese managers. These problems, andthe more general relative technological backward-ness of the domestic industry, provide opportu-nities for the foreign suppliers of technology atthe present time. It is likely, however, that effec-tive international technology transfers will alsostimulate the domestic industry to improve its ca-pacity for indigenous innovation.

Internal Transfers

The question of how effectively foreign tech-nology is diffused within China remains uncer-tain. Foreign firms have been concerned that tech-nology licensed to one enterprise may illicitly betransferred to another, in the absence of effectivepatent protection. China’s new patent law andother recent policies designed to encourage tech-nology transfer, should help alleviate some ofthese concerns. A separate question, however, isthe capability of the Chinese system for internaltechnological diffusion.

Chinese organizational life is excessively bu-reaucratic and compartmentalized. The Chinesethemselves often lament what they refer to as“departmentalism. ” The result of these organiza-tional characteristics is that there is often little ef-fective horizontal, interorganizational communi-cation. Instead, communications follow the strongvertical orientations according to which Chineseorganizations were designed.

The Chinese have attempted to overcome thesefeatures by creating mechanisms for cross-cutting

— —

technological communications. The first of theseare the professional societies organized aroundacademic disciplines and industrial technologies.The professional societies, uniquely, draw indi-viduals from different vertical systems (differentministries, academies, and universities) into acommon forum. A second mechanism is a net-work of scientific and technical information serv-ices that have been established, the developmentof which has been aided since 1979 by coopera-tion with the U.S. National Technical Informa-tion Service. In addition to these two mechanisms,in recent years, a large number of technical con-sulting organizations have been formed, and otherorganizations, including production enterprises,universities, and research institutes, have been ac-tive in establishing consultancies as well. Recentpolicy has also sanctioned individual consulting.

Thus, while the formal structure of the Chineseeconomic and research systems works to inhibitthe diffusion of technology and ideas, the climatefor the domestic supply of technical services andthe diffusion of technology has improved mark-edly in recent years. Thus, the likelihood thatChina’s investment in foreign technology will havemore of a payoff—with advanced technology fil-tering out through the economy—is now greaterthan would have been the case in the immediatepast.

Decision making

Decisionmaking is another constraint on effec-tive technology transfer experienced by develop-ing countries, and China too has its share of deci-sionmaking problems. For instance, there has notalways been good coordination among centralministries in the energy sector, and between deci-sionmakers in Beijing and those at the provincelevel. Decisionmakers in Beijing making purchas-ing decisions about foreign technology have notalways had a good understanding of the techni-cal problems in the field. Perhaps most impor-tantly, China’s economic system has over theyears structured incentives in such a way thatdecisionmakers are often risk averse. Individualshave been unwilling to make decisions withoutcollective consensus. The resulting delays in de-cisions are costly to foreign companies who face

2 7

high daily expenses to maintain representativesin China.

The current economic reforms promise someimprovement in decisionmaking, however. In aneffort to put China’s energy industry on more ofa business-like footing, management has in manycases been removed from government ministriesand vested in new corporate entities, such as theChina National Oil Development Corp., whichin principle, are to run as profit-making organi-zations. Efforts are being made throughout thegovernment and the economy to promote youn-ger, more technically qualified and more entre-preneurial individuals into managerial positions.The mechanisms for horizontal technical commu-nication, noted above, also serve to aid in Chi-nese decisionmaking. It seems to be the case now,although this was not true in the late 1970s, thatdecisionmaking about what types of technologyto import is informed by some of the best techni-cal judgments available in China. This is largelya result of the growth of consulting and advisoryservices.

This is not to say, however, that such decision-making is now problem free. The best technicaljudgments do not necessarily result in the mostappropriate technology decisions, and it doesseem to be the case that the full integration of tech-nical, economic, and political criteria remainssomething of an ideal. China’s increasing exposureto the international economy, and particularly tointernational organizations, has now sharpenedthe Chinese sense of the importance of projectplanning and analysis, and efforts have been madeby both the Chinese themselves, and with theassistance of organizations like the World Bank,to strengthen central analytic capabilities, and ca-pabilities for coordinated decisionmaking, ontechnology transfer decisions.

The current economic reforms should improveChina’s ability to absorb and diffuse technologyin other ways as well. Technology as an economicconcept has undergone a fundamental change inChinese thinking. Whereas in the past it wasregarded as a free public good, which in a socialistsociety is available to any and all, technology nowis regarded as a commodity to be bought and soldthrough market transactions. The Chinese hope

28

that this new conception of technology will pro-vide better incentives for those who produce tech-nology, and will make those who would procureand use it, more conscious of its economic value.More effective internal technology transfers, andsharper macroeconomic decisionmaking are ex-pected.

Conclusion

On balance, in spite of financial, manpower,and decisionmaking problems which limit its abil-ity to procure and assimilate technology, Chinaalso has capacities which make these limitationsless of a problem than they have been in otherdeveloping countries. These include an expand-ing pool of trained personnel, an establishedenergy industry with an extensive R&D system,

and new policies to encourage foreign investmentand technology transfer, as well as those for eco-nomic, administrative, and educational reform,which seem appropriate for China’s current needs.Whether these policies will succeecl and whetherthe associated political and social costs can bemanaged are major uncertainties.

China’s leaders, however, have incentives tomaintain an environment favorable to technol-ogy transfer and absorption. China’s rate of eco-nomic growth for the remainder of the centurywill be constrained by energy production, yet theability to maintain political support for the pol-icies of modernization and reform is to a large ex-tent a function of economic performance. Im-proving performance through the use of foreigntechnology thus has great domestic political sig-nificance for China’s current leaders.

Chapter 4

Nuclear Power and the ProposedCooperation Agreement

Chapter 4

Nuclear Power and the ProposedCooperation Agreement

China has a strong interest in developing nu-clear power to supplement its coal and hydro-electric resources. The severe power shortages, de-scribed in the previous chapter, suggest that allmajor options for additional electrical generatingcapacity should be considered, and nuclear energyhas several important advantages, Nuclear plantscan be located anywhere in the country wheresuitable sites can be found. The major populationcenters are near the coast, far from the greathydroelectric sites and larger coal deposits. Bothelectricity and coal can be shipped long distances,but that would require large additional invest-ments in transmission or transportation networkswhich may be inefficient, unreliable, and vulner-able in case of war. Nuclear plants can be locatedrelatively close to the points of demand with fewrequirements for transportation or transmission.

In addition, China has severe problems with airand water pollution. Much of this pollution is dueto coal mining and combustion. Nuclear poweris almost completely free from such problems ex-cept for waste heat emissions which can be man-aged reasonably well. Accidental radioactive re-leases and waste disposal, problems which havebeen of concern to many in this country, appearto be seen in China as manageable, acceptablerisks. Thus if nuclear plants replace old pollut-ing coal plants or even substitute for new coalplants with less than the best available controltechnology, the environment should be improved.Compared to coal, hydropower seems to be rela-tively benign, but it too can cause environmentalproblems (health effects from schistosomiasis andmalaria, loss of land, interruption of natural flowpatterns, catastrophic flooding from dam breaks).Reservoirs are also subject to siltation, limitingtheir lifetimes, and large hydropower projects cancause major social dislocations. For instance, itis estimated that the Three Gorges project wouldinvolve the relocation of from 300,000 to 1 mil-lion people. Thus, while there are certain risks

associated with nuclear power, China’s nonnu-clear power options also have substantial costs.

China already has a significant nuclear exper-tise because of its weapons, submarine propulsion,and research programs. The military nuclear pro-gram, like the defense sector generally, is underpolicy instructions to use its relatively abundanttechnical resources to serve the civilian economy.Should this expertise not be used in the civiliannuclear sector, it would have to be redirected toentirely different fields. In the Chinese system,massive shifts of personnel are difficult to accom-plish. Therefore, these people are more likely tocontribute to the growth of the Chinese economyif a civilian nuclear power industry is created thanby leaving them in the military or trying to retrainthem to ease the shortage of engineers elsewhere.

Overall, nuclear power is an energy option atleast as reasonable for China as it is for many na-tions that already have reactors. However, someof the causes of the worldwide slowdown in thegrowth rate of nuclear power may affect China’splans. First, reactors are extremely capital-inten-sive. Even when economic analyses show the finalpower costs to be lower than coal plants becauseof the low fuel costs for nuclear plants, a largeamount of capital must be supplied before thereis any return on the investment, In particular forimporting countries, considerable foreign exchangemust be spent for the reactor and major compo-nents (the cost of the nuclear steam supply systemis about 20 percent of the total plant cost), evenif attractive financing terms are included. Theoperation of reactors in some developing coun-tries has been a disappointment. Some have oper-ated well, particularly if a high level of servicesfrom supplier countries has been included, but mostcountries (including the United States) have foundreactors considerably more complex and demand-ing than expected. Concerns over costs and safetyhave led to opposition in some countries.

31

32

China’s ability to operate civilian nuclear re-actors safely and reliably is, of course, untested.While general industrial workplace safety prac-tices often appear to the foreign observer as verylax, it is also true that with regard to nuclear tech-nology, China is not a typical developing country.Its nuclear industry has more than 25 years of ex-perience, and has operated with few reports ofaccidents,1 although there has been some concernexpressed about low-level radiation exposure atthe workplace. z China shows signs of taking is-sues of reactor safety seriously. It established theNational Nuclear Safety Administration in Octo-ber 1984, it has enacted new legislation for nu-clear safety, it has sought the assistance of for-eign governments (including the United States, seebelow) for establishing a regulatory framework,and it has begun to train a national team of nu-clear safety officers with the assistance of the In-ternational Atomic Energy Agency (IAEA).3

Plans have been announced to build a total of10,000 megawatts (MW) of nuclear power in Chinaby 2000, a goal that is ambitious but not impos-sible.4 Currently, China has 81,000 MW of gen-eration capacity from all sources. To meet ex-pected demand, this capacity will have to increaseto 250,000 MW by 2000.5 The addition of 169,000MW in 15 years, however, would be a substan-tial achievement. This tripling of supply wouldmatch expected economic growth. Since most de-veloping countries have experienced electricalgrowth considerably higher than economic growth(as was the case in the United States prior to 1973),

‘For an exception, see Mark Baker, “Peking Admits Accident atAtomic City, ” The Financial Times, Dec. 9, 1983,

z Zhang Yongxiang, “Radiation Protection Assessment of the past20 Years of Operation of the First Heavy Water Reactor in China, ”Fushe Fanghu (Radiation Protection), No. 5, September 1983, inJoint Publications Research Service JPR$CST-84-016.6-20.

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

4Jiang Xinxiong, “China’s Nuclear Industry in the Last 30 Yearsand Its Future, ” industrial Equipment & Materials, vol. VI, No. 4,Hong Kong.

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

a considerable increase in the efficiency of use isimplied in the projections.

The only firm commitments for nuclear plantsat present are for a 300 MW plant under construc-tion near Shanghai (the 728 project), and for animported plant in Guangdong. The former, grow-ing out of China’s naval propulsion program andanalyses of foreign units of similar size, will beproduced largely indigenously. The first largeplant is to be built at Daya Bay in Guangdongprovince near Hong Kong using two 900 to 1,000MWe units. Most of the power would be sold toHong Kong, and the plants would be financedlargely by foreign investors. It was expected thatthe nuclear components for the plant would besupplied by France (with the generators comingfrom the United Kingdom). However, despite pro-tracted negotiations and reported near agreement,no contract has been signed, and recently, Chinasolicited competing bids from West Germany. Itis not yet clear if this indicates a major problemwith the French bid or is a tactic to wring moreconcessions. Sites have been chosen for two follow-on projects in Jiangsu and Liaoning provinces.Proposals for the former are being considered.Again, the French and the Germans are expectedto be the main competitors. Japanese firms arealso anxious to participate, and free to bid onprojects since the two countries signed an agree-ment on nuclear cooperation in August 1985. U.S.companies cannot compete unless a nuclear co-operation agreement is in force.

China’s dual approach of developing indigenouscapabilities and importing foreign equipment andtechnology is intended to minimize the timeneeded to master nuclear power technology byincorporating the best available on the world mar-ket, while ensuring that the program does not gettoo dependent on foreign sources, China coulddevelop reactor technology on its own if it hadto, but that approach would take considerablylonger and cost considerably more before reach-ing the present level of western nuclear tech-nology.

— — — . .- .

33

PRESENT CAPABILITIES

China has a substantial nuclear industry whichwas created originally for military purposes. Thisindustry developed nuclear weapons (both fissionand fusion) in a remarkably short time (the firstfission bomb was tested 4 years after the breakwith the Soviet Union, the first fusion bomb lessthan 3 years later). Since then, China has pro-duced at least several hundred warheads. It hasalso built plutonium production reactors, enrich-ment plants, and various research facilities includ-ing other types of reactors. In addition, it devel-oped, largely independently, the pressurized watertechnology (which the United States uses in itsnavy and commercial power industry), and hasbuilt at least four nuclear-powered submarines.These programs are discussed in more detail be-low. The important point to note here is thatChina is not at all a typical developing countryin terms of nuclear technology. Total employmentin the nuclear industry is estimated at 100,000 to150,000 people. ’ The Chinese Nuclear Society hasover 20,000 members, a rough indication of thenumber of scientists and engineers with nuclearskills. Figure 2 shows an organizational chart ofthe Chinese nuclear industry.

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

The 728 or Qinshan project has emerged fromthe military sector in an effort to convert this ex-pertise to civilian use. According to one report,as many as 4,000 people were transferred frommilitary work to the 728 project.7 Recently, aspokesman for China’s Atomic Energy IndustrialCo. estimated that the nuclear industry is in theprocess of shifting from 80 percent military workto 80 percent civilian. g There are conflictingreports of the progress of the 728 project, but theofficially announced goal for operation is 1989.Preliminary site work has been completed, majorcomponents have been ordered, and constructionof the main buildings started. Most compoundswill be made in China. However, the reactor pres-sure vessel has been ordered from Japan, and itsdelivery was given a one time special approvalby the Japanese Government in the absence (atthat time) of a nuclear cooperation agreement be-tween Japan and China. ’

— — —‘Gerard Gourievidis, “Nuclear Power in China, ” Re\rue Gener-

ale A’ucleare, July-August 1984, pp 358-3b8, in Ic) int Pub] lcat ionsResearch Service JPRS-CST-85-005, pp. 103-124.

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

‘China and Japan have now signed an agreement. (See Ch]a Dail},Aug. 1, 1985. )

THE ROLE OF IMPORTED TECHNOLOGY

China has started work on scaling up the 300MW design of the 728 project to 600 MW, butthe domestic industry will not have the designsor the manufacturing capability to meet the 10,000MW goal by 2000 without foreign technology.Several countries would like to sell complete re-actor systems: the United States, France, WestGermany, Japan, and the U.S.S.R. all could ex-port the pressurized water reactors (PWRs) fa-vored by China. Other types of reactors are heavywater (Canada), gas cooled (Great Britain, Ger-many, and the United States) and boiling water(United States and Sweden). The differencesamong the various PWRs are technologically im-portant in detail, but not very significant froman economic, safety, or policy standpoint. The

United States, however, is the only country thathas actually transferred the complete technology,as distinct from selling the equipment. The French,German, and Japanese designs are derived fromU.S. PWR technology, and royalties have beenpaid to American companies.

This record in technology transfer is one of themain reasons that China would still like to dealwith American companies despite delays in thenuclear cooperation agreement. China has madeit clear that it intends to absorb the technologyand develop its own capability to manufacturelarge reactors. By the fourth project, the Chinesehope to be able to supply 80 percent of the partsthemselves, although this may be an unrealisti-

34

Figure 2.— Nuclear Policy Decisionmaking Organization

State Party

vancyand Electric Power

Chinese Association

State Central Military Commission

Party Central­Military Commission

Uniformed Militarj stablishment

of Science and Technology

Chinese Association of Science and Technology

Chinese Nuclear Society

Chinese Nuclear Society

China Nuclear Energy Industry Corporation

a) Foreign negotiating partner

~uclear Policy Implementation

State Council

a) Fuel cycle b) Uranium

geology c) Construction d) Safety e) Foreign affairs f) Science and technology

- Reactor research Nuclear power

- Nuclear physics Institutional oversight

a) 728 Project

a) Enrighmentl 'eprocessing

b) Narhead production c) Jropu Ision d) 1esearch and development

b) Beijing Institute of Nuclear Engineering c) South West Institute of Reactor Engineering and Design d) South West Institute of Physics

iRepresents the most important nuclear affairs decisionmaking organizations.

,OUReE Of lice of Technology Assessment.

—

cally high goal, Even Japan does not supply allcomponents for its reactors. Considering theirgreat need for new generating capacity, theirlimited foreign exchange (sizable relative to mostdeveloping countries, but small relative to theiroverall needs and the cost of a nuclear program)and their existing nuclear capability, eventual self-sufficiency is probably a realistic and necessarygoal.

The first project, Guangdong, would involvethe import of all important components. As notedabove, the nuclear island (reactor, primary

pumps, and steam generators) was expected tocome from France, and the generating componentsfrom Great Britain. The recent German bid re-ceived from Kraftwerk Union, however, hasreportedly led the Chinese to rethink their deci-sion. The German bid is for four 1,000 M W eunits—two for Guangdong, and two for the follow-on project (“Sunan”) in Jiangsu—and provides forthe Chinese to supply 20 percent of the compo-nents for the first project and 80 percent for thefourth. China would have to pay a surcharge forthe technology if the fourth plant is not orderedwithin 6 years after the order for the first.10

There is far more to a nuclear plant than equip-ment, however. Even if there is no attempt totransfer the technology to design and manufac-ture nuclear plants, a considerable amount of ex-pertise must accompany the sale of equipment.For instance, quality control is a crucial concept:much of the plant will be built domestically, soit is necessary to understand plant safety and eco-nomic requirements and how to determine thespecifications for various components and mate-rials to meet these requirements. Operator train-ing must be extensive to ensure that the plant willoperate smoothly and that accident sequences can

‘L’,Yuclear Englneerlng lnternatlona], ]une 1 9 8 5 , p 3,

PROLIFERATION CONCERNS

35—.

be terminated. Workers must be taught how torefuel and perform other kinds of maintenance.Health physicists must know how to determineexposures and how to minimize them. Computerprograms must be supplied to determine fuel man-agement programs, while chemists and metal-lurgists must understand the effects of radiationon materials.

If a manufacturing capability is included in thetransfer, much more information must be madeavailable. Even if a complete design is to be dupli-cated, each reactor will be a little different depend-ing on site-specific characteristics and customerneeds. Designers must know how these differenceswill interact with the full system. They also mustknow the manufacturing capabilities available,and possibly modify the foreign designs for com-ponents accordingly, Therefore they must knowwhy components are designed the way they areand how they are expected to be manufactured.China has reverse engineered some technologies(duplicated them without access to manufactur-ing information), but the process is very difficultand uncertain of success, even for technologiesmuch simpler than nuclear reactors. Designingand manufacturing reactors also requires scien-tists and engineers with a solid grasp of corephysics, metallurgy, safety analysis, and all theother disciplines that go into designing a reactor.Even if the receiving country intends to manufac-ture only the fuel, a considerable amount of nu-clear and metallurgical expertise must be trans-ferred.

Specific areas where the Chinese feel foreigntechnology could improve their own capabilitiessignificantly include advanced fuel fabrication,instrumentation, and construction management.Foreign participation in the 728 project includesin-core monitoring equipment from France andcoolant pumps from Germany in addition to thepressure vessel from Japan.

Preventing the spread of nuclear weapons has are prepared to forego attractive commercial op-been a major objective of this country’s foreign portunities and expend diplomatic capital as partpolic y for many years. We have shown that we of this commitment. It is a basic tenet of U.S. pol-

36—

icy that American technology not be used by anyother country to produce nuclear weapons, al-though the policy has not always been appliedconsistent y.

One proliferation concern is that some spentfuel from commercial power reactors could be re-processed to separate the plutonium, which is thekey material in nuclear explosives. Studies ofproliferation, including OTA’s, have concludedthat this is a possible, though relatively unlikelyroute to nuclear weapons under most conditions.The plutonium generated under normal PWRoperation is far from ideal to work with, and aslong as safeguards are applied, a country runs aconsiderable risk of being detected if it divertsspent fuel, thereby opening itself to sanctions oreven hostile action. A circumstance that couldlead to diversion (as opposed to building facilitiessuch as a small reactor and reprocessing plantdedicated to producing plutonium, possibly clan-destinely) might be a desperate military situationwhich required a very rapid introduction of nu-clear weapons.

Since the technology could be used in a weap-ons program, importing countries must agree tocertain terms in order to obtain U.S. equipmentand other forms of assistance. Typical terms aresigning the Non-Proliferation Treaty or accept-ing equivalent safeguards, and agreeing not toretransfer the technology to other countries or re-process fuel supplied by the United States or ir-radiated in U.S.-supplied reactors without priorU.S. permission.

China, however, is a special case. One argu-ment against the likelihood of the diversion routeis that the plutonium contained in spent fuel, re-actor grade plutonium, would result in low yield,unreliable weapons unless the bomb designerswere very good. China obviously has very goodbomb designers; therefore, unlike practicallyevery other developing country, it could makereliable, high yield weapons (at least in the kilo-ton equivalent range) from reactor grade pluto-nium. Furthermore, with a substantial nuclearpower program, it could easily produce some fuel— .-. —

1 ‘U. S, Congress, Office of Technology Assessment, NuclearProliferation and Safeguards (New York: Praeger Publishing Co.,June 1977).

which had only a short exposure in a reactor, re-sulting in weapons grade plutonium. Not only canmuch higher yields from smaller weapons be ob-tained with weapons grade plutonium, but thematerial is easier to handle, and it generates muchless internal heat, thereby increasing the shelf-lifeof the weapon, and making maintenance of theweapon easier.

Diversion of weapons grade plutonium wouldbe easier if China builds liquid metal fast breederreactors. The Chinese are not known at this timeto have any specific plans to build breeder re-actors, but they do have an interest in the tech-nology, and have a research program which couldenable them to start building in the next century.Considering their relatively small proven reservesof uranium, enough after military uses to fuel15,000 MW for a normal plant lifetime, ]2 this in-terest is consistent with their projections for thegrowth of light water reactors. Uranium prospect-ing continues (with foreign participation), and itappears likely that considerably more uraniumwill be discovered. China thus may find breedersuneconomic for many more years.

Despite the relative ease with which Chinacould use commercial nuclear power technologyto facilitate the acquisition of fissionable materialsfor weapons purposes, it is unlikely that China’sinterest in nuclear technology transfer is based ona desire to do so. It already has several hundrednuclear weapons and all the dedicated facilitiesit needs: over a dozen reactors for research andplutonium production, and reprocessing plantsand enrichment plants that can produce high en-riched uranium for weapons. Fissile material doesnot seem to be a constraint on their weapons pro-duction: if anything they have excess capacity.Effective delivery systems are a more likely con-straint. China has already tested at least 26 fis-sion and thermonuclear warheads (see table 7).Presumably, this is only a small fraction of thenumber it has stockpiled. Therefore, China al-ready has a significant arsenal and the ability toproduce as many more as it is likely to be ableto use. What China does not have is civilian nu-clear power technology.

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

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

— —

Test Date

123456

78

91011121314151617181920212223242526———

16 Oct 6414 May 659 May 66

27 Oct 6626 Dec 6617 June 67

24 Dec 6727 Dec 68

22 Sep 6929 Sep 6914 Oct 7018 NOV 7 1

7 Jan 7218 Mar 7227 Jun 7317 Jun 7428 Oct 7523 Jan 7626 Sep 7617 Oct 7617 N OV 7 617 Sep 7715 Mar 7814 Oct 7814 Dec 7816 Oct 80

3 7

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

Yield.—20kt20-40kt200 + kt20kt300-500kt3mt

15-25kt3mt

25kt3mt3 + mt29kt20kt100-200kt2-3mt200kt-1 mt2-5kt2kt10kt20kt4 + mt20kt6kt20kt20kt200kt-1 mt

Location

Lop NorLop NorLop NorLop NorLop NorLop Nor

Lop NorL O P N o r

Lop NorLop NorLop NorLop NorLop NorLop NorLop NorLop NorLop NorLop NorLop NorLop NorLop NorLop NorLop NorLop NorLop Nor

Delivery system

70 meter towerTU-4 type A/CHong 6 Bombera

CSS-1 MRBMTowerHong 6 Bomber

Hong 6 BomberHong 6 Bomber

UndergroundHong 6 BomberHong 6 BomberHigh towerCSS-2 IRBMCSS-3 ICBMHong 6 BomberUnreportedUndergroundAtmosphericAtmosphericUndergroundCSS-4 ICBMAtmosphereAtmosphereUndergroundAtmospheric

Lop Nor AtmosphericaPRC production model of the Soviet TU 16/Badger medium range for bomberbUnsuccessful–only the fission stage completedcUnsuccessful — PRC and France had detonations the same datedHydrogen warhead for a long range ICMB

SOURCE Strategic Digest, June 1983

While it seems reasonable to dismiss concernsthat the Chinese would misuse American tech-nology to make nuclear explosives, U.S. policy-makers are rightly concerned about the prolifer-ation implications of possible future Chinesenuclear exports, particularly the reexport of tech-nology of U.S. origin without rigorous safeguards.This reexport issue has been of particular concernto some because of reports of past Chinese exportsof enriched uranium and heavy water, withoutrequiring safeguards, to countries which have notsigned the Nuclear Non-Proliferation Treaty. Al-though the United States has a special responsi-bility for guarding against unsafeguarded reex-ports of U.S.-supplied technology, it should benoted that the question of China’s exports per-tains to China’s own technology and to technol-ogy supplied by other countries, as well as to thatsupplied by the United States. In addition, thetechnologies of greatest concern from a prolifer-ation perspective are enrichment and reprocess-

Remarks

U-235 produced yieldU-235 produced yieldU-235 + Li-6 produced yieldU-235 produced yieldU-235 + Li-6 produced yieldU-235, U-238, heavy hydro

gen + Li-6 for yieldU-235. U-238+ LI-6b produced yieldU-235 fuse; Li nucleus; U-238 crust;

traces of plutonium in fallout

Fusion deviceFusion deviceNuclear device

Limited range

“not good”c

Special weapon

Full ranged

centered 44.5 N, 88.6 ENuclear bomb

ing plants. China istechnologies, whichtransferred from the

The concern over

already proficient in thesepresumably would not beUnited States in any case.

reexport, therefore, is lessover the technology itself-than over the politicaldamage to the entire nonproliferation norm shouldthe terms of U.S.-China cooperation be lax on thispoint. U.S. interests would be served not only byhaving strong protections in the agreement againstthe reexport, without rigorous safeguards, of tech-nology of U.S. origin, but also by China’s mov-ing toward a nuclear export policy which is in linewith that of other suppliers. It is not clear whetherChina is moving towards such a position, but pro-ponents of the nuclear accord believe both thatit is, and that the existence of such an agreementwill aid in bringing China more closely in line withU.S. nonproliferation interests. This belief isreflected in the ACDA Nuclear Proliferation As-sessment Statement (p. 1-4) submitted to Congress

38

along with the recently signed U.S.-China nuclearagreement. (A copy of the agreement, and thesupporting documentation, is included in the ap-pendix. ) Critics believe that the evidence support-

OTHER MILITARY CONCERNS

PWR technology was developed for the U.S.submarine program. It was seen later that thistechnology could also be used for commercialpowerplants. Reactors much larger than those insubmarines but conceptually quite similar nowproduce most of the nuclear power around theworld. Since powerplants were derived frompropulsion units, it has been suggested that theprocess could be reversed: a nation with powerreactors could use the technology in hand to de-sign and construct a naval reactor,

China already has at least four nuclear subma-rines. There are two types: attack submarines(SSN), the first of which was launched in 1972,and missile submarines (SSBN), first launched in1981. The latter is capable of carrying about 16missiles, but is still in the testing stage. Chinatested its underwater launched ballistic missile forthe first time in 1982 from a nonnuclear subma-rine. This missile was reported to have a rangeof about 2,000 miles. The next generation mis-sile could have a range of about 4,000 miles.

These submarines are not now a major elementin China’s strategic strike capability, althoughthey could be in the mid to late 1990s. Even with-out leaving the Chinese coastal regions, they canstrike almost all of the Pacific coast of the SovietUnion. The advanced missiles could strike Mos-cow. As of now, the Chinese seem to have no in-tention of sending submarines on distant opera-tional patrols. Considerably more support serviceswould be required to go even as far as the IndianOcean. That means that they are not taking ad-vantage of the extended range of nuclear reactors.The additional cost of the nuclear power presum-ably was justified by their ability to stay sub-merged for long periods to avoid detection. De-veloping a fleet of nuclear submarines would be

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

ing this view is too limited to justify the risk ofan agreement without strict protections. This is-sue and other implications of a nuclear agreementare discussed further below.

a necessary step if China intends to become aworld power.

As discussed above, China seems to be follow-ing the U.S. example of developing power reactorsfrom the naval technology, but there is some rea-son to believe that having access to the latestpower technology could help them improve theirsubmarines. It has been reported that their sub-marines are relatively noisy, making them easyto detect .14 They do not venture far from ports,possibly because of concerns over reliability andguidance system adequacy. U.S. submarines haveimproved dramatically over the past 30 years inspeed, range, reliability, and quietness. While thedevelopment programs in this country for navaland power reactors have been quite separate,some of the technological improvements wouldhave been common to both, such as quality as-surance, materials, and analytical techniques.

No one has yet suggested to OTA a specific im-provement that would derive directly from mod-ern power reactor technology and make a sub-stantial difference in the performance of Chinesesubmarines, but there is a general feeling amongengineers that this access would be useful. Reactorcores could be made more powerful and efficientif designers could use the latest information andcomputer codes; components, such as control rodsand pumps, could be made more reliable, quieter(though the U.S. Trident submarine has a natu-ral circulation reactor, eliminating the need forthe large and noisy primary coolant pump), andless subject to corrosion; systems analysis can im-prove integration of the entire design; quality con-trol would improve, thus increasing reliability.Many of China’s best performing factories havebeen stimulated by exposure to Western practices.Nuclear power should be no different even though—.—.

14 Defense Intelligence Agency, Handbook of the L’hinese l’eop/es.Liberation Army, November 1984, p. 57.

power reactors and naval reactors are quite differ-ent in size, power density, mission requirementsand economic criteria.

It must also be noted, however, that it makeslittle difference whose PWR technology is trans-ferred. There is significantly less difference amongPWRs from the United States, France, Germany,or even the U.S.S.R. than between any of theseand a naval reactor. Thus if the Chinese buy anymodem PWRs, they will have essentially the sameexpertise that they would have had from theUnited States. The only significant difference, asdiscussed above, is that the United States hasunique experience in transferring the technology

to manufactureanother country

39—

nuclear reactors and assistingto develop a nuclear industry.

Other countries now stand ready to try, and willif the price is right, but China probably wouldprefer to rely on the United States.

Furthermore, in so far as the valuable com-modity to be transferred is exposure to modemnuclear industrial practices, it makes little differ-ence which type of reactor is transferred. Thusboiling water reactors or even gas reactors, whichwould not themselves be used in nuclear poweredships, would provide some of the same advan-tages to the Chinese in improving their subma-rine PWRs.

NUCLEAR COOPERATION AGREEMENT

The U.S. and Chinese governments have co-operated on an agency-to-agency basis in the fieldof nuclear safety since the signing of a protocolto that effect in October 1981. Under the protocol,the Nuclear Regulatory Commission has trans-ferred to China a basic set of NRC safety docu-ments, including regulatory rules, safety guides,technical reports, and safety assessment computercodes.

A government-to-government nuclear cooper-ation agreement, which among other things wouldpermit the U.S. nuclear industry to participate inChina’s nuclear development program, was ini-tialed during President Reagan’s visit to China inApril 1984. It was signed in Washington on July23, 1985, and forwarded to Congress with sup-porting documentation on July 24. The text of theagreement and the supporting documentation isappended to this technical memorandum. In-cluded in a separate volume is a discussion of theissues raised following the initialing of the agree-ment (Background Paper 2). Congressional pol-icy considerations are also discussed in chapter5 below. In addition, the Issue Brief from the Con-gressional Research Service, “Nuclear Energy:Consideration of the Proposed Agreement forU.S. Nuclear Cooperation with China” by War-ren H. Donnelly is included in the backgroundpapers because of its thorough treatment of theissues and the congressional role in the agreement.

This section reviews some of the issues raised inthe debate prior to the signing of the agreement,and discusses how cooperation, or its rejection,might affect international proliferation controland relations between the two countries.

As discussed above, China is unlikely to divertnuclear material produced from U.S.-suppliedtechnology, but there are several other aspects tothe proliferation issue. The first is based on con-cerns over China’s past nuclear export behavior.It has been widely reported that China has aideda Pakistani effort to design and construct a cen-trifuge enrichment plant (and perhaps, nuclearweapons), but OTA has not obtained classifiedinformation to verify this charge. Such actionswould indicate a serious disregard for the goal ofstopping the spread of nuclear weapons. Even theless serious allegations of unsafeguarded ship-ments of enriched uranium and heavy water toArgentina and perhaps South Africa would stillbe major breaches of the international nonpro-liferation regime, although these alleged actionsmay be more indicative of past Chinese insensi-tivity to proliferation problems than a consciousdisregard for nonproliferation objectives.

China’s nonproliferation policy appears to begetting closer to that of the United States and othersuppliers. China joined the IAEA in January 1984,and there have been no reports of contracts for

40

unsafeguarded exports since then. China’s leadershave pledged to require safeguards on all futureexports and to refrain from assisting any othercountry to proliferate. If one believes that the alle-gations of previous assistance to potential prolifer-ators are true, but no longer reflect the positionof the Chinese leaders, then one might be willingto dismiss them in thinking of future relations.In the 14 months between the initialing of theagreement and its signing, the executive branchhas attempted to ascertain the details of China’snuclear export policies and behavior, and has con-cluded that China’s current export policy is con-sistent with U.S. nonproliferation objectives. (See,ACDA Assessment Statement, attached. ) Never-theless, some observers have held that since thealleged exports were so recent and so inimical toU.S. interests, and since they may in fact be con-tinuing even now, a heavy burden should lie onChina to show that it is complying and will con-tinue to comply with nonproliferation norms be-fore the United States extends any nuclear coop-eration. Since conclusive evidence on past andpresent behavior, if it exists, has not been madeavailable, OTA is unable to determine which viewis best supported by the facts.

In the period since the initialing of the agree-ment, and in light of the fact that China has notsigned the Non-Proliferation Treaty, there hasbeen considerable discussion about the nature ofChina’s nonproliferation pledges. The concern hasbeen that China’s pledges have only been verbal.Some analysts have felt that a pledge is uncertainunless it is put in writing with explicitly agreedupon wording. They point out that written assur-ances can be made with more explicit detail; spo-ken words can always be reinterpreted or dis-avowed later. Other analysts, however, believethat a verbal pledge has as great a force if madein the appropriate diplomatic context.

Premier Zhao Ziyang has stated publicly thatChina does not favor proliferation and will nothelp other nations. One such occasion was a toastat a state banquet, another was before the Sec-ond Session of the Sixth National People’s Con-gress, which approved of Zhao’s statement. VicePremier Li Peng has been more explicit in elab-orating on Zhao’s statement in an interview withthe press in January 1985. In light of the role and

powers of the National People’s Congress (whichis a forum for announcing and ratifying policy,but which does not have the power to constrainthe Communist Party leadership), and the factthat the Chinese press is a vehicle for advancingstate policy, there is little reason to doubt thatChina meant to go on record with the nonprolif-eration statements of Zhao and Li. This, however,does not alleviate the concerns of those who wishto see pledges in writing, preferably committingChina to adhere to the terms of the Non-Prolifer-ation Treaty.

For historical reasons, the Chinese are extremelysensitive about infringements on their nationalsovereignty. However, since the Chinese also havebeen relatively isolated from the internationalcommunity until recently, they have not been par-ties to the various international regimes, includ-ing the nonproliferation regime, established sincethe end of World War II. These regimes, in ef-fect, proscribe national sovereign rights to achievemultilateral collective benefits, and the Chineseare only slowly coming to accept this principle.In light of this, the provisions for safeguards andreprocessing, as lenient as they may appear to berelative to other cooperation agreements, repre-sent a significant concession by China.

With China’s entry into the IAEA, and with thesigning of an agreement with the United States(as well as with other countries earlier), China isnow much more committed, in writing, to non-proliferation norms than was the case as recentlyas 2 years ago. Assessing the value of these writ-ten commitments for the furthering of nonprolif-eration objectives awaits detailed analysis of thelanguage of the agreements.

The second major issue is over the safeguardsto be applied directly on U.S. exports to China,which if the agreement were put in force, wouldbe the first nuclear weapons state with whom theUnited States had a bilateral agreement. Such safe-guards are required in all our other nuclear agree-ments, and are normally applied by the IAEA.Functionally, such safeguards are somewhat ir-relevant in the case of weapons states such asChina, and IAEA safeguards are not required byU.S. law. Symbolically, however, they have im-

.

portance. The United States and Great Britainhave accepted safeguards on all civilian facilities(although they are in effect applied to only a few)in order to subject themselves to the same burdenas nonweapons states, and recently the U.S.S.R.has entered into an agreement with the IAEA forsafeguards on certain civilian facilities selected bythe Soviets. There is already a considerable feel-ing of discrimination on the part of some non-weapons states, especially among the developingcountries, over their treatment by the supplierstates. Granting lenient terms to China, itself adeveloping country, could lead to demands bythese nations that they be accorded equal treat-ment. This point is disputed by some who findthat developing countries do not regard safeguardsin weapons countries (including China) as mean-ingful in any case.

Other supplier countries might also seek to takeadvantage of lenient terms in a U.S.-China nu-clear agreement. The United States has a recordof insisting on strong safeguards and has had somesuccess in getting other suppliers to go along. Ifthe U.S.-China agreement is seen as inconsistentwith this position, it could be more difficult inthe future to bring pressure on other suppliers.

The safeguards provisions of the U.S.-Chinanuclear accord reflect the fact that the agreementis between nuclear weapons states. The languageis quite different from other recent agreements,and no provision is made for IAEA inspections.IAEA inspectors check operating records and thespent fuel, and keep records to ensure that the fuelhas not been removed from authorized locations.Spent fuel is rather easy to safeguard in this man-ner, but it does call for diligence and continuity.Visits without careful materials accountancywould have little credibility from a safeguards per-spective. The agreement does provide for nego-tiations through diplomatic channels to establishvisits by U.S. personnel to Chinese facilities em-ploying U.S. technology and/or possessing U. S.-supplied materials. The ACDA Assessment State-ment reflects a U.S. understanding that the termsof the visits will be linked to the approval of ex-port licenses (p. II-4). The language of the agree-ment itself is less clear on this point. The agree-ment also calls for the exchange of information

41-— —

on materials accountancy, but it is not clear howdetailed this information would be. This lack ofspecificity may lead to misunderstandings orproblems from differences of opinion.

The safeguards issue became politically morecomplicated after the agreement was initialed:China signed nuclear agreements with Brazil andArgentina that call for the reciprocal applicationof IAEA safeguards on nuclear materials and tech-nology (reportedly, with specific reference to“moderator materials” in the agreement with Ar-gentina), and agreement has been reached withJapan for IAEA safeguards as well. Such provi-sions may reflect the growing realization of theimportance of nonproliferation. The recentlysigned agreement with the United Kingdom, how-ever, does not require IAEA safeguards (on non-sensitive nuclear technology), nor do the earlieragreements with Belgium and Germany. How-ever, in light of the precedent set in the agreementswith Brazil and Argentina, some Members ofCongress have expressed the belief that as partof a continuing effort to strengthen the nonpro-liferation regime, the U.S. agreement should pro-vide for nothing less.

In a closely related issue, U.S. nuclear agree-ments with other countries also contain “consentrights” provisions, according to which fuel sup-plied by the United States or irradiated in U. S.-supplied reactors cannot be reprocessed withoutour permission. Reprocessing plants are far harderto safeguard than spent fuel pools, and if sepa-rated plutonium is available, there would be many

more opportunities for diversion or theft by ter-rorist groups. It has been U.S. policy to discouragereprocessing, particularly in developing countries,for these reasons.

The consent rights provisions of the agreementmay be the most controversial section of the ac-cord. The agreement does not state explicitly thatU.S. permission is required. Instead, it states thatneither party has any plans to reprocess fuel sup-plied under the terms of the agreement and makesprovision for a two-stage consultation processshould the plans of the parties change. The twoparties agree to enter into a 6-month period ofnegotiations to reach a long-term agreement forreprocessing. If, at the end of the 6-month period,

no long-term agreement has been reached, the twoparties agree to consult on measures that wouldallow reprocessing on an interim basis, Duringthese consultation phases, the parties pledge notto take any action that would prejudge the long-term agreement or adversely affect cooperationunder the nuclear agreement. The agreement isvague, however, as to what would happen in theevent that consultations do not produce mutualagreement. Implied, is a right for either party tocease cooperation if an agreement is not reached.As with the provision on safeguards, ambiguityin the agreement may create problems of inter-pretation later.

As noted in the discussion of proliferation con-cerns above, it is unlikely that China would wishto divert spent fuel from civilian power reactorsto its weapons program. Nevertheless, the con-sent rights provision is unorthodox, and is likelyto spur debate on two issues. The first is whetherU.S. consent rights are upheld to the extent re-quired by Section 123 of the Atomic Energy Actas amended. The second is whether the languageof the agreement with China will compromiseU.S. efforts to strengthen consent rights provi-sions in agreements with other countries. Furthercomplications are the facts that China already hasreprocessing experience (although not with spentfuel from commercial power reactors) and thatit has expressed an interest in reprocessing even-tually, including possibly spent fuel it accepts fordisposal from other countries. Thus, reprocess-ing need not involve fuel of U.S. origin, or fuelirradiated in U.S. reactors, but if the commercialpromise of the agreement is realized, China wouldhave a significant supply of fuel subject to U.S.consent rights.

Nuclear cooperation with China could resultin a significant amount of business, perhaps sev-eral billion dollars over the next few years, foran industry that has little prospect for U.S. orders.If carried out unskillfully, it could make our non-proliferation efforts with other countries more dif-ficult. The nonproliferation regime might be un-dercut directly if China does not honor its pledgeto require safeguards on exports, and its naval re-actor program could get an unintended assist, butthese problems could occur with technology fromother suppliers as well. On the plus side, cooper-

ation can also help draw China into the nonpro-liferation regime, and could help build ties be-tween the two countries.

These are risks and benefits that cannot be wellquantified, but are nonetheless real. Rejecting theagreement would have implications that are evenharder to define, Obviously U.S. firms, who havealready lost commercial opportunities, wouldcontinue to lose the economic benefits of large-scale nuclear trade with China. A rejected agree-ment would be a major irritant to U. S .-China re-lations, but analysts disagree over whether reject-ing the agreement, in itself, would cause lastingdamage to bilateral relations. We would, how-ever, lose most or all of our influence on China’snonproliferation policy and nuclear developmentprogram, including areas such as internationalspent fuel storage where we may wish at somelater date to have maximal influence. We mightalso create dissension in the IAEA. We would fur-ther distance ourselves from our allies who be-lieve that the risks of nuclear cooperation withChina can be managed. Refusal to cooperatemight even make nuclear cooperation with the So-viet Union more attractive to China. Thus, thereare risks in not cooperating with China. Whethera stronger agreement could be negotiated, if it be-came certain that this one would not be acceptedby Congress, is not clear.

Having an agreement in force also has risks.Should relations between the two countries sour,transferring nuclear technology might be regardedin the future as a serious mistake (although thethreats to U.S. interests are only likely to be feltover the longer term—sometime after the year2000).” There are several potential risks that shouldbe considered under such a scenario. If Chinesenuclear-powered submarines and eventual surfaceships become good enough, they could ventureas close to our shores as Russian ones do; U.S.defense expenditures might have to rise more thanthe value of the postulated sales in order tocounter this additional threat. Even if China re-mains a regional power, adding to its strengthmay threaten U.S. allies such as South Korea. Im-proved nuclear technology could also enhancetheir capacity for destabilizing behavior elsewherein the world, for instance by selling nuclear sub-marines to Brazil or Argentina.

— ———

People holding this perspective note that Chinais still a nondemocratic, one party state with ahistory of political instability, whose interests arenot identical to ours, even strategically vis a visthe Soviet Union. Nuclear cooperation now wouldbe seen as a significant vote of confidence in a po-litical relationship which has not been proven, andcould create a “carte blanche” atmosphere for ex-port controls generally.

It should be noted, however, that other tech-nologies being considered for transfer to Chinacarry national security risks as well. Judgmentsas to the severity of the risks of nuclear, and otherhigh-technology transfers are contingent in parton assessments of the nature of the political rela-tions between the two countries (a subject nottreated in great detail in this technical memoran-dum, but one to be taken up in greater depth inthe full assessment). If political relations areregarded as good, and susceptible to improve-ment, then the risks of nuclear cooperation, andother technology transfers, can be seen as man-ageable in a process of building enhanced politi-cal understandings and commercial ties. If therelationship is seen as fragile, and inherentlylimited, then the risks are less tolerable.

While there has been widespread support (al-though by no means unanimity) for improvedrelations with China if they are based on a con-gruence of interest and a compatibility of think-ing, opinion on nuclear cooperation is more com-plex. At least four general perspectives can beidentified.

The first sees the development of U.S.-Chinarelations since 1978 as a major achievement inovercoming nearly 30 years of hostility. Not onlyhas hostility been overcome, but mutual interestshave been identified, and friendship has devel-oped. The possibility for building on those mutualinterests is good and nuclear cooperation is partof that process. U.S. access and influence will helpChina towards a fuller understanding of and com-mitment to the international nonproliferation re-gime, and both economies will benefit.

The second view, though not necessarily un-friendly to China, places highest priority on non-proliferation. In this view, China’s past behaviorhas been unacceptable, and its current stance,

43

adopted only recently, is highly suspect. There-fore, approving any agreement without the strong-est provisions on safeguards and assurances wouldbe a blow to nonproliferation control. Chinashould be called on to demonstrate its compliancebefore it is granted cooperation, and any signifi-cant doubt should be grounds for rejection.

The third perspective sees little use for nuclearpower anywhere, especially in a developing coun-try. China should be encouraged not to waste itslimited money on highly expensive and risky re-actors when other energy sources could fill theneed at less cost. Thus nuclear cooperation wouldbe a digression at best and possibly much worse.

Finally, there is the perspective which is verysuspicious of China but not necessarily of nuclearpower. China is likely to misuse our technologyto our eventual dismay. As in the nonprolifera-tion perspective, the burden of proof should beon China before it is aided, but the nature of theproof here would involve a broader set of issues,such as a closer adherence to U.S. diplomatic po-sitions generally.

These perspectives are based on differing assess-ment of the risks and opportunities involved withtrade with China as discussed above, as well asspecific views on nuclear power. Definitive sup-port or rebuttal is not possible at this time. Ques-tions that Congress could ask include:

1.

2.

3.

4

How well does the agreement comply withU.S. statutory requirements, particularlywith regard to safeguards and reprocessingconsent rights?What is the evidence that China has helpedPakistan and other countries in ways wewould find unacceptable? What is the evi-dence that this behavior is not now takingplace?How soon, and in what ways could the U.S.nuclear assistance effect China’s industrialbase as it pertains to the ability to produceimproved nuclear weapons and warships?Would assistance from other major nuclearsuppliers be any different?What access does China now have to our na-tional laboratories, companies involved inmilitary work, and production facilities, andhow would that change if we approve thenuclear cooperation agreement?

44

5. What financial assistance, if any, should theU.S. Government supply through the Ex-port-Import Bank for the sale of nuclear re-actors to China?

6. What will be the specific procedures for safe-guards? What safeguarding arrangements doother major nuclear exporting countries havewith China? Why has China not volunteeredto submit its civilian facilities to IAEA in-spections?

7. How do other Asian countries feel about im-proving China’s nuclear capabilities?

8. How would other developing countries viewU.S. nuclear assistance and financial aid toChina when the United States may not pro-vide either to some nonnuclear weaponsstates?

9. How does the fact that China now has nu-clear cooperation agreements with all themajor western suppliers (France, Germany,Britain, Japan), and with lesser suppliers(Brazil, Argentina, Belgium) affect the cal-culation of the costs and benefits of a U. S.-China agreement?

Chapter 5

U.S. Policy: Tools forControlling and

Energy Technology TransfersPromoting

— —

Chapter 5

U.S. Policy: Tools for Controlling andPromoting Energy Technology Transfers

The U.S. Government has available both con-trols and promotional programs that can be usedto affect the scope and nature of energy technol-ogy transfers to China, within the overall con-text of U.S. foreign policy.

Export controls have historically been by farthe more extensively used of these two avenues,For 20 years all U.S. exports to China were em-bargoed. It was not until the early 1970s whenU.S.-China relations began to thaw that U.S. non-strategic exports similar to those allowed for theSoviet Union were permitted. During the past 3years, U.S. restrictions on exports to China havebeen significantly loosened in light of a dramaticshift toward encouraging Chinese economic mod-ernization and U.S. trade. But controls remaincentral to U.S. policies affecting technology trans-fer to China.

The U.S. approach to policies governing tech-nology transfer contrasts with those of othercountries supplying technology to China such asJapan and some West European nations, not onlyin the more extensive use of controls but also be-cause the United States has no aid program forChina and does not use extensive official financ-ing to promote energy-related development proj-ects there. Science and technology exchanges arethe major way the U.S. Government helps to de-velop China’s science and technology infrastruc-ture needed to absorb foreign technologies andinnovate domestically. Many of these exchanges,however, contribute only rather indirectly to com-mercial technology transfers in energy fields.

U.S.-China relations have bloomed since thenormalization of relations in 1979. Both the UnitedStates and China see technology transfer, particu-

larly in energy, as a key area of cooperation. Butdespite the great expectations, doubts remainabout U.S. willingness to transfer the most ad-vanced and sensitive technologies, particularlythose with military as well as civilian applications.This has caused some to question whether the U.S.commitment to export liberalization is really gen-uine, while others fear that the United States maybe moving too quickly to export dual-use tech-nologies without developing a comprehensivestrategy.

In the sections that follow, disputes surround-ing U.S. policies (both controls and promotionalprograms) that affect energy technology transfersto China are discussed and possible improvementsoutlined. The analysis indicates that the ration-ale for controls on militarily sensitive technologiesremains valid, but problems in U.S. and Cocomexport administration have created a climate ofuncertainty. Additional steps could be taken toimprove these systems, better focusing efforts onrestricting flows of militarily sensitive exports,Most of the energy technologies that China wants,however, are not sensitive dual-use technologies.The U.S. Government could play a more activerole in promoting these kinds of energy technol-ogy transfers.

Many of the improvements in policy that couldbe considered are not easily susceptible to con-gressional action. Indeed, some of the long-termpolicy issues raised below cannot be effectively

handled by the United States unilaterally. Never-theless, the time is ripe for a review of U.S. pol-icies affecting energy technology, because such areview could contribute to the integration of pol-icies and programs into a more coherent strategy.

47

4 8

CONTROLS ON NONNUCLEAR ENERGY EXPORTS

The Rationale of U.S. Export Controls

The U.S. system of export control attempts tobalance two sometimes conflicting goals. Theseare preserving national security (by restricting theexport of items that could significantly augmentthe military capabilities of unfriendly countries)and ensuring the ability of U.S. firms to export.In more concrete terms, the system is designed toidentify and restrict U.S. exports that have mili-tary significance to particular countries, withoutconstraining trade in other commodities and toother parts of the world. Sensitive exports thatrequire extensive review and a validated licenseare contained on the Commodity Control Listwhich includes more than 300 entries.1 The U.S.system of export controls also includes a coun-try classification of export destinations which re-flect U.S. foreign policy considerations. Both themilitary significance of-the particular commodityor technology and U.S. relations with the coun-try to which the export is destined are taken intoconsideration in reviews of applications forexport,

The rationale for U.S. export policies to Chinawas summarized by President Reagan in a 1981directive on technology transfer. It states that theUnited States “supports a secure, friendly andmodernized China.”2 Earlier, the Carter Admin-istration decided to liberalize exports of high tech-nology civilian goods with potential military ap-plications.

In the past 4 years, U.S. controls on exportsto China have been rapidly liberalized. Under the“two times rule” adopted in 1981, exports withtechnical levels twice those previously exportedto the U.S.S.R. and China were approved. In aneven more dramatic move, China was transferredin June 1983, to category V, a catchall which in-cludes friendly countries such as Japan and WestEuropean allies as well as Yugoslavia and India.3

‘The entries are categorized by Export Commodity Control Num-bers (ECCN) in the Department of (~ommerce Export Regulations,

‘See Shelly Mumtord, “U.S. Relaxes Restrictions on China Trade;Expects $2 Billion in Export Revenues, ” EDIV, May 17, 1984, p, 301,

31n announcing this change, the U.S. Government noted that “re-strictions on certain products and technologies” would neverthe-less be allowed. See U.S. Department of Commerce, Export Admini-stration Artnuai Report, 1983 (Washington, DC: 1984), p. 9.

The United States also permits exports to Chinaof items on the U.S. Munitions Control List ona case-by-case basis. These steps signaled that of-ficial U.S. policy sees China as a friendly coun-try and seeks to promote its modernization.4

U.S. export administrators took an unusual stepin establishing a “zone” system to cover China ex-ports. The goal was to restrict certain kinds ofexports in the interest of national security whilespeeding the review of applications for nonsensi-tive exports by providing clear guidelines to li-cense review officers.

The China zone guidelines enable the Depart-ment of Commerce to expedite applications fromU.S. businesses for “green” zone technologies thatare seen to pose no threat to U.S. national secu-rity if exported.5 Because of the time and techni-cal effort required to formulate the zones, the De-partment of Commerce began by targeting sevenareas for special attention in license reviews. b

These seven categories, which were said to makeup about 75 percent of all license applications forChina, 7 were semiconductor production equip-ment; electronic instruments; microcircuits; com-puters; recording equipment; oscilloscopes; andcomputerized instruments. In the case of greenzone items, the Department of Commerce can byitself approve exports .8 U.S. export regulationsinclude references to green zone items.

4See, for example, Department of State, “The U .S .-China Rela-tionship, ” Current Policy, No. 594, May 31, 1984, p, 2. PresidentReagan directed in 1983 that China be treated as a “friendly, non-allied country. ”

‘For a statement of the guidelines for U.S. controls on exportsto China, see testimony of William T. Archey before the Subcom-mittee on International Economic Policy and Trade, House ForeignAffairs Committee, Nov. 17, 1983.

‘Today there are eight major categories. Two of the orginal cate-gories have been merged, and two additional ones added (micro-wave, numerically controlled machine tools).

70ne expert has estimated that today the green zone actually cov-ers about 40 to .50 percent of license applications.

8Some types of U.S. exports to China, such as agricultural prod-ucts, do not require licenses or export review. In 1984, for exam-ple, total U.S. exports to China were valued at $3.o billion ($1.9billion in manufactured goods; $614 million for agricultural exports;$443 million other), while the total value of U.S. licenses approvedfor exports to China was $2.o billion. This figure should, however,be used cautiously, since many export shipments may not actuallyoccur or there may be delays between license approval and actualshipments. One expert in the U.S. Department of State estimatesthat only about 10 percent of all U.S. exports actually require ex-tensive review.

.

4 9

The most advanced technologies that have di-rect applications to military systems are theoreti-cally included in the “red” zone, although no listof red zone items has been published. Includedare technologies with direct and significant mili-tary applications—nuclear weapons and deliverysystems, technologies and equipment used in intel-ligence gathering, electronic warfare, antisubma-rine warfare, power projection, and air superi-ority. 9 Some of these technologies could providemore significant military applications than somekinds of less sophisticated weaponry. Since theexport of red zone technologies may pose a threatto U.S. national security, these license applica-tions are carefully reviewed. Exports to Chinahave been greatly liberalized in light of growingfriendly relations, but militarily sensitive exportsmay be denied.

In practice, license reviews for all items not onthe green list are approved on a case-by-case ba-sis and require reviews by the Department of De-fense and other agencies as appropriate. Initiallyit was hoped that a three zone system (red-inter-mediate-green) would clearly categorize all ex-ports and facilitate reviews, but in actuality de-cisions about cases depend on a number of specificfactors about which various executive branchagencies may disagree. Non-green zone exportsmay be approved if the agencies determine thattheir export causes no threat to U.S. national secu-rity. This determination is based on a number offactors. These include, among others, the type ofend-user in China and the control that the U.S.firm will retain over the technology. In somecases, the reviewing agencies set conditions on ex-ports (for example, that the equipment must beoperated solely by the U.S. firm or that it beleased but not sold to China).

The categorization of items and technologieshas evolved over time. For example, the UnitedStates restricts the export to China of computerswith very high processing data rates (with proc-essing data rates above 155 Mbits/second) on thegrounds that they have significant military appli-cations. The ceiling level has changed over time.In late 1984, after months of consideration, the

U.S. Government approved the leasing of a high-powered Cyber computer to China. Both becauseU.S. policies toward China have changed and be-cause technology is constantly being developed,the Commodity Control List and the zones mustbe periodically updated. (Technical AdvisoryCommittees, which include industry representa-tives, help to identify the critical technical datain their fields. ) At present, an interagency groupis working on a review of the green zone (GreenZone II). This review has been underway for morethan a year, much to the distress of exporters.

The total volume of trade with China hasgrown rapidly in the context of liberalization ofexport regulations. The dollar value of all a p -proved licenses for export to China increased from$523 million in 1982 to $2 billion in 1984. Accord-ing to one estimate, the “high-tech” exports (ex-cluding commercial aircraft) exceeded $300 mil-lion of this total by 1984.10 During 1984 of the9,637 license applications processed, only 15 weredenied. In addition, 1,810 were returned withoutaction (often because forms were incomplete).

Because equipment used in energy developmentspans a number of Commodity Control List (CCL)categories, it is difficult to quantify the dollarvalue of these energy exports. In 1984 over $1 mil-lion worth of geophysical and mineral prospect-ing equipment and about $21,000 in nuclear re-lated equipment was approved for export. Thelargest dollar value of approved exports ($1.1 bil-lion) during 1984 was for “electric and electronicequipment.” 11

Under the current U.S. export system forChina, there are very few nonnuclear energy-related exports considered to have direct militaryapplications. Most energy-related commoditiesand technologies therefore are included in thegreen zone or require no license review.

The exceptions are high-powered computersand array transform processors used in oil andgas exploration, and certain kinds of calibrationand measuring equipment. Because these kinds ofequipment and technology are critical for someenergy development projects such as offshore oil

“See L] S [Depar tment ot State, ‘U. S E~port ~ontrols and China, ‘

GIS~, hlarch 1Q85.

1’Ibid,‘ ‘The Ilepartrnent (~1 C~~mmerce suppl]ed these statistlc~ to OTA

in hlay 1 Q85.

50

explorations, some U.S. energy technology trans-fers have been limited by these restrictions. Spe-cifically, U.S. export controls do not permit salesof certain kinds of array processors used in evalu-ating seismic data in support of oil development.l2

U.S. export restrictions have been revised a num-ber of times, with the result that U.S. firms suchas Western Geophysical and Control Data Corp.have been forced to modify equipment. This isa costly process.

13 In addition, regulations on theexport of technical data have been said to limitU.S. firms in providing training in analysis of seis-mic data.

Problems With the System

U.S. controls on exports to China have beenofficially relaxed during recent years, but someuncertainty remains for exporters about what canand cannot be exported and how long the proc-ess of license review will take. *4 This uncertainty

I has been reflected in delays in license reviews, turfbattles within and between U.S. agencies involvedin export administration, difficulties in coordinat-ing U.S. export policies with those of Japan andWestern Europe, and (until recently) congressional

I ~The current official green zone standard for array Processorsallows export of those that have a maximum rate of multiply oper-ations less than or equal to 2 million per second or not less than40 milliseconds for performing an FFT (fast fourier transformer) for1,024 complex points. Industry officials note that there is no com-mercially available array transform processor that currently meetsthese specifications.

1’According to one of the firms (Western Geophysical), the modifi-cations (for eight array processors ) cost $180,000. The total sellingprice of one of the processors is approximately $100,000. None ofthe eight units have yet been exported to China.

“In May and June 1985, OTA made a series of calls to Depart-ment ot Commerce telephone numbers set up to provide exporterswith information about the licensing system and the status of theirapplication reviews. Out of 20 calls made to these numbers, the OTAcall was answered only twice (and in both cases immediately puton hold). This admittedly limited experiment provides substantia-tion for claims that U.S. exporters find it extremely frustrating toobtain information about export administration.

stalemate over renewal of the Export Administra-tion Act.

The number and dollar value of export appli-cations for China more than doubled between1983 and 1984 alone (see table 8). Not surpris-ingly, the U.S. export administration system hasbeen unable to quickly respond to the surge inapplications. Exporters have complained aboutdelays associated with export licensing. BetweenJune and October 1984, the licensing review proc-ess within the U.S. Government took an averageof 117 days for green zone and 192 days for non-green zone case reviews. In addition, the requiredreview by Cocom (discussed below) took aboutanother 100 days in each case.ls

Exporters and some U.S. Government officialsclaim that these delays have caused U.S. firms tolose sales. OTA has not been able to develop anestimate of lost sales, but U.S. firms probablyhave been disadvantaged in some cases becauseother supplier countries do not have such exten-sive export controls. Based on the informationnow available, however, it is not clear whetherU.S. sales in energy-related fields would have beensignificantly higher had the delays been reducedsince there are a number of other factors such asfinancing that come into play.

In addition to the backlog in license reviews,exporters complain about apparent inconsisten-cies in the system. For example, U.S. business-men need approval to ship computers to theirbranches overseas; but they can often purchasethe same computers abroad. U.S.-made advancedtechnology products such as computers are avail-able throughout Asia and particularly in HongKong, China’s second largest trading partner.

The Department of Commerce has taken anumber of steps to streamline the review proc-

15Data provided by DOC to OTA in May 1985.

Table 8.—Export Applications for the PRC (millions)

Received = Pending + Processed= Approved + Returned + Denied

1983 . . . . . . . . . 4,015 ($1,300) 84 3,931 2,834 1,082 151984 . . . . . . . . . 9,637 ($6,300) 3,366 6,271 4,443 1,810 151 9 8 5a . .......3,900 ($2,500) NA NA 1,800 NA 10aFirst quarter 1985.

SOURCE U S Department of Commerce, May 1985

— —

51

ess. In May 1985 DOC officials stated that theywere processing green zone cases within 30 daysand that non-green zone case processing had prob-ably been reduced to about 14.5 days. A Departmentof Defense official stated in June 1985 that theywere processing cases in 18 to 20 days (average).

In addition to increasing the numbers of licensereviewers, DOC officials point to specific stepstaken to reduce the backlog in China applications.These include the elimination of end-user checksby other U.S. agencies for green zone applications;initiation of fast track processing by routing casesdirectly from the licensing division to the Cocomsubmission branch (eliminating review by theEast-West trade office); using a form cover letterfor submissions to Cocom; and automating someaspects of the licensing process.16 Other stepstaken (using faster means of sending submissionsto Paris) were also expected to reduce the timerequired for Cocom review of U.S. cases.

DOC officials indicate that much of the back-log in Washington has been reduced and the re-view time significantly shortened. Whether thiswill continue and whether U.S. exporters, whohave heard such promises by the DOC for years,will be satisfied remain to be seen.

Another type of problem concerns the defini-tion of the green, intermediate, and red zones. Thethrust of changes in U.S. controls on exports toChina in recent years has been to focus attentionon the really sensitive items (in the intermediateand red zones ), while speeding the review of non-sensitive green zone items.

One dimension of this problem is that the zonedefinitions must be constantly updated, in lightof technological change, foreign availability ofitems, and developments in U.S.-China relations.At a more fundamental level, disagreements aboutthe zones reflect uncertainty about the nationalsecurity implications of transferring certain typesof technology to China. Official U.S. policy char-acterizes China as a friendly, non-allied countryand export policy is to approve much more ad-vanced and sensitive technology exports to Chinathan to the Soviet Union. There is, however, room

for disagreement among informed observers aboutwhat the proper threshold level should be and onwhat basis it should be determined.

Another question is whether sensitive (red zone)exports are slipping by U.S. license reviewers, ei-ther because of Chinese attempts to circumventU.S. restrictions, or because license reviewers lackproper expertise and resources to evaluate exportapplications.

The first issue was raised in congressional hear-ings a few years ago. The Defense IntelligenceAgency (DIA) in 1982 referred to an upsurge inChinese attempts to obtain Western computersand other technologies restricted by Cocom throughsurreptitious efforts. The DIA Director, in con-gressional testimony, said that the Chinese Gov-ernment did not appear to have a formal policyof illegal acquisition of restricted technologies, butit was “likely” using commercial channels andscience and technology exchanges to supplementlegitimate commercial purchases. ” Other observ-ers have suggested that China may use invest-ments in the U.S. and dummy firms to gain ac-cess to U.S. technology.l8

Questions about the capabilities of U.S. licensereviewers, the second issue, have also been raised.A 1984 congressional hearing on technology trans-fer highlighted a turf battle between the DefenseDepartment’s DRE (Defense Research and Engi-neering) and ISP (International Security Policy).19

More recently, Congress has debated the pros andcons of an expanded role for the Department ofthe Defense in Cocom.20) The Department of Com-

‘ - S e e T e s t ] rnon} (~t It. Gen. lames A 11’]lllam>, 111A, before Sub-

committee on International Trade, Finance, and Sc.cllrit}, E( [~n(>m ic.~,]olnt Economic Committee of the Congress, A)~(wations of l<esource~in the .$oviet Union and China, June 2~ and Dec. 1, 1~82, p. 113.See also “U.S. to Ease Technology Controls, Change Country Gr[~up;AuRust Announcement Seen, ” [1. S. E~port L1’eeklj, June 28, 1 Q83,pP. 463-464.

“Denls Fred Simon, “Technology for China: Too hluch Too FastT”Technc]log~r Re\ie~{r, October 1984, p 48,

‘OSome Nlembers of Con~ress questioned ~~hether the more p(}-]itica] 1S1’ could effecti~,el} handle the technical rc,klel, formtrl} Iecjb} DRE This dispute wa~ sett led In fat{}r t}t the IS1> In the newExport Administration Act pawd b} b~~th 1 lt]uiei In June 1 ~85. SeeSenate Comm]ttw on Go\rernmental Affairs, Subct>mmlttee ~}n I’er-manent ln~’estlgatlons Trdnster’ of Technolo~jr, hearings ( Apr 2,3, 11, ~nd 12, 1 Q&l I and rep{~rt (September 1Q841, pp. 15 and 2b,DOD (lft]c]al~ ]n the Strateg]c Trade ~lrect(~rate sd} that they callon t he res(~ u rcw [>! DRE v,. hert nw’ded I n 1 IC ~’n~e rev ]ew’s ~nd ha VC’avai]ablc technical expert]w thr~~u~h~~ut the Defenw Ileparment.

“’see Congressional]” Record hla~. Q, IQ85, H 3061

52

merce and the Customs Service have, moreover,feuded over which has primary responsibilty forexport enforcement. Bureaucratic struggles withinU.S. export control agencies and between themrevolve around who is best equipped to maketechnical judgments required in license review andwhether reviewers have adequate resources to doa good job.

Critics believe that the licensing bureaucracywas established to control exports and is not reallycommitted to export liberalization. In addition,high-level policy makers have openly disagreedabout U.S. export controls, thereby sendinglicense examiners and exporters alike mixed sig-nals. In this sense, the delays in the review proc-ess reflect underlying turf battles and differencesin perspective among the relevant agencies. Con-gressional stalemate over renewal of the ExportAdministration Act reflected and contributed tothese disputes. After 2 years of delay, Congressrenewed the Export Administration Act on June27, 1985, thereby sending a clearer signal to theexecutive branch on export controls which couldhelp to moderate disputes among agencies overjurisdiction.

From one perspective, however, delays in li-cense reviews may be a reasonable price to payfor ensuring that really sensitive technologies arenot exported. On the other hand, delays may stemfrom negligence on the part of reviewers. Thequestion is whether the process of export admin-istration can be streamlined and, more impor-tantly, whether a coherent strategy can be builtto guide policy implementation.

Problems with export administration may beas serious (or perhaps more so) in Paris as inWashington. Paris is the headquarters of the Co-ordinating Committee for Multilateral ExportControls (Cocom), an informal organization in-volving the United States, Japan, and West Euro-pean countries with the purpose of coordinatingexport policies toward Communist countries. Avoluntary organization formed in 1950, Cocomoperates on the basis of unanimous approval fordecisions but has no formal sanctions against vio-lations of its informal guidelines.

Cocom maintains three lists of items that ex-porters cannot sell to Soviet bloc countries (in-

cluding China, Albania and Southeast AsianCommunist countries) without its permission.These lists cover military, nuclear, and dual-useitems. Despite its limited resources, Cocom re-mains one joint Western institution that keeps ex-port controls on the multilateral agenda.

Because of U.S. membership in Cocom, U.S.export applications for sales of items on theCocom list must pass Cocom review as well asU.S. review. Especially since U.S. c:ontrols on ex-ports to China were loosened in 1983, the num-ber of U.S. submissions (requests for approval byCocom) has grown dramatically. In 1984 morethan 2,200 U.S. license applications were sent toCocom, while a total of more than 6,200 wereprocessed in the United States. z] The currentCocom system sets a voluntary framework thatmakes it difficult (but not “illegal”) to make cer-tain changes in U.S. export administration forChina. Eliminating review of green zone exportsto China altogether, for example, would not belikely so long as some of these items are coveredby Cocom review. Nor is the United States likelyunder the current Cocom system to institute dis-tribution licenses, which permit U.S. sellers tomake repeated sales (unlimited quantities to un-specified end-users) during a specified time period.

While the details of Cocom decisionmaking areconfidential, general problems have been muchpublicized. The major enduring dilemma is tomaintain an operating consensus among Cocommembers who often disagree about the details ofexport policy for specific Communist bloc coun-tries. With regard to China specifically, the UnitedStates has found itself in the unusual position inrecent years in its support of a liberalized Cocomreview for China exports, while at the same timeadvocating tighter controls on exports to the So-viet Union. Countries such as France and WestGermany have reportedly resisted these efforts inlight of the fact that Washington has refused toloosen up on exports to countries such as Bulgariawhere they do more business .22

Member countries have accused each other ofplaying “games” in Cocom designed to further the

“Some of the license applications sent to Ctxom cover two ormore U.S. applications.

“See report by Stuart Auerbach, “Cocom Feuds Over Trade toE a s t B]cjc, fr MIa// street Journal, JU]Y 17’, 1984 P 27

5 3

commercial fortunes of domestic firms. U.S. firmshave complained that they have lost sales becauseof red tape and delays in Cocom review.23 Butfirms from other countries have also complainedthat the United States uses Cocom to its ownadvantage.

What is clear is that China applications makeup by far the bulk of U.S. submissions to Cocom(90 percent),24 and there have been many moreU.S. submissions to Cocom than those by otherCocom members. According to one report, inearly 1985 the United States had submitted 70 per-cent of all cases before Cocom; 807 of 877 pend-ing cases were for products destined for China .25

In May 1985 there was still a large backlog inCocom cases, according to State and CommerceDepartment officials. Of the 454 U.S. cases pend-ing in Cocom, 418 were for exports to China, Inaddition, more than 200 submissions had not beenmade because of a limitation that no more than20 U.S. cases can be submitted weekly .2” Whiledata are not available on numbers of submissionsby other Cocom countries, it appears that U.S.cases for China are still the great majority of casesnow pending in Cocom, despite the fact that thevalue of U.S. exports is lower than that of Japan,for example.’;

These problems have become points of conten-tion in Cocom, and they have also been noted bythe Chinese. The Chinese Vice Minister of theMinistry of Electronic Industry told a group ofSeattle businessmen in April 1984 that Cocom ap-proval was still a problem, despite the fact thatthe United States had relaxed its export regula-tions. 28 The Japanese Mainichi Daily News re-ported in March 1985 that Minister Ding Min ofthe Chinese Embassy in Tokyo called for Japa-

1‘See Stuart Auerbach, Red Tape Snarl> Seattle Exp~>rter’s Saleto C h i n a , Jlr~\h/ngtf)n Post, JuI} 2 2 , 1Q84, p F8.

‘:[lata pr[)vlded b} DOC t(> O T A In Nla>r 1Q85.“ See Dan]el St~utherlanci and Stuart Auerbach, “Hi~h Tech Sales

tt~ C h i n a D e l a y e d , ilr~+ington Post, hlar 5, 1~85, p. Dl.21 Int(lrmation pr(~vlcied to O T A b y DOC, State, hla} 1~85.‘ It may be that other countrie~ submit caws to C<mlm only when

a m]] itary end-user ]~ intr(]l~’ed (Jr th[’ Item lt clear-l>’ m il itaril}’ sen-sitive Cocom does not make public data that would make it possi-ble t(> sub>tantlate the h}pc~thesl;, b u t It +eems unl]kely that the[]nited $tate~ i~ sell inx so man} more items on the Coc(~m list than(~t her countries.

‘nStuart Auerbach, “China Hits Slowness of High Tech Imports, ”[$’dshjngt(}n Post, Apr. 24, 1984, p. D~.

nese efforts to remove China from the Cocomlist ,29

U.S. officials have disagreed among themselvesabout Cocom, and one high ranking trade offi-cial resigned in 1983 to protest what he called a“counterproductive” U.S. strategy in Cocom, spe-cifically vis-a-vis controls on exports to theU.S.S.R. and Eastern Europe.30 China-relatedexports are thus one facet of a larger Cocom con-sensus-building dilemma, but the surge in U.S. ap-plications for China exports has certainly over-whelmed the organization.

Possible Improvements inU.S. Export Controls

The problems discussed above suggest a num-ber of possible approaches to improving the U.S.system of export controls. Congress has, first ofall, helped to clarify overall U.S. policy by pass-ing an Export Administration Act. Failure to passthe act allowed export controls to be the productof bureaucratic rivalries within the executivebranch. The recent passage of export control leg-islation holds at least the potential for reducingU.S. exporters’ uncertainty about the system.

Nor does the U.S. Government possess exten-sive information about certain aspects of technol-ogy transfer to China, or to other parts of theworld for that matter. More information and sys-tematic review of alleged problems such as vio-lations of U.S. export controls in third countries,and (if they occur) patent infringements and ille-gal acquisitions of technology by China could helpto clarify where the real national security prob-lems lie. Perhaps even more importantly, variousagencies could cooperate better in exchanging rele-vant information.

There are a number of other possible stepswhich the executive branch might consider to im-prove the management of export adminstration,including concluding the Green Zone II review,The Department of Commerce has already addeda number of people to its licensing review staff,

‘“’’Envoy Urges Removing 1’RC From Coc{lm List ,“ ~$1.~inichi D.liljrA’ew’s (English ), Mar. 20, 1 Q8s, p. 1.

“see \f’illiam A, Rootf “Export Control\ That \l’ork, ForeignPolic}, N(> 56, fall 1 9 8 4 .

54—

but managerial improvements could also be made.License reviewers normally handle cases dealingwith exports worldwide. It might be useful to as-sign a few individuals to concentrate on reviewof China cases, while preserving non-area exper-tise at higher decisionmaking levels. Measures tofurther automate the system of license review sothat documents and information can be quicklyexchanged among executive branch agencies couldalso help to streamline the U.S. export controlprocess. In order to ensure that the really sensi-tive items are restricted, efforts could be made tofurther develop the technical expertise of licensereviewers. For nonsensitive energy related ex-ports, the ceiling on service supply licenses couldbe raised above the existing $8,000 limitation soas to facilitate exports.

.

Efforts are now underway to streamline theCocom process of China export reviews. Neitherending Cocom review of exports to China nor anaggressive unilateral U.S. push on Cocom part-ners to tighten controls is likely to be feasible orpromising at this juncture. Instead, more construc-tive efforts are now being made to adopt a “notifi-cation” system for nonsensitive items. Cocom,with all its problems, is an organization that playsa key role in harmonizing Western approaches toEast-West trade. It appears that changes can bemade to streamline China review without jeop-ardizing the carefully built Cocom consensus ontrade with other countries. In light of the infor-mal nature of the Cocom organization, these stepscan best be pursued in low-key negotiationsamong the member countries.

CONGRESSIONAL REVIEW OF NUCLEARCOOPERATION AGREEMENT

The primary focus of policy debate on nuclear-related matters will be on the proposed coopera-tion agreement with China. Issues of nucleartrade, proliferation, and strategic security aresubsumed under this rubric. The specific issuesare discussed in chapter 4. Additional informationis in the Congressional Research Service Issue Briefincluded with the background papers.

Before a nuclear cooperation agreement be-comes valid, it is submitted to Congress by thePresident for a period of 90 working days (30 daysof consultation with the Foreign Affairs and For-eign Relations Committees, and 60 days of con-gressional review). If, as in this case, the Presidentdetermines the agreement does not require an ex-emption from the relevant sections of the AtomicEnergy Act as revised, the signed agreement comesinto force at the end of the 90-day period, unlessCongress adopts a joint resolution of disapproval.Congress would need a two-thirds majority tooverride a Presidential veto. Under the recentlyrenewed Export Administration Act which wassigned into law by the President on July 12, 1985,a nuclear agreement requiring an exemption be-cause it significantly deviates from usual terms

and conditions of the Atomic Energy Act wouldnot be valid unless Congress passes a joint reso-lution approving it. The situation is less clear inthe event that the President sends to Congress anagreement without exemption, but where one ofthe two lead committees believes an exemptionis required. According to the conference commit-tee that developed the legislation, in such a caseCongress “expects that the President will submitan exemption. “31 There is, however, no specificrequirement in the law to this effect.

When the U.S.-China agreement was submittedto Congress on July 24, 1985, it was accompaniedby the President’s written determination, approvaland authorization for the agreement, a memoran-dum prepared jointly by the Departments of Stateand Energy stating that the agreement meets therequirements of U.S. law and that it serves U.S.foreign policy and nonproliferation interests, amemorandum from the Director of the Arms Con-trol and Disarmament Agency (ACDA) assessingthe “adequacy of the safeguards and other controlmechanisms, and peaceful use assurances” of theproposed agreement, and a Nuclear Nonprolifer-ation Assessment Statement prepared by ACDA.

‘congressional Record, HI<49 19, Iune 25, 1Q85,

55

These documents are included at the back of this likely route to enhanced capability would betechnical memorandum. through the upgrading of China’s nuclear industry

As Congress reviews the signed agreement, thegenerally. Close monitoring as required by law

language of these documents (particularly Articleof nuclear exports as part of the export control

5 on retransfers and consent rights) will be care-procedures handled by the Nuclear Regulatory

fully scrutinized. Concerns over possible improve-Commission (NRC) and perhaps improved intel-ligence could also help to serve U.S. nuclear non-

ments to submarine technology are more difficultto address via these documents, since the most

proliferation policy aims.

PROMOTING ENERGY TECHNOLOGY TRANSFERS

Limited Scope of U.S.Promotional Programs

The United States has few programs explicitlydesigned to promote commercial technologytransfers to China. Official U.S. programs are fo-cused much more on science and technical ex-change than those of other countries like Japanwhere aid and official financing have been usedextensively to support involvement in commer-cial energy development projects. In the UnitedStates, controls rather than promotional programshave been the central focus of policy debate.

There are a number of possible explanations forthe comparative lack of attention to promotionalmeasures. There may be a sense that U.S. promo-tional programs have not been especially effec-tive in the past, or that these are best left to thefirms themselves. In a period of budgetary aus-terity, it is unlikely that some of these programswill be expanded. Since U.S. controls are seen bymany to directly inhibit trade, many proponentsof expanded trade and technology transfer toChina look to changes in export administration,rather than promotional programs, as the primeavenue for policy change.

The few U.S. Government programs that evenindirectly affect commercial energy technologytransfer to China include science and technologycooperation, U.S. official representation in China,and insurance and financing support for U.S.firms doing business there. The United States andChina have established a Joint Commission onCommerce and Trade (JCCT), but current pro-grams do not include activities in energy technol-ogy transfers.

Table 9 provides a listing of the energy-relatedscience and technology accords. The fossil energyprotocol was recently negotiated. ”

The United States has assisted China’s petro-leum geologists by providing Landsat remote sens-ing data. The United States and China have alsoagreed to cooperate in environmental protection,but little has yet been done in the area of pollu-tion control technologies. Studies on the healtheffects of coal combustion (at least one underwayand others planned by the U.S. Department ofHealth and Human Services) could lay the foun-dation for exploring and documenting some veryserious problems associated with energy use inChina. 33

“Among the 24 active prot(>co]s are agrwement> on co[~perationin high energy physics, nuclear safet}r Sec Ilepa rtmen t of St a tc>‘ l-l, S.-China Science and Technc~l(~R\ EXC han~t+ (11S7-, April 1Q85

‘ ‘See House Committee on Energ} and L(lmnlerce, Special Sub-commit tee on U, S. Trade with China, [’h~n.] \ E( on ornjc /kIrL’lop-merrt and L~. S. Trade’ lntert’st~, hla}. 148s, pp, 4Q-52.

Table 9.—Energy-Related Science and TechnologyAgreements With China

1. Nuclear Safety (NRC)2. Nuclear Physics and Magnetic Fusion (DOE)3. Fossil Energy (DOE)

(Hydropower–expired)NOTE These agreements support basic science and exchange of Information

between scientists and technicians The programs contribute, but ratherindirectIy, to commercial technology transfers in energy-related fields

The hydropower protocol was probably the most controversial U.S. pri-vate sector firms criticized the role of the U S Government, and there wassome misunderstanding with the Chinese on the role of the private sec-tor See, for example, Robert A DeIfs, Jr “Hydropower Agreement Up-date China Business Review May-June 1981, p 52

The U S Department of the Interior IS continuing to provide technicalassistance for Chinese hydropower development on a reimbursable basisIn other words, the Chinese are funding these stud! es, some of which havebeen subcontracted to U S firms The Department of the Interior IS leading discussions to explore the possibility of an expanded U S role in theThree Gorges Project with U S private sector participation.

56

The U.S. Embassy in Beijing has a staff of 124U.S. citizens, and another 50 are stationed in U.S.consulates in other cities. In order to representU.S. business, the Foreign Commercial Service hassix U.S. officers stationed in China .34 In addition,there are four

35 official U.S. representatives inBeijing involved in science and technology ex-change activities.

U.S. Government financing and insurance pro-grams supporting energy development in Chinahave been fairly limited. The primary mechanismsfor providing this support are loans and creditsfrom the Export-Import Bank, insurance by theOverseas Private Investment Corporation (OPIC),and financing of feasibility studies by the Tradeand Development Program. OPIC insures U.S.firms investing overseas; it covered three energyprojects in China by September 1984.3’ U.S. di-rect investment in China is very limited .37 OPICinsures against political risk, an important con-cern for U.S. firms participating in offshore oiland gas development. But limitations on OPIC’sresources have been criticized by U.S. energyfirms who believe that the ceiling on OPIC coun-try coverage should be raised to support addi-tional U.S. investments in Chinese energy dev-lopment. 38 The Chinese have found financing(some at aid-related confessional rates) from Jap-anese and other sources at interest rates lower thanthose offered by the U.S. Export-Import Bank.U.S. Export-Import Bank loans have been granted

~lThe tota] number of u.5. citizens officially posted to China is178, including Foreign Commercial Service, State Department,United States Information Service, and other agency representation.These figures were provided by the U.S. State Department, May1985, and the FCS, August 1985.

“In June 1985 there were three representatives, w’lth an additi<~nalone authorized.

‘“See Henry R. Berghoet, “OPIC in China, ” The China BusinessReview’, October 1984, p. 44.

‘“The most recent official U.S. Department of Commerce datashow a negative U.S. fore]gn direct investment position of !39 mll-li(~n as (~t 1~83. This statistic reflects the fact that the value of thedebt owed by U.S. parent c{~mpanies to their Chinese affiliates was~reater than the debt owed by those atiiliates to them. This is notuncommon in a situat itln where there is 1 ittle or no direct invest-ment by the parent tirms.

New data will be released near the end of 1985. The U.S.-ChinaTrade Council has drawn up a list of U. S.-PRC joint ventures (asIJI Mar. 31, 1985) that includes 17 in energy-related fields.

‘sSee House Committee on Energy and Commerce, Special Sub-committee on U.S. Trade with China, China Offshore Oil Det’el-(Ipnle,nt and the Energ)~ Securit}’ ot the Pacific Rim, Feb. 28, 1984,p. 56.

to only two U.S. firms involved in work in China.The two are Combustion Engineering and West-inghouse, involved in energy-related projects. Ta-ble 10 provides a list of the U.S. Government sup-ported energy-related projects in China.

Subsidized supplier government financing hasbeen a key factor in some of China’s energyprojects, particularly those in the hydroelectric-ity field. A number of these projects involve theuse of “mixed credits, ” which combine official(Export-Import Bank) and aid-type confessionalfinancing. The United States, because it does nothave an aid program in China, ” has not been ina position to match the soft financing offered else-where. The United States has used the Trade andDevelopment Program, however, to provide fi-nancing for feasibility studies for one Chinesehydropower project (see table 10).

Japan, in contrast, negotiated with China apackage of construction projects valued at $1.5billion, one involving hydroelectricity develop-ment. The loans for these projects were providedby the Japanese Government, through the Over-seas Economic Cooperation Fund which providesaid-type confessional financing at a rate of 3 per-cent annual interest over a 30-year repaymentperiod. The Wuqiangxi hydroelectric powerplantsupported by these loans is expected to power therefining of nonferrous metals, whose exportshould help finance Chinese purchases of Japa-nese products .40 Japan’s Export-Import Bank hasalso provided credits for seven coal developmentprojects, and in 1983 it was said to have commit-ted over $500 million to Chinese offshore oil de-velopment.

41 Table 11 shows that the JapaneseExport-Import Bank has provided more than $2billion for energy projects in China. Japan has

‘gChapter 3, Section 620-F of the Foreign Assistance Act of 1961prohibits the provision of funds (for aid) to Communist countriesand stipulates that the President shall not waive this prohibition un-less he can show that this is necessary for national security or thatthe country is no longer controlled by the international Communistconspiracy, or that assistance will promote its independence fromsuch. The People’s Republic of China is specifically mentioned. Inrecent years, the U.S. Government has provided some assistancethrough the TDP (Trade and Development Program) and throughexchange programs, neither of which involve direct payments toChina.

‘“See Chae-Jin Lee, China and lapan (Stanford, CA: Hoover Press,1984), ch. 4.

“’See Martin Weil, “Coal’s Promises and Problems, ” China Busi-ness Review,, March-April 1984.

57

Table 10.—U.S. Government-Supported Energy Department Projects in China

Project

1.2,3.4,5.6.7.8.9.

Dresser Ind., Inc. . . . . . . . .Pennzoil Co, ., ... . . .Texaco Inc. . . . . . . . . . . . . . .Combustion Eng. . . . . . . . . . .Westinghouse . . . . . . . . .Harza Eng. . . . . . . . . . . . . . . . .Not yet contracted ..., . .Kaiser Engineers. . . . . . . . . .SAIC . . . . . . . . . . . . . . . . . . . . . .

oil/gas servicesoil/gas explorationoil/gas explorationthermal power generationthermal power generationTienshengqiao hydropowerHualing coal mineYuxian coal gas

$ 4,950,000’$100,000,000’$ 50,000,000’$ 23,000,000b

$ 28,000,000b

$ 440,000 C

$ 550,000’$ 750,000C

ShanJiasi heavy oil $ 280,000C

aTotal insured Investment by OPIC.bTotal loans by Export-import BankcFunds provided by the Trade and Development Program for feasibility studiesNOTE TDP supported pre-feasibilitv study exchanges between the Army Corps of Engineers and the Bureau of Reclamation

on hydropower projects in China {980.84 -

SOURCE Office of Technology Assessment

Table 11 .–U.S. and Japanese Trade, Aid,and Investment in China, 1983

United States Japan

TradeExports to PRC ... ..$2,173 million $4,914 millionImports from PRC .. .$2,243 million $4,843 million

Investment . . . . . . . . . . a a

Aid (ODA loans net). . 0 $ 299 millionb

Exlm loans for energyprojects (1980-84) ... .$ 51 millionc $2,132 million’

‘Official DOC data show a -$9 million U S direct Investment position in Chinaduring 1983 See footnote 42 for additional explanation Additional data are nowbeing prepared which may show a positive investment position for the UnitedStates in the hundreds of millions of dollars The U S Department of State esti-mates that U S direct Investment totaled more than $100 million by late 1984See Office of Chinese Affairs, USDOS, “U.S. and Other Foreign Investment inChina, ” October 1984

JETRO data indicate that Japan’s direct Investment position was $29 mil-Iion in 1983, and that by 1985 Japanese Investments in China had risen to $187million

bTotal ODA received by China during 1983 was $500 million See OECD Ge-ographical Distribution of Financial Flows to Developing Countries, 1980.83(Paris 1984), p 74

cSee table 3 for U.S. data. Japanese data from JETRO data file 1984, providedto OTA Japanese data Includes only coal and oil development projects

signed long-term agreements to import some ofthe coal and oil it is helping China develop, andhas granted China trade preferences under theGeneralized System of Preferences.

Japanese firms and the government work to-gether to negotiate large development projects inChina, which combine trade and aid concerns.While Japanese foreign direct investments inChina are apparently very limited,42 Japanesefirms are well represented in China, including re-mote areas of the countryside, by trading com-

‘2As indicated in the notes to table II, investment data for Chinashould be treated with great caution. Current official U.S. data isnot available, and the U, S,, Chinese, and Japanese governments in-clude different elements in their foreign direct investment data.

panies as well as government organizations suchas JETRO (the Japan External Trade Organiza-tion). In 1983, more than 1,200 Japanese expertswere sent to China by JICA (the Japan Interna-tional Cooperation Agency) to work on techni-cal cooperation projects.43 European firms are alsopursuing innovative approaches to the China mar-ket, The establishment of a special West Europeanfinancing consortium for China trade was recentlyannounced.

Japan and the United States have developedquite different types of economic interactions withChina. Table 11 shows the comparative strengthof Japanese Government financing and aid as wellas the strong overall lead Japanese firms enjoy intrade.

It is unlikely that the U.S. Government will pro-vide subsidized financing for China trade equiva-lent to Japan’s. Nor is it clear that this would bedesirable from a national perspective, since theinterest rate subsidies could be costly. The UnitedStates has furthermore gone on record advocat-ing the elimination of mixed credits (which com-bine confessional aid and official trade financing)as examples of predatory financing.

On the other hand, the United States is wellpositioned to do much more in the area of pro-motion. Such steps could involve expansion ofestablished programs, particularly support for fea-sibility studies and insurance programs. In addi-tion, technical exchanges in areas such as reduc-

4’MIT1, Keizai K~’orJoLu no Gn)o to Afondai (The Current Sta-tus of Economic Cooperation)

58—

ing coal-related environmental pollution could bepromoted under the science and technology pro-tocols. This could be carried out by allocatingfunds directly to the projects rather than relyingon the Environmental Protection Agency or someother government agency to provide funding. Itshould be noted that promotional programs couldbe expanded without adopting predatory financ-ing approaches that weaken international tradeagreements. The expansion of technical ex-changes, Ex-Im financing and OPIC insurance andfeasibility studies could all be carried out in a wayconsistent with international trade norms.

Selection of EnergyDevelopment Projects

Among the many energy development projectsthat China undertakes, some will undoubtedly bemore successful than others. If there are negativeside effects (such as adverse environmental con-sequences) associated with technology transfers,ill will might be created between the United Statesand China.

But while energy technology transfers to Chinacould involve negative, unexpected consequencesfor both countries, the U.S. Government has notand probably cannot establish regulations thateliminate such risks. The one important exceptionto this rule is national security-related risks, wherethe U.S. export control system is designed to pro-hibit certain types of transfers with potential mil-itary applications. In particular, nuclear-relatedexports must undergo an extensive review by theDepartment of Energy and related agencies.

With regard to the other nonsensitive energytechnologies, the ability of the U.S. Governmentto try to tell China how to develop its energy re-sources is quite limited. The U.S. Governmentofficially supports few energy-related projects inChina, as table 10 indicates. In addition, giventhe availability of energy technologies from othersuppliers it generally would be futile for the UnitedStates to try to tell China what to purchase. Thebasic assumption of U.S. policies affecting tech-nology transfers worldwide is that the firms them-selves are in a position to make responsible choicesabout what kinds of technology transfers theyshould make, unless these choices impinge on na-

tional security. In addition, since the United Statesdoes not have an aid program for China, a mech-anism for encouraging certain types of projectsin developing countries is not available for China.

In the few instances where U.S. Governmentfinancing is used (Ex-Im Bank loans and credits),the Ex-Im Bank considers the creditworthiness ofthe host country. Today China is ranked high interms of creditworthiness by the Bank.44 Projectselection by the Bank normally involves an evalu-ation of the financial soundness of the proposedproject. The Bank prefers projects that will ex-pand U.S. exports and employment. The Bank,however, does not have a rigid set of criteria usedin evaluating projects, and in practice decisionshave often been influenced by political factors .45

Since 1977, Congress has reviewed nuclear tech-nology exports involving financing by the Bank.The level of loans and credits for nuclear-relatedexports has fallen in recent years to 2.4 percent($4 million to support management services) ofthe Bank’s authorizations in energy-related prod-ucts and services in 1983.46 The Bank has changedits position in recent years on support of nuclearexports to countries such as Egypt, reflecting con-troversy within the United States over whetheror not subsidized financing should be providedto such projects. In practice, however, Ex-Im Bankfinancing for nuclear projects has fallen to a verysmall part of Bank-supported projects. For China,Ex-Im financing of nuclear exports will be mootuntil the agreement on nuclear cooperation be-comes effective,

The Overseas Private Investment Corporation,which provides investment insurance, contractorguarantees, and other support to U.S. investmentsoverseas has a detailed and extensive list of cri-teria it considers when supporting a project.47

“Information” provided to O T A b}’ U S. Exp(~rt-Impc~rt Bank in

May 1985.

“See, for example, ‘ The Select[(ln and I]istributi[~n ot Loansr ‘in Richard E. Feinberg, Subsidizing Success: The Expt)rt-lmp(]rt Banh/n the IJ. S. Econom t’ ~ Cambridge, hlA: Cambridge LJnlverslty I)rw+,1~82), p. 65. -

i~ExpCJrt. ]mp(}rt l~ank, RePc)rt 10 the Cc)ngress on Exporf L’redit

C“(Pmpetition and the Exp(>rt-In?port Barth of the L’nited Stateb, !or

Jan, 1 , 1983 to D e c . 3 1 , 1Q83 (V1’ashington, IX: 1Q84 )

‘“For a discussion of OI>IC-’S role in techn(}lc)~}’ transfer, see U.S.C[>ngress, Office of Techn[~l(~gy Assessment, Techno/og}r Transferto the Afidcf]e East (Washington DC: LI. S. Govcrment I)rintin~ Ot-Ilce, September 1984), OTA-ISC-1 73, p. 538f!

59

Congress requires that OPIC carry out a devel-opmental impact statement of projects, in orderto ensure that economic and social effects aretaken into account. Other criteria considered in-clude U.S. employment, technology transfer, pro-ductivity, multiplier effects on other industries,contribution to host country revenues, and envi-ronmental and safety effects.

It does not appear likely that the U.S. Govern-ment could effectively extend its review of energyprojects beyond what is already built into thesereviews and into export administration review (ongrounds of U.S. national security).

On the other hand, more could be done to pro-vide China with information on the health andsafety effects of energy technologies. There areprotocols with China in environmental protectionand nuclear safety. But science and technologyexchanges in these and other areas (legal issuessurrounding contract obligations, and projectmanagement) could be enlarged to augmentChina’s own expanding efforts in the area of envi-ronmental protection .48

Possible Improvements inU.S. Promotional Programs

While controls remain the major focus of U.S.Government policies affecting technology trans-fers to China, there are steps that could be takento promote energy technology transfers in addi-tion to streamlining the license review process.

At the most general level, Congress could takethe lead in promoting a new view of the UnitedStates as a country whose economic health de-pends on our ability to promote exports world-wide. This would involve a significant change inthinking in light of recent preoccupation with im-

port penetration. It is unlikely that promotionalprograms will be expanded unless Congress de-velops a new approach to U.S. exports. Moreextensive export promotion programs could be de-signed that support rather than endanger multi-lateral agreements on trade and export financing.

There is no one program that if changed or en-larged would provide a “quick fix” for export pro-motion, but there are a number of possibilities forincremental improvements, particularly in infor-mation flows. U.S. representation through theForeign Commercial Service could be expandedin China, and efforts could be better linked totrade development in the United States. Such ef-forts could, in some cases, augment the scienceand technology protocol activities. The U.S. Gov-ernment could support expanded technical train-ing in energy-related fields in China and in theUnited States. Were the United States to estab-lish an aid program, more extensive programscould be considered, but the above-mentionedsteps could be taken regardless.

In the absence of an aid program, science andtechnology exchanges are a major avenue for U.S.Government support. Protocols in fossil energyand nuclear safety provide a framework for co-operation in energy-related fields. Programs of theCommittee on Scholarly Communication with thePeople’s Republic of China (CSCPRC) under theNational Academy of Sciences and the NationalAcademy of Engineering, funded by U.S. Gov-ernment agencies, support exchanges of scholarsbetween the United States and China in the engi-neering and social science fields relevant to energy

technology transfer. The joint study on coal con-version in China supported by the CSCPRC is anexample of a useful exchange of information thatshould assist both Chinese and U.S. firms in thisfield of energy development. Further studies andexchanges in energy-related fields could be con-sidered, but their relevance and utility will alsodepend on the support given these efforts byChina’s leaders.

60

BALANCING CONTROL AND PROMOTION

U.S. Government policies and programs affect-ing energy technology transfers to China includea mix of controls and promotional programs thathas shifted over time in response to changes inoverall U.S. China policy and other contextualfactors. While export controls retain a centralplace in U.S. policies, today agreements for co-operation in science and technology as well aslimited financial and insurance support provideonly modest encouragement for technology trans-fer in energy fields.

Despite the problems identified above, the fun-damental rationale for export controls remainsvalid. U.S. export controls play a critical role inrestricting the flow of militarily sensitive technol-ogies while at the same time allowing exports inother areas. A U.S.-led push to remove exportsto China from Cocom review is not at present afeasible or promising alternative, since this wouldgreatly reduce the ability of Western countries tocontrol exports in the event that China dramati-cally changes its foreign policy, and since remov-ing China from Cocom could disturb the volun-tary consensus that undergirds the organization.

Nevertheless, much could be done to stream-line and improve the system. In addition, as tech-nology is further developed and U.S.-China re-lations evolve, it will be important to reviewperiodically the overall balance of control andpromotion programs to ensure a proper fit withoverall U.S. China policy. This type of system-atic review is especially needed at this point, sinceU.S.-China economic relations have developedrapidly during the past few years.

Many of the areas where improvements couldbe made in U.S. policies are not easily suscepti-ble to congressional action, and many requiremultilateral coordination with other countries,The following types of changes could be con-sidered:

● measures to improve the efficiency of theU.S. export control system (upgrading thetechnical expertise of license examiners, ex-panding their numbers, better managementof license review, better coordination among

●

●

executive branch agencies involved in thereview);measures to speed the Cocom review process(adoption of a “notification” system for non-sensitive exports so that Cocom review canfocus on the really sensitive cases while atthe same time keeping a record of other typesof exports that can be periodically reviewed);andmaintain and expand promotional measures(use science and technology exchanges to as-sist China in understanding the long-term en-vironmental effects of energy technologytransfers; maintain financing and other sup-ports for energy projects such as measuresto improve the flow of information aboutChina’s technology needs and U.S. expertise).

Congress has an immediate role in reviewingthe nuclear cooperation agreement. Although itdoes not specifically promote exports, an agree-ment is a necessary step for expanding nucleartrade. However, there are other factors that Con-gress will consider in this review: nonproliferationpolicy, the adequacy of the consent rights provi-sions, the level of concern over potential improve-ments to China’s nuclear submarines, the appro-priateness of nuclear power for China, the roleof other supplier countries, and overall U. S.-China relations. As discussed in chapter 4, differ-ent evaluations of these factors can lead to argu-ments favoring or rejecting the agreement.

China’s energy technology requirements presenta tremendous opportunity for U.S. firms and or-ganizations. U.S. technologies could, in particu-lar, contribute to improving the efficient use ofenergy, environmental protection, and the devel-opment of large-scale electrical systems in China.While there are significant risks associated withenergy technology transfers, the potential gainsoutweigh the dangers and it should be possibleto effectively manage the risks.

U.S. policies affecting energy technology trans-fers, however, have been rather inconsistently im-plemented to date. Despite high-level decisions toliberalize exports, uncertainty and delays have

61

continued within U.S. export administration. U.S. port examiners on assessing, limiting, and moni-Government policy makers must maintain the toring the militarily sensitive exports, whileproper balance between controls and promotional expanding efforts to promote the many otherpolicies, one consistent with the overall U. S.- types of energy technology transfers China needsChina relationship. In the current context, the ma- to develop its energy resources.jor challenges are to further focus attention of ex-

—. — -.

Appendix

Nuclear Cooperation Agreementand Supporting Documents

Appendix

Nuclear Cooperation Agreementand Supporting Documents

A g r e e m e n t f o r C o o p e r a t i o n B e t w e e nT h e G o v e r n m e n t o f t h e U n i t e d S t a t e s o f A m e r i c a a n d

The Government of the People’s Republic of C h i n aC o n c e r n i n g P e a c e f u l U s e s o f N u c l e a r E n e r g y

T h e G o v e r n m e n t o f t h e U n i t e d S t a t e s o f A m e r i c a a n d t h e

G o v e r n m e n t o f t h e P e o p l e ’ s R e p u b l i c o f C h i n a7

Desiring to establish extensive cooperation in the peaceful u s e s

of nuclear energy on the basis of mutual respect for sovereignty,

non-interference in each other’s internal affairs, equality and

mutual benefit,

Noting tha t such coopera t ion i s one be tween two nuc lear weapon

s t a t e s ,

A f f i r m i n g t h e i r s u p p o r t o f t h e o b j e c t i v e s o f t h e s t a t u t e o f t h e

International Atomic Energy Agency (IAEA)/

A f f i r m i n g t h e i r intention to carry out such cooperation on a

stable, reliable and predictable basis,

Mindful that peaceful nuclear activities must be undertaken with

a view to protecting the international environment from radioactive,

chemical and thermal contamination,

Have agreed as follows:

65

66—

Article 1Definitions

For the purposes of this agreement:

(1) ‘parties = means the Government of the United States of

America and the Government of the People’s Republic of China;

( 2 ) ‘ a u t h o r i z e d p e r s o n ” m e a n s a n y i n d i v i d u a l o r a n y e n t i t y

under the jurisdiction of either party and authorized by that party

to receive, possess, use, or transfer material, facilities or

components;

( 3 ) “person” m e a n s a n y i n d i v i d u a l o r a n y e n t i t y s u b j e c t t o t h e

j u r i s d i c t i o n o f e i t h e r p a r t y b u t d o e s n o t i n c l u d e t h e p a r t i e s t o

this agreement;

(4) ‘peaceful purposes” include the use of information,

technology, material, facilities and components in such fields as

research, power generation, medicine, agriculture and industry but

do not include use in, r e s e a r c h s p e c i f i c a l l y o n o r d e v e l o p m e n t o f

any n u c l e a r e x p l o s i v e d e v i c e , o r a n y m i l i t a r y p u r p o s e ;

(5) “material” means source material, special nuclear material

or byproduct material, radioisotopes other than byproduct material,

moderator material, or any other such substance so designated by

agreement of the parties;

(6) “source material” means (i) uranium, thorium, or any other

material so designated by agreement of the parties, or (ii) ores

containing one or more of the foregoing materials, in such

c o n c e n t r a t i o n a s t h e p a r t i e s m a y a g r e e f r o m t i m e t o t i m e ;

67

(7) "special nuclear material” means (i) plutonium, uranium

233, or uranium enriched in the isotope 235, or (ii) a n y o t h e r

material so designated by agreement of the parties;

(8) “byproduct material” m e a n s a n y r a d i o a c t i v e m a t e r i a l

( e x c e p t s p e c i a l n u c l e a r m a t e r i a l ) y i e l d e d i n o r m a d e r a d i o a c t i v e b y

e x p o s u r e t o t h e r a d i a t i o n i n c i d e n t t o t h e p r o c e s s o f p r o d u c i n g o r

u t i l i z i n g s p e c i a l n u c l e a r m a t e r i a l ;

( 9 ) “ m o d e r a t o r m a t e r i a l ” m e a n s h e a v y w a t e r , o r g r a p h i t e o r

beryllium of a purity suitable for use in a reactor to slow down

high velocity neutrons and increase the likelihood of further

fission, or any other such material so designated by agreement of

the parties;

(lo) “high enriched uranium” m e a n s u r a n i u m e n r i c h e d t o t w e n t y

p e r c e n t o r g r e a t e r i n t h e i s o t o p e 2 3 5 ;

(11) “low enriched uranium” means uranium enriched to less than

twenty percent in the isotope 235;

(12) “facility” means any reactor, other than one designee or

used primarily for the formation of plutonium or uranium 233, or any

other item so designated by agreement of the parties;

(13) “reactor” is defined in Annex I, which may be modified by

mutual consent of the parties.

(14) “sensitive nuclear facility” means any plant designed or

used primarily for uranium enrichment, reprocessing of nuclear fuel,

heavy water production or fabrication of nuclear fuel containinq

plutonium;

68

( 1 5 ) “component” means a component pact Of a facility or other

i t e m , s o d e s i g n a t e d b y a g r e e m e n t o f the p a r t i e s ;

( 1 6 ) ‘ m a j o r c r i t i c a l c o m p o n e n t ” means any part or group of

parts essential to the operation of a sensitive nuclear facility;

(17) ‘sensitive nuclear technology” means any information

(including information incorporated in a facility or an important

component) which is not in the public domain and which is important

to

of

the design, construction, fabrication, operation or maintenance

any sensitive nuclear facility, or such other information so

designated by agreement of the parties.

Article 2Scope of Cooperation

1. The parties shall cooperate in the use of nuclear energy for

peaceful purposes in accordance with the provisions of this

agreement. , Each party shall implement this agreement in accordance

with its respective applicable treaties, national laws, regulations

and license requirements concerning the use of nuclear energy for

peaceful purposes. The parties recognize, with respect to the

observance of this agreement, the principle of international law

that provides that a party may not invoke the provisions of its

internal law as justificaton for its failure to perform a treaty.

69

2. Transfers of information, technology, material, facilities

and components under this agreement may be undertaken directly

between the parties or through authorized persons. Such cooperation

shall be subject to this agreement and to such additional terms and

conditions as may be agreed by the parties.

3. Material, facilities and components will be regarded as

having been transferred pursuant to this agreement only upon receipt

of confirmation by the supplier party, from the appropriate

Government authority of the recipient party, that such material,

facilities or components will be subject to this agreement and that

the proposed recipient of such material, facilities or components,

if other than the recipient party, is an authorized person.

4. Any transfer of sensitive nuclear technology, sensitive

nuclear facilities, or major critical components will, subject to

the p r i n c i p l e s o f t h i s a g r e e m e n t , r e q u i r e a d d i t i o n a l p r o v i s i o n s a s

a n a m e n d m e n t t o t h i s a g r e e m e n t .

Article 3Transfer of Information and Technologv

Information and technology concerning the use of nuclear energy

for peaceful purposes may be transferred. Transfers of such

information and technology shall be that which the parties are

permitted to transfer and may be accomplished through various means,

including reports, data banks, computer programs, conferences,

70

v i s i t s a n d a s s i g n m e n t s o f p e r s o n s t o f a c i l i t i e s . F i e l d s w h i c h m a y

be covered include, but shall not be limited to, the following:

(1) research, development, experiment, design, construction,

operation, maintenance and use and retirement of reactors and

nuclear fuel fabrication technology;

(2) the use of material in physical and biological research,

medicine, agriculture and industry;

(3) nuclear fuel cycle research, development and industrial

application to meet civil nuclear needs, including multilateral

approaches to guaranteeing nuclear fuel supply and appropriate

techniques for management of nuclear wastes;

(4) health, safety, environment, and research and development

related to the foregoing;

(5) assessing the role nuclear power may play in international

energy plans;

(6) codes, regulations and standards for the nuclear energy

industry; and

(7) such other fields as may be agreed by the parties.

Article 4Transfer of Material, Facilities and Components

1. Material, facilities and components may be transferred

pursuant to this agreement for applications consistent with this

agreement. Any special nuclear material to be transferred under

this agreement shall be low enriched uranium except as provided in

paragraph 4 of this article.

—

71

2. Low enriched uranium may be transferred for use as fuel in

reactors and reactor experiments, for conversion or fabrication, or

for such other purposes as may be agreed by the parties.

3 . T h e q u a n t i t y o f s p e c i a l n u c l e a r m a t e r i a l t r a n s f e r r e d u n d e r

t h i s a g r e e m e n t s h a l l b e t h e q u a n t i t y w h i c h t h e p a r t i e s a g r e e i s

necessary for. any of the following purposes: the loading of

reactors or use in reactor experiments, the efficient and continuous

operation of such reactors or conduct of such reactor experiments,

and the accomplishment of such other purposes as may be agreed by

the parties.

4. Small quantities of special nuclear material may be

transferred for use as samples, standards, detectors, targets,

radiation sources and for such other purposes as the parties may

a g r e e .

Article 5Retransfers, Storage, Reprocessing, Enrichment,Alteration, and No Use for Military Purposes

1. Material, facilities, components or special nuclear material

transferred pursuant to this agreement and any special nuclear

material produced through the use of such material or facilities may

be retransferred by the recipient party, except that any such

material, facility, components or special nuclear material snail not

be retransferred to unauthorized persons or, unless the parties

aqree, beyond its territory.

72

2 . Neither party has any plans to enrich to twenty percent Or

greater t reprocess, or alter in form or content material transferred

pursuant to this agreement or material used in or produced through

the use of any material or facility so transferred. Neither party

has any plans to change locations for storage of plutonium, uranium

233 (except as contained in irradiated fuel elements), or high

enriched uranium transferred pursuant to this agreement or used in

or produced through the use of any material or facility so

transferred. In the event that a party would like at some future

time to undertake such activities, the parties will promptly hold

consultations to agree on a mutually acceptable arrangement. The

parties undertake the obligation to consider such activities

favorably, and agree to provide pertinent information on the plans

d u r i n g t h e c o n s u l t a t i o n s . Inasmuch as any such activities will be

solely f o r p e a c e f u l p u r p o s e s a n d w i l l b e i n a c c o r d a n c e w i t h t h e

p r o v i s i o n s o f t h i s a g r e e m e n t , t h e p a r t i e s w i l l c o n s u l t i m m e d i a t e l y

a n d w i l l s e e k a g r e e m e n t w i t h i n s i x m o n t h s o n l o n g - t e r m a r r a n g e m e n t s

for such activities. In the spirit of cooperation the parties agree

not to act within that period of time. If such an arrangement is

I not agreed upon within that period of time, the parties will

promptly consult for the purpose of agreeing on measures which they

consider to be consistent with the provisions of the agreement in

order to undertake such activities on an interim basis. The

—

73

parties agree to refrainfrom actions which either party believes

wou ld p r ej u d g e t h e lo n g – term arrangements for undertaking such

activities or adversely affect cooperation under this agreement.

The parties agree that the consultations referred to above will be

carried out promptly and mutual agreement reached in a manner to

avoid hampering, delay or undue interference in their respective

nuclear programs. Neither party will seek to gain commercial

advantage. Nothing in this article shall be used by either party to

inhibit the legitimate development and exploitation of nuclear

energy for peaceful purposes in accordance with this agreement.

3. Material, facilities or components transferred pursuant to

this agreement and material used in or produced through the use of

any material, facility or components so transferred shall not be

used for any nuclear explosive device, for research specifically on

or development of any nuclear explosive device, or for any military

purpose.

Article 6Physical Security

1. Each party shall maintain adequate physical security with

respect to any material, facility or components transferred pursuant

to this agreement and with respect to any special nuclear material

used in or produced through the use of any material or facilicy so

transferred.

74

2. The parties agree to the levels for the application of

physical security set forth in Annex 11, which levels may be

modified by mutual consent of the parties. The parties shall

maintain adequate physical security measures in accordance with such

levels. These measures, as minimum protection measures, shall be

comparable to the recommendations set forth in IAEA document

INFCIRC/225/Revision 1 entitled “The Physical Protection of Nuclear

Material”, or in any revision of that document agreed to by the

parties.

3 . The parties shall consult at the request of either party

regarding the adequacy of physical security measures maintained

pursuant to this article.

4. Each party shall identify those agencies or authorities

responsible for ensuring that levels of physical security are

a d e q u a t e l y m e t a n d h a v i n g r e s p o n s i b i l i t y f o r c o o r d i n a t i n g r e s p o n s e

a n d r e c o v e r y o p e r a t i o n s i n t h e e v e n t o f u n a u t h o r i z e d u s e o r h a n d l i n g

o f m a t e r i a l s u b j e c t t o t h i s a r t i c l e . E a c h p a r t y s h a l l a l s o

d e s i g n a t e p o i n t s o f c o n t a c t w i t h i n i t s n a t i o n a l a u t h o r i t i e s t o

c o o p e r a t e o n m a t t e r s o f o u t - o f - c o u n t r y t r a n s p o r t a t i o n a n d o t h e r

p h y s i c a l s e c u r i t y m a t t e r s o f m u t u a l c o n c e r n .

75

A r t i c l e 7Cessation of Cooperation

1. Each party shall endeavor to avoid taking any actions that

affect cooperation under this agreement. If either party at any

time following entry into force of this agreement does not comply

with the provisions of this agreement, the parties shall promptly

hold consultations on the problem, it being understood that the

other party shall have the rights to cease further cooperation under

this agreement.

2 . If either party decides to cease further cooperation under

this agreement, the parties shall make appropriate arrangements as

may be required.

Article 8Consultations

1. The parties shall consult at the request of either party

regarding the implementation of this agreement, the development of

further cooperation in the field of peaceful uses of nuclear energy,

and other matters of mutual concern.

2. The parties recognize that this cooperation in the peaceful

uses of nuclear energy is between two nuclear-weapon states and that

bilateral safeguards are not required. In order to exchange

experience, strengthen technical cooperation between the parties,

76

e n s u r e t h a t t h e p r o v i s i o n s o f t h i s a g r e e m e n t a r e e f f e c t i v e l y c a r r i e d

out, and enhance a stable, rel iable, and predictable nuclear

cooperation relationship, in connection with transfers of material,

facilities and components under this agreement the parties will use

diplomatic channels to establish mutually acceptable arrangements

for exchanges of information and visits to material, facilities and

components subject to this agreement.

3 . The parties shall exchange views and information on the

establishment and operation of their respective national accounting

and control systems for source and special nuclear material subject

to this agreement.

Article 9Environmental Protection

The parties shall consult, with regard to activities under this

agreement, to identify the international environmental implications

a r i s i n g f r o m s u c h a c t i v i t i e s a n d s h a l l c o o p e r a t e i n p r o t e c t i n g t h e

international environment from radioactive, chemical or thermal

c o n t a m i n a t i o n a r i s i n g f r o m p e a c e f u l n u c l e a r c o o p e r a t i o n u n d e r t h i s

a g r e e m e n t a n d i n r e l a t e d m a t t e r s o f h e a l t h a n d s a f e t y .

A r t i c l e 1 0Entry Into Force and Duration

1. This agreement shall enter into force on the date of mutual

n o t i f i c a t i o n s o f t h e c o m p l e t i o n o f l e g a l p r o c e d u r e s b y t h e p a r t i e s

and shall remain in force for a period of thirty years. This term

— .

77

may be extended by agreement of the partIes in accordanc~ With tnelr

respective app' icable procedures.

2. NotwithstandIng the suspensIon, termInation or expIration at

this agreement or any cooperation hereunder for any reason, the

provisions of articles 5, 6, 7, and 8 shall continue in effect so

long as any material, facility or components subject to these

articles remain in the territory of the party concerned or any

material, facility or components subject to thes~ articles remain

subject to that party's right to exercise jurisdiction or to direct

disposition elsewhere.

IN WITNESS WHEREOF, the undersigned, being duly authorized, have

signed this agreement.

DONE atrii2~ this

1n English and Chinese, both equally authentic

fOR THE GOVERNMENT Of THE

U~S~T,ES~~~ fOR THE GOVERNMENT Of THE PEOPLE'S REPUBLIC Of CHINA:

78

Annex I -- Definition of “Reactor”

“Reactor” means:

1. any apparatus, other than a nuclear weapon or other nuclear

explosive device, in which a self-sustaining fission chain

reaction is maintained by utilizing uranium, plutonium or

thorium, or any combination thereof; or

2. any of the following major parts of an apparatus described

in paragraph 1:

(1) a pressure vessel designed to contain the core;

(2) primary coolant pumps;

(3) fuel charging or discharging machines;

(4) control rods.

A “reactor” does not include the steam turbine generator

portion of a nuclear power plant.

79

Annex 11

pursuant to paragraph 2 of article 6, the agreed levels of

physical security to be ensured by the competent national

authorities in the use, storage and transportation of the materials

listed in the attached table shall as a minimum include protection

characteristics as below.

Category III

Use and storage within an area to which access is controlled.

Transportation under special precautions including prior

arrangements among sender, recipient and carrier, and prior

agreement between entities subject to the jurisdiction and

regulation of supplier and recipient States, respectively, in case

of international transport specifying time, place and procedures for

transferring transport responsibility.

Use and storage within a

Category II

protected area to which access is

controlled, i.e., an area under constant surveillance by guards or

e l e c t r o n i c d e v i c e s , surrounded by a physical barrier with a limited

number of points of entry under appropriate control, or any area

with an equivalent level of physical protection.

Transportation under special precautions including prior

arrangements among sender, recipient and carrier, and prior

a g r e e m e n t b e t w e e n e n t i t i e s s u b j e c t to the jurisdiction and

80

regulation of suppller and recipient States, respectively, in case

of international transport, sPecifying time, place and procedures

for transferring transport responsibility.

Category I

Material in this category shall be protected with highly

reliable systems against unauthorized uses as follows:

Use and storage within a highly protected area, i.e., a

protected area as defined for category II above, to which, in

addition, access is restricted to persons whose trustworthiness has

been determined, and which is under surveillance by guards who are

in close communication with appropriate response forces. Specific

measures taken in this context should have as their objective the

detection and prevention of any assault, unauthorized access or

unauthorized removal of material.

Transportation under special precautions as identified above for

transpiration of categories II and III materials and, in addition,

under constant surveillance by escorts and under conditions which

assure close communication with appropriate response forces.

81

Agreed Minute

During the negotiation of the Agreement for Cooperation between

the United States of America and the People’s Republic of China

Concerning Peaceful Uses of Nuclear Energy signed today, the

following understanding, which shall be an integral part of the

agreement, was reached.

The parties agree that the interpretation and implementation of

article 5(3) shall not involve any nuclear activities and related

research and development carried out by either party, as a nuclear

weapon state, t h r o u g h t h e u s e o f m a t e r i a l , f a c i l i t i e s , c o m p o n e n t s

a n d t e c h n o l o g y n o t s u b j e c t t o t h e a g r e e m e n t .

Material

2. Uranium-235d

TABLE: CATEGORIZATION OF NUCLEAR MATERIALC

Form

Unirradiated b

Unirradiated b

uranium enriched to 20% 235U or more

uranium enriched to 10% 2’s U butless than 20%

uranium enriched above natural, butless than 10% 235U

3. Uranium-233 Unirradiatedb

J

2 kg or more

5 kg or more

2 kg or more

Less than 2 kg but morethan 500 g

Less than 5 kg but morethan 1 kg10 kg or more

Less than 2 kg but morethan 500 g

III

500 g or lessc

1 kg or lessc

Less than 10 kg

10 kg or more

500 g or lessC

8b

cd

c

f

A l l p l u t o n i u m e x c e p t t h a t w l t h i s o t o p i C c o n c e n t r a t i o n exceeding 80% in p lu ton ium.2 36.

Material not irradiated in a reactor or material irradiated in a reactor but W ith a radiation Ievel equal to or Iess than 100 rads/hour at one meter unshiel-

Less than a radiologically significant quantity should be exempted.

Natural uranium. depleted uranium and thorium and quantities of uranium enriched to less than 10% not falling in Category III should be protected ir

accordance wi th prudent m a n a g e m e n t p r a c t i c e .

Irradiated fuel shouId be procted as Category I. II or III nucIear material depending on the category of the fresh fuel. However, fuel which by virtue

o r i g i n a I f i s s i l e I material content is included as Category I or I I beffore irradiation shouId onIy be reduced one C a t e g o r y Ievel , while the radiation level for

fuel exceeds 100 rads/h at one meter unshielded.

T h e S t a t e ’ s c o m p e t e n t a u t h o r i t y s h o u l d d t e r r m i n e i f t h e r e i S a c r e d i b l e t h r e a t t o d i s p e r s e p l u t o n i u m m a l e v o l e n t l y . T h e S t a t e s h o u l d t h e n a p p l y p h y s i -

protection requirements for category I, II or III of nuclear material, as it deems appropriate and without regard to the plutonium quantity specified u ,

each category herein, to the plutonium isotopes in those quantities and forms determined by the State to fall within the scope of the credible disopersa

83

EEMORANDUH FOR: THE PRESIDENT

fROM: John C. Whitehead John s. Herringt n

Deputy S~Cl(:'lc..') C?f State

W ashir.gton. D.C. 20520

July 20, 1985

SUBJECT: Proposed Agreement for Cooperation Bet~een the United states and the People's Republic of China Concerning Peaceful Uses of Nuclear Energy

A proposed new agreement for peaceful nuclear cooperation between the United states and the People's Republic of China (PRC), including an accompanying agreed minute which is an integral part of the agreement, is at attachment 3. A summary of the basic provisions of the proposed agreement is at attachment 4.

The agreement was negotiated by the Department of state, with the technical assistance and concurrence of the Depart~ent of Energy and in consultation with the Arms Control and Disar~a~ent Agency (ACDA), ~hose views and recoD~2ndations are at attcchment 5. The Nuclear Proliferation state~Ent concerning the agrEe~Ent is being submitted to you directly by the Director of ACDA.

The agree~ent ~as initialed in Beijing on Ipril 30, 1984. ,; h i I ere c en t a. IT; end::: en t s t 0 S.:: c t ion' 1 2 3 0 f the .!. t 0171 icE n e r S y J.. c t \~ 0 u 1 d !? ~ r r.i t you tot r f. r; s Ti' itt he c 9 r e e:7. e n t toe·:, :! c r s for .. con.s u 1 tat ion s· be for e the c S r e 2j-;-' e nth a d bee n siS n (; d, \~' e r e c c' ;:-",""7. ~ n d t fi a t you c: ?? r 0 vet h e c. 9 r e E;;-; 2: n t I 2. U t tor i z e i t for sisnature, determine that it ~ill promote, and not constitute an unreasonable risk to, the C0D~on d2f~nse c.nd s~curity cnd have the c.gree~2nt signed before it is tr2ns~itted to Congress. If you approve our r~co~rnen~ation, the 8g[e~~2nt ~ill be signEd and then transmitted to Congress for 50 days of continuous session. If.you cgree ~ith our conclusion tr.at the cgr2C:J:".~nt ):",eE:ts all the_:?.?plic2ble requirei:-.ents of' the Atomic Ene r S y Act 0 f 1 9 5 4, eSC:. i.1 e nee d by t fJ e 1~ u c 1 ear t; 0 n - Pro 1 i fer a t ion Act of 1978, it ~ay be transmittEd to Concress ~ithout an ext i c n 0 f c. n y 0 f tho s ere qui r (- 171 en t s • j. nag r GEl:'. e il t \:- i tho u t ex tic~s ~c.y be brought into force after 90 days of continuous session un12ss, during that ti~e, there h2.S been enacted a joint resolution of discpproval (-..'hich \'ould require pr~sent2tion to you for sig~at~re or veto).

84

The Nuclear Non-Proliferation Act of 1978 (NNPA) contains requirements for new or amended agreements for peaceful nuclear cooperation. In our judgment, the proposed agreement meets all the requirements applicable to such agreements with nuclear-weapon states. It is the first peaceful nuclear cooperation agreement with a Communist country and the only such agreement applicable solely to another nuclear-weapon state (the UK and France are covered by U.S. agreements with EURATOM).

China intends to make nuclear power one of its major energy sources by the year 2000. China has announced plans to build, by that year, nuclear power plants with a total capacity of 10,000 MWe. In the first stage of development, the PRC plans to build a Chinese-designed, 300 HWE reactor at Qinshan, Zhejiang (near Shanghai). China also plans on the construction of two much iarger reactor projects: the twin 1000 MWe =Sunan= plant, to be built in Southern Jiangsu Province; and the Daya Bay, Guangdong plant, to include twin 900 MWE reactors. China is negotiating with a number of countries for assistance to its program, but it is clear that China regards U.S. nuclear equipment and technology very highly and would like to be able to buy ·such equipment and technology from the United States.

The purpose of the agreement is to permit such peaceful nuclear cooperation to take place between the United States and the PRe. It has a term of 30 years, subject to extension by the parties in accordance with their respective requirements, and provides for the transfer of facilitie~ (including reactors), co~ponents and material (including fuel) for both nuclear research and power purposes. The agree~ent does not provide for any transfer of sensitive nuclear technology, sensitive nuclear facilities or major critical components.

The agreement contains provisions which satisfy t~e requirements of section 123 a. of the Atomic Energy Act as they apply to nuclear-weapon states. Paragraph (1) of section 123 (a) requires that safeg~ards -as set forth in the agreement­will be maintained for .the life of ite~s subject to the agreement, irrespective of the duration of the agree~ent itself. Under the Nuclear Non-Proliferation Treaty and section 127 (1) of the Atomic Energy Act, International Atomic Energy Agency (IAEA) safeguards are only required as a condition for nuclear exports to non-nuclear-weapon states. Therefore, IAEA safequards are not provided for in the agreement. Article 8 (2),-ho~ever, provides for arrangements for exchanges of information and visits by U.S. Governnent officials to material, facilities and components subject to the agree~ent. Mutually acceptable arrangements on such visits and infor~ation exchange will be established prior to the approval of any U.S.

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exports under the agreement. This provlslon, together with article 10 (2), which provides that this provision and others continue for the life of the items to which they apply, meets the requirement of section 123 (a) (1).

Legally required provisions precluding retransfers without u.s. consent and precluding any military or explosive use are contained in article 5 (1) and (3). The required provisions on the physical protection of items subject to the agreement are in article 6. Paragraphs (2) and (4) of section 123 (a) of the Atomic Energy Act, pertaining to IAEA safeguards on all nuclear activities and a right of return of items in certain circumstances, do not by their terms apply to agreements with nuclear-weapon states, and consequently are not reflected in the U.S.-PRe agreement.

Subsections 123 (a) (7) and (8) of the Atomic Energy Act require that the u.S. have prior approval rights with regard to reprocessing, enrichment, alteration in form and content and (for weapons-usable material) storage of material subject to the agreement. These requirements are met in article 5 (2) of the agreement, although the text of this provision is different from the formulations in previous agreements. The effect of the provision is that none of these activities may be undertaken unilaterally; prior approval of the United States is required.

In accordance with section 407 of the Nuclear Non-Proliferation Act, the agreement contains a provision relating to identification of environ~ental i~~lications cnd ~rotection of the international environmental aspects of activities under the agreement, and in related matters of health and safety.

The proposed agreement will, in our view, further the non-proliferation and other foreign policy interests of the United States. During the period of our negotiations, China took several i~portant.steps which clarify its non-proliferation and puclear export policies and practices. Chinese Pre~ier Zhao ~ade important state~ents of China's no~-proliferation policy which make clear that China will not contribute to proliferation. The Premier's statements ~ere subsequently endorsed by the National People's Congress, thereby giving them official status. In conjunction with China's mern~ership in the International Ato~ic Energy Agency effective January 1, 1984, China said that it will require safeguards on its future nuclear export co~mitrnents to non-nuclear weapon states and is imple~enting that policy_

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Recommendation

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United States - People’s Republic of ChinaPeaceful Nuclear Cooperation Agreement

Summary of Basic Provisions

Article 1 and Annex I contain definitions;

A r t i c l e 2 s e t s f o r t h t h e s c o p e o f c o o p e r a t i o n i n thenuclear energy for peaceful purposes. The parties stateintent to cooperate in this area in accordance with theprovisions of the agreement. Information, technology,

use oftheir

material, facilities and components may be transferred underthe agreement directly between the parties or throughauthorized persons, and shall be subject to the terms of theagreement and to such additional terms and conditions as may beagreed by the parties. Material, facilities and componentswill be regarded as having been transferred pursuant to theagreement only upon confirmation by the recipient party thatsuch item or items are to be subject to the terms of theagreement. Sensitive nuclear technology, sensitive nuclearfacilities, and major critical components cannot be transferredunder the agreement; their transfer would require additionalprovisions as an amendment to the agreement. Each party willimplement the agreement in accordance with its respectiveapplicable treaties, national laws, regulations and licenserequirements concerning the use of nuclear energy for peacefulpurposes.

Article 3 provides for the transfer of information in avariety of fields involving the peaceful uses of nuclearenergy. These fields include research, development and use ofreactors and nuclear fuel fabrication technology, the use ofmaterial and physical and biological research, medicirle,agriculture and industry, nuclear fuel cycle research,including waste management techniques, health, safety, andenvironmental research and development~ assessing the rolenuclear pow er may play in international energy plans, andcodes, regulations and standards for the nuclear energyindustry. The agreement limits transfers of information andtechnology to that which the parties are permitted to transfer,thus excluding the transfer of restricted data, since specialprocedures under section 144 of the Atomic Energy Act must befollowed to authorize such transfers-- - .

Article 4 provides the basic enabling framework for thetransfer of material, facilities and components. Except forsmall quantities of special nuclear material for use assamples, standards~, detectors, targets, radiation sources andsuch othec agreed purposes, the agreement limits authorized

88.

transfers of special nuclear material to low-enriched uranium.Low-enriched uranium may be transferred for use as fuel inreactors and reactor experiments, for conversion orfabrication, or for such other purposes as may be agreed by theparties. The quantity of nuclear material transferred shallnot at any time be in excess of the quantity necessary forreactors or reactor experiments, and such other purposes as maybe agreed by the parties.

Article 5 requires the parties’ agreement for theretransfer of any material, facilities, components or specialnuclear material transferred pursuant to the agreement and anyspecial nuclear material produced through the use of any suchmaterial or facilities.

This article also specifies that neither party has anyplans to enrich to 20 percent or greater, reprocess, or alterin form or content material transferred pursuant to theagreement or material used in or produced through the use ofany material or facility so transferred. In addition, neitherparty has any plans to change locations for storage ofplutonium, uranium 233 (except as contained in irradiated fuelelements), or high-enriched uranium transferred pursuant to theagreement or used in or produced through the use of anymaterial or facility so transferred. If plans change, theparties will consult immediately and seek agreement within sixmonths on long-term arrangements for such activities. Theparties undertake to consider the activities favorably, andagree to provide pertinent information on their plans. Eachparty agrees not to act during this period. If a long-termarrangement is not agreed, the parties will promptly consultfor the purpose of agreeing on an interim arrangement. Bothparties agree to refrain from actions which either partybelieves would prejudge the ions-term arrangement or adverselyaffect cooperation under the agreement. In essence,consequently, none of the activities referred to in thisparagraph may be undertaken unilaterally; prior approval of theother party is required;

Finally, article 5 precludes the use of material,facilities or components transferred pursuant to the agreementand material used in or produced through the use of anymaterial, facility or component so transferred for any nuclearexplosive device, for research specifically on or developmentof any nuclear explosive device, or for any military purpose.The agreed minute makes clear that this obligation does notinvolve any nuclear activities and related research anddevelopment carried out by either party, as a nuclear weaponstate, through the use of material, facilities, components andtechnology not subject to the agreement.

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Article 6 requires that each party maintain adequatephysical security measures, in accordance with the levels ofprotection set forth in Annex II, with respect to any material,facility or components transferred pursuant to the agreementand with respect to any special nuclear material used in orproduced through the use of any material or facility sotransferred. The measures applied shall, as a minimum, becomparable to the recommendations set forth in IAEA documentINFCIRC/225/Rev.1, ‘The Physical Protection of NuclearMaterial," or in any revision of that document agreed to by theparties. The Annex describes physical security levelsapplicable with respect to the use, storage, and transport ofnuclear materials classified as categories I (requiring themost stringent levels of protection), II, and III. The partiesagree to consult at the request of either party regarding theadequacy of physical security measures, and agree to identifythose agencies and authorities responsible for ensuring thatlevels of physical security are adequately met and havingresponsibility for coordinating response and recoveryoperations in the event of unauthorized use or handling ofmaterials subject to the article.

Article 7 accords each party the right to cease cooperationif the other party does not comply with the provisions of theagreement. Each party undertakes to endeavor to avoid takingactions that would affect cooperation under the agreement.

Article 8 provides that parties shall consult at therequest of either party regarding the implementation of theagreement, the development of further peaceful nuclearcooperation, and other matters of mutual concern. It isrecognized that since the parties are both nuclear-weaponstates, bilateral safeguards are not required. However, inorder to exchange experience, strengthen technical cooperationbetween the parties, ensure that the provisions of theagreement are effectively carried out, and enhance a stable,reliable and predictable nuclear cooperation relationship, inconnection with transfers under the agreement the parties willuse diplomatic channels “to establish mutually acceptablearrangements for exchanges of information and visits tomaterial, facilities and components subject to the agreement.The parties also agree to exchange views and information on theestablishment and operation of their respective nationalaccounting and control systems for source and special nuclearm l a t e r i a l s u b j e c t t o t h e a g r e e m e n t .

A r t i c l e 9 p r o v i d e s t h a t t h e p a r t i e s s h a l l c o n s u l t t oi d e n t i f y t h e i n t e r n a t i o n a l e n v i r o n m e n t a l i m p l i c a t i o n s a r i s i n gfrom activities under the agreement, and shall cooperate inprotecting the international environment from radioactive,

90

chemical or thermal contamination arising from such activitiesand in related matters of health and safety.

Article 10 establishes a thirty-year term for the agreementwhich may be extended by agreement of the parties in accordancewith their respective applicable procedures. In the event ofsuspension? termination or expiration of the agreement or ofcooperation thereunder for any reason, articles 5, 6, 7, and 8shall continue in effect so long as any material, facility orcomponents subject to these articles remains in the territoryof the party concerned or any material, facility or componentssubject to these articles remain subject to that party’s rightto exercise jurisdiction or direct disposition elsewhere.

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MEMORANDUM FOR THE PRESIDENT

SUBJECT : Nuclear Proliferation Assessment Statement forthe Peaceful Nuclear Cooperation AgreementBetween the United States and China

Pursuant to Section 123a. of the Atomic Energy Act of 1954,as amended, I am submitting to you an unclassified NuclearProliferation Assessment Statement on the agreement forcooperation between the United States and China. This state-ment addresses the background (Part I), the statutory require-ments (Part II), and the non-proliferation policy issues(Part III) as they relate to the agreement.

China has recently taken major and welcome steps in adoptingpolicies that advance non-proliferation objectives. Theprospect of peaceful nuclear cooperation with the UnitedStates and others played an important role in encouragingChina to adopt these policies. China understands that UScooperation under the agreement is contingent upon China’simplementation of these policies in a manner fully consistentwith those basic non–proliferate on practices and standardsthat were discussed and clarified during the negotiationswith China.

I have concluded that the agreement meets all statutoryrequirements, and I have reached a favorable assessment ofthe adequacy of the provisions in the agreement to ensurethat any assistance furnished under it will not be used tofurther any military or nuclear explosive purpose. The agree-ment substantially benefits US non-proliferate on objectives,and it will provide a good opportunity for continuing con-sultations with China on non-proliferation issues. In lightof all the above, I recommend that it be approved.

Attachment:

Nuclear Proliferation Assessment Statement.

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NUCLEAR PROLIFERATION ASSESSMENT STATEMENT. . .

Pursuant to Section 123 a. of theAtomic Energy Act of 1954, as Amended,

With Respect to the proposed Agreement for CooperationB e t w e e n t h e U n i t e d S t a t e s o f A m e r i c a

a n d t h e P e o p l e ’ s R e p u b l i c o f C h i n aC o n c e r n i n g P e a c e f u l U s e s o f N u c l e a r E n e r g y

This Nuclear Proliferation Assessment Statement relatesto the proposed Agreement for Cooperation between the UnitedStates of America and the People’s Republic of China ConcerningPeaceful Uses of Nuclear Energy. This agreement for coopera-tion (which, together with its accompanying Agreed Minute,is hereinafter called the “proposed Agreement”) is concurrentlybeing submitted to the President for his authorization forexecution.

Section 123 a. of the Atomic Energy Act of 1954, asamended (“Atomic Energy Act”), provides that a Nuclear Pro-liferation Assessment Statement shall address the “adequacyof safeguards and other control mechanisms and the peacefuluse assurances contained in the agreement for cooperation toensure that any assistance furnished thereunder will not beused to further any military or nuclear explosive purpose.”This assessment statement addresses the background on thenuclear program and policies of China (Part I); the natureand scope of cooperation contemplated in the proposedAgreement (Part II A), and how the applicable substantiverequirements of the Nuclear Non-Proliferation Act (NNPA) andt h e A t o m i c E n e r g y A c t a r e m e t b y t h e p r o p o s e d A g r e e m e n t( P a r t 1 1 B ) ; o t h e r n o n - p r o l i f e r a t i o n p o l i c y i s s u e s p e r t i n e n tt o t h i s a g r e e m e n t ( P a r t I I I ) ; a n d t h e a s s e s s m e n t , c o n c l u s i o n s ,v i e w s a n d r e c o m m e n d a t i o n s o f t h e U n i t e d S t a t e s A r m s C o n t r o land Disarmament Agency (Part V). Part II B. responds to therequirements for a Proliferation Assessment Statement inSection 123a. of the Atomic Energy Act, as amended by boththe Nuclear Non-proliferation Act of 1978 and, more recently,by the Export Administration Amendments Act of 1985.

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I. BACKGROUND

A. China’s Civil Nuclear Program

C h i n a h a s r e c e n t l y b e g u n t o d e v e l o p a c i v i l i a nn u c l e a r e n e r g y p r o g r a m a n d has ambi t ious p lans for theinstallation of substantial nuclear electric power capacityby the year 2000. China hopes to double total energy outputand efficiency of energy use by that time. The constructionof nuclear power plants in energy-poor areas would help Chinareach those goals.

China sees its nuclear power program as a necessarypart of its development and modernization efforts. China isfaced with severe electric power shortages. This has notonly limited the amount of electricity available for householdconsumption, but it has also adversely affected industrialproduction. Future industrial and economic growth will requireincreased electric power.

China has relied primarily on coal-generated electricity,especially in the northern and central portions of the countrywhich possess rich fossil fuel deposits. In 1984, China'scoal production increased 8% over 1983 to 772 million metrictons. However, the growing demands for coal from a spreadingindustrial base have begun to tax the transportation sector'sinfrastructure, particularly the railroads. As a result,coal-generated energy has become increasingly costly.

Petroleum usage as a percentage of total energy pro–duct ion has fallen. The output of petroleum has remainedflat since 1978 and now accounts for 21% of the nationalenergy supply, down from 24% in 1978. China has continuedto export crude oil and some petroleum products in order toacquire badly needed foreign currency. It is estimated thatoil and petroleum products constitute some 25% of currentexport earnings. Growing internal demands for oil may forceChina to reconsider its oil export policy.

Hydroelectric power also provides energy in China.However, the large dams required to expand China’s presenthydroelectric power supplies are regarded as costly to con-struct and often result in the loss of valuable agriculturalland.

Because of these perce ived energy requi rements and con-d i t i o n s , the nuclear power alternative has gained acceptancein China. The Chinese leadership will consider the cost andbenefits of foreign technological assistance necessary to

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build modern nuclear power plants and the longstandingtraditions of Chinese self-reliance. Thus, China’s nuclearpower program most likely will be a two-track effort: some

foreign plant’s will eventually be constructed, and an indige-nous effort at reactor construction and fuel fabricationwill be advanced.

It is estimated that China possesses sufficient uraniumdeposits to maintain a modest civil nuclear program. Specificand detailed information on uranium deposits is presentlyunavailable, largely because China has yet to explore fullythe regions where uranium is likely to be found.

China’s technological base for peaceful nuclear activitiesis primarily an outgrowth of its cooperation with the SovietUnion in the 1950’s. During that time, hundreds of Chineseengineers and technicians were trained at Soviet universitiesand research facilities. The Soviets also provided theresearch reactor for the Beijing Institute of Atomic Energy(BIAE) .

Three main centers of nuclear power research are locatedin Beijing, Shanghai, and Sichuan. Beijing has two nuclearresearch facilities -- BIAE and one at Qinghua University.BIAE has a heavy water research reactor furnished by theSoviet Union in 1958 and is focused largely on the develop-ment of heavy water reactor technology. The Nuclear EnergyInstitute of Qinghua University is the primary facility fortraining nuclear engineers in China.

The primary research facility near Shanghai is theShanghai Nuclear Physics Institute (SNPI). It cooperatesclosely with the 728 Reactor Research and Design Institutedescribed below. Both groups are working on the design of alight water nuclear power reactor similar to those used inthe United States. The 728 Institute maintains a smallresearch reactor to study control rod design, power dis-tribution, and hydraulics.

The Southwest Reactor Engineering Research and DesignCenter (SWERC) is located in Chengdu, Sichuan Province. Likethe facilities near Shanghai, SWERC is involved in researchon nuclear power reactors. In addition, a large researchand test reactor is operated at Ziajiang. In February 1981,China announced that the reactor had gone into high poweroperation; it is used to produce radioactive isotopes foroil exploration and medical uses.

China has announced plans to build at least ten nuclearpower plants with a total generating capacity of 10,000 meqa-watts by the year 2000. PRC officials have stated that many

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Of these projects will import foreign equipment and engineeringservices.

Chinese officials at various levels have announced plansfor reactors in at least a dozen locations, from Hainan Islandin the south to the Liaoning Peninsula in the north. However,it appears that only three projects are likely to be startedin the near future:

Qinshan, Zhejiang (“728 Project”)_. This 300-megawatt,“Chinese-designed n power plant has been advertised as theprototype for China’s indigenous nuclear industry. Two majorreactor components -- the pressure vessel and the coolingpumps -- are to be supplied by Japan and West Germany,respectively. The Chinese press reported that constructionbegan January 25, 1985, with the laying of the plant’scornerstone. The press account reported that all roads,water, and electricity lines for the plant were completed bythe end of 1984, ahead of schedule.

Daya Bay, Guanqdonq. A joint venture company was formedJanuary 18, 1985, for the purpose of constructing this powerplant with twin 900 MW pressurized water reactors. Namedthe “Guangdong Nuclear Power Joint Venture Company”, thec o m p a n y i s o w n e d 7 5 % b y t h e G u a n g d o n g N u c l e a r P o w e r i n v e s t m e n tC o m p a n y ( a P R C c o r p o r a t i o n ) a n d 2 5 % b y t h e H o n g K o n g N u c l e a rInvestment Company (a wholly-owned subsidiary of Hong KongPower and Light) . Years of negotiations have not yet resultedin any final contracts between the Chinese and the likelysuppliers of equipment and services for the Daya Bay project.

Sunan (“Southern Jiangsu” or “East China”), JiangyinCounty, Jiangsu. The Chinese press has announced the estab–lishment of the “Dongnan Nuclear Power Development Company” ,responsible for constructing this plant on the southern bankof the Yangtze River, north of Shanghai. It will hold twin1000 MW pressurized water reactors. Earlier this year,requests for quotation for construction of the Sunan Projectwere issued to France and West Germany. In the absence ofan agreement for cooperation, US companies were not invitedto bid.

The Chinese have had c o m m e r c i a l c o n s u l t a t i o n s o n t h es u p p l y o f n u c l e a r p o w e r – r e l a t e d e q u i p m e n t w i t h F r a n c e , t h eU n i t e d K i n g d o m , C a n a d a , S w e d e n , t h e F e d e r a l R e p u b l i c o f G e r m a n y( F R G ) , I t a l y , B e l g i u m , a n d J a p a n . Belgium, the FRG, and theUK have agreements for peaceful nuclear cooperation withChina. China has also concluded such agreements with Argentinaand Brazil that could lead to reciprocal supply arrangements.

The proposed Agreement is the culmination of over fouryears of U.S.-China talks. Six rounds of intensive negotiations

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were held, both in Washington and Beijing, prior to initiallingof the proposed Agreement on April 30, 1984, by AmbassadorKennedy and Commissioner Jia during President Reagan’s visitto China.

Prior to seeking formal presidential approval, it becamenecessary to engage in further discussions with China forthe purpose of clarifying matters related to implementationof C h i n a ’ s n u c l e a r p o l i c i e s . T h e s e d i s c u s s i o n s t o o k p l a c et h r o u g h d i p l o m a t i c c h a n n e l s a n d d u r i n g v i s i t s o f s e n i o r U So f f i c i a l s t o B e i j i n g . T h e d i s c u s s i o n s c o n c l u d e d s u c c e s s -fully on June 27, 1985. W i t h a r e s o l u t i o n o f t h e s e a d d i t i o n a lq u e s t i o n s , i t w a s t h e n a p p r o p r i a t e t o p r o c e e d w i t h o b t a i n i n gP r e s i d e n t i a l a u t h o r i t y t o s i g n t h e p r o p o s e d A g r e e m e n t .

B. Non-Proliferation Policy

China's non-proliferation policy and statementshave evolved since the end of the Cultural Revolution. Withthe rise of the post-Mao leadership of Deng Xiaoping, Chinahas moved toward more responsible and active participationon disarmament issues in general, and most recently on non-proliferation in particular.

During the 1960’s and 1970’s, China's declaratory postureargued that the spread of nuclear weapons to additional coun-tries would diminish the power of the United States and theSoviet Union, and rejected the view that an increase in thenumber of nuclear-weapon states would enhance the risk ofnuclear war. Chinese declarations even postulated that theintroduction of nuclear weapons to nations in the Third Worldcould increase the opportunity of revolution. During thenegotiations of the Nuclear Non-Proliferation Treaty, andsubsequently, China has criticized the Treaty as discriminatory.But at the same time, China’s actions were more restrainedthan its declaratory policy.

In the early 1980’s, the possibility of Chinese involve-ment in international nuclear comrnerce became a reality.This development presented a serious problem. China hadassumed no international legal obligation nor had it adopteda policy to require International Atomic Energy Agency (IAEA)safeguards or other controls on its nuclear exports. Also,its broader posture on non-proliferation continued to raisec o n c e r n s a b o u t w h e t h e r C h i n a w o u l d a v o i d a c t i o n s t h a t c o u l dhelp another country acquire nuclear explosives.

Recently, China has taken a series of positive non-proliferation steps, moving to accept those basic non-proliferation practices and norms common to all suppliers.During the January 1984 visit to Washington of Premier Zhao,he stated that China does not “engage in n u c l e a r p r o l i f e r a t i o n

97

ourselves , nor do we help other countries to develop nuclear. weapons."

On May 15, 1984, in an address to the Sixth NationalPeople’s Congress, Zhao repeated that China does not “engagein such proliferation by helping other countries to developn u c l e a r w e a p o n s . ” T h i s s t a t e m e n t t o t h e P e o p l e ' s C o n g r e s sand its subsequent endorsement by the Congress is the ChineseGovernment’s highest vehicle for the pronouncement of publicpolicy.

China’s position on nuclear non-proliferation was mostrecently stated publicly by Vice Premier Li Peng in January1985. According to an interview published in Beijing, hesaid China has no intention, now or in the future, to helpnon-nuclear nations develop nuclear weapons. He also saidthat China’s present and future nuclear cooperation withother countries would be confined exclusively to peacefulpurposes.

Discussions have been held with the Chinese, since theproposed Agreement was initialed last year, in order toclarify implementation of certain aspects of its non-proliferation policy. These discussions made clear that thetwo governments have a common understanding of the essentialsteps needed to implement these policies, consistent withtheir mutual commitment to non-proliferation . Thus, we canexpect that China’s policy of not assisting non-nuclear-weapon s ta tes to acqui re nuc lear explosives will be imple-mented in a m a n n e r c o n s i s t e n t w i t h t h e b a s i c n o n - p r o l i f e r a t e o np r a c t i c e s c o m m o n t o t h e U n i t e d S t a t e s a n d o t h e r s u p p l i e r s .

These discussions also provided the Chinese with a morecomplete description of US policies and laws that form thebasis for peaceful nuclear cooperation with a country like

China. Finally, these consultations also permitted discussionof China’s intentions regarding IAEA safeguards on its civilnuclear program.

On January 1, 1984, China joined the IAEA. Chineseofficials said during the course of negotiations on the pro-posed Agreement and in the ensuing discussions that, as amember of the IAEA, China would require IAEA safeguards onits nuclear exports to non-nuclear-weapon states. Thispolicy was formally implemented in late 1984 when the China–Brazil civil nuclear cooperation agreement incorporated areciprocal IAEA safeguards requirement for items transferredunder the agreement.

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(1) Permitted Cooperation

99—

;";' ';"i; :\\Jrl!'~n(!nt: Hllj Lr1 J.(jdltlOr! t<) tjC'}'~': :.: ,1 t~'r )~~'!(Llr'!

.' 'r~::'jln(J 'lnd·~r ~_hf! ~)r()p()Se(j :\,;r'->'!;'l,-,;)t ,thf!r rHj\~l"lr

,·'\~))rt'-; ' ..... rdeh the part If.35 ayree ')h~)'jl j :", ~,r":ii,'.;t,,:::.rt',> j

I 1jr-~lLl:it ~r) the tJr );'Y)Sl.:::1 r\(Jr.~er:lt~nt.

,.; [ t 1 C 1 e ~ ::; e t 5 E 0 r t h i n rn () res t) eel t l' r: ,! ens t:'I e C')P'-.' r;f (::oopera tin covered by the pro[J,)sed :\'JreefT1ent.

Ar e 4( ) t3t s that the oniy pc i3i nu lear materlal t () '; t ri n sEe r r r:: d ...... ill he 1 0·..... e n r 1 c he rl ran 1 1j m (" LEU" ) (1.0., ur3nlum nrlched to less than 20~ in the is tr;pe 23S) ex cpt s r-ovided in sut)par-::iyr-aph 4 E Arti le 4.

Article 4(4) authorizes the transter of small amounts )f s~ecial detectors,

nuclear materlal for use as samples, standards, tarQets and other purposes as the parties may

(2) Types of Cooperation Not Authorized

The proposed A~reement excludes the transfer of sensi­tive facilities and technologies. Article 2(4) provides that sensitive nuclear technology, sensitive nuclear facilities or major critical components "will require additional provislons as an amendment to this agreement." This constitutes a preclusion of such transfers under this proposed Agreement. The law does not require such a prohibition; but if such cooperation is authorized, the law requires that certain criteria be met in the agreement. IE such transfers wer~ to be contemplated at any time in the future, additional control mechanisms would need to

btained either in an amendment to the proposed Agreement or in a new d(dr ement. The term "sensitive nuclear t e c h no] 0 (oJ y II i s deE 1 ned a tAr tic leI ( 1 7 ), II sen sit i v e

u 1 ear fa c i lit 1 e s II a tAr tic 1 e 1 ( 1 4) and II r;'. a J 0 r c r i tic a 1 ~()r1t)onentsll at Article 1 (16).

B . pecltic Requirements Era ~ew Cooperation

reement Eor

Section 123 a. of the Atomic Ener-gy Act prOVides that a new agreement Eor cooperation shall include nine specific requirements. These are quoted below, together wlth an explanation of how they are satisfied by the proposed ree mente

(1) Safeguards and their Durability

ubparayraph (1) of Section 123 d. requires:

"a yuaranty by the cooperating party that safeguards as set forth in the agreement Eor cooperation will be maintained with respect to all nuclear materials and equipment transferred pursuant thereto, and with

100

respect to all special nuc1ear materia1 used i n o rproduced through the use of such nuclear materialsand equipment, so long as the material or equipmentremains under the jurisdiction or control of thecooperating party, irrespective of the duration ofother provisions in the agreement or whether theagreement is terminated or suspended for any reason.”

( 2 ) Scope of Safeguards

Subparagraph (2) of Section 123 a. provides:

“in the case of non-nuclear-weapon states, arequirement, as a condition of continued UnitedStates nuclear supply under the agreement forcooperation, that IAEA safeguards be maintained withrespect to all nuclear materials in all peacefulnuclear activities within the territory of suchstate, under its jurisdiction, or carried out underits control anywhere;"

Since China is a nuclear weapon state, the requirement forI A E A s a f e g u a r d s s e t f o r t h i n s u b p a r a g r a p h 2 o f S e c t i o n 1 2 3 a .i s n o t a p p l i c a b l e .

Subparagraph (1) mandates that whatever safeguards are setforth in the agreement for cooperation shall apply to theitems specified in that subparagraph as long as those itemsremain under the jurisdiction or control of the cooperatingparty. paragraph 2 of Article 10 (2) of the proposed Agreementstates:

2. Notwithstanding the suspension, termination ore x p i r a t i o n o f t h i s a g r e e m e n t o r a n y c o o p e r a t i o nhereunder for any reason, the provisions of article5 , 6 , 7 , and 8 shall continue in effect so long asany material, facility or components subject tothese articles remain in the territory of the partyconcerned or any material, facility or componentssubject to these articles remain subject to thatparty’s right to exercise jurisdiction or to directdisposition elsewhere.

Article 5 deals with retransfers, reprocessing, enrichment,alteration and no use for military purposes. This article isexamined in detail in the analysis of subparagraphs 3, 5, 7,and 8 of 123 a. Article 6 deals with physical security andis examined under the analysis of subparagraph 6 of 123 a.

Article 7 states in pertinent part:

If either party at any time following entry intoforce of this agreement does not comply with the

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provisions of this agreement, the parties shallpromptly hold consultations on the problem, It beingunderstood that the other Party shall have the rightto cease further cooperation under this agreement.

Finally., Article 8 states:

1 . The parties shall consult at the request ofeither party regarding the implementation of thisagreement, the development of further cooperation inthe field of peaceful uses of nuclear energy, andother matters of mutual concern.

2. The parties recognize that this cooperation inthe peaceful use of nuclear energy is between twonuclear-weapon states and that bilateral safeguardsare not required. In order to exchange experience,strengthen technical cooperation between the parties,ensure that the provisions of this agreement areeffectively carried out, and enhance a stable,reliable, and predictable nuclear cooperation rela-tionship, in connection with transfers of material,facilities and components under the agreement theparties will use diplomatic channels to establishmutually acceptable arrangements for exchanges ofinformation and visits to material, facilities andcomponents subject to the agreement.

3. The parties shall exchange views and informationon the establishment and operation of their respectivenational accounting and control systems for sourceand special nuclear material subject to this agreement.

Thus, Article 10 of the proposed agreement would applyUs. rights regarding retransfer, storage, reprocessing,enrichment, alteration, physical security, exchanges ofinformation and visits and the Chinese guaranty againstmilitary or explosive use irrespective of the duration ofother provisions in the agreement or “whether the agreement isterminated or suspended for any reason.

The right set forth in Article 8 for the United Statesto conduct visits to material, facilities and componentssubject to the proposed Agreement is an important means ofassuring that the provisions of the proposed Agreement arecarried out, in particular, the Chinese guaranty againstmilitary or explosive use. Indeed, Article 8 specificallystates that one of the purposes of visits is to ensure thatthe provisions of the proposed Agreement are effectivelycarried out. Moreover, Article 8 states that visits shall bearranged “in connection with transfers” of items under theproposed Agreement. Mutually acceptable arrangements onvisits will be established before exports under theproposed Agreement are approved. Also valuable for the

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(3) No Military or Explosive Use

Subparagraph ( 3 ) of Section 123 a . requires:

“a guaranty by the cooperating party that no nuc1earmaterials and equipment or sensitive nuclear technologyto be transferred pursuant to such agreement, and nospecial nuclear material produced through the use ofany nuclear materials and equipment or sensitivenuclear technology transferred pursuant to suchagreement, will be used for any nuclear explosivedevice, or for research on or development of anynuclear explosive device, or for any other militarypurpose;”

Article 5 meets this requirement wherein China guaranteesthat:

“Material, facilities or components transferredpursuant to this agreement and material used in orproduced through the use of any material, facilitiesor components so transferred shall not be used forany nuclear explosive device, for research specificallyon or development of any nuclear explosive device,or for any military purpose.”

There is no reference to sensitive nuclear technology be-cause, as noted above, Article 2(4) of the proposed Agreementprovides that an amendment is required before sensitivenuclear technology could be transferred under the proposedAgreement.

During the negotiations, China sought assurance that theagreement did not affect its right, as a nuclear weapon state,to conduct nuclear explosive activities using materials,facilities, components, and technology that are not subjectto the proposed Agreement. The Agreed Minute provided suchassurance as follows:

Both parties agree that the interpretation andimplementation of article 5(3) shall not involve anynuclear activities and related research and developmentcarried out by either party, as a nuclear weapon

state, through the use of material, facilities,components and technology not subject to the agreement.

~) :) f ~) t? (~ t i () n 1 2 3 a. ! i_' (~ U 1 r'l:-; :

I, e :< c e p t 1 nth e c 3. s e () f tho s e ~. q ref: men t s for c () 0 per a t ion ''''; i t h n u c 1 ear .'" f2 a po n s tat e s, a s tip u 1 a ti,) nth a t

the Unitel.i States shall have the riqht to reciuirf:? the return of any nuclear materials anel equiprlent transferred pursuant thereto and any special nuclear material produced through the use thereof if the cooperatinq party detonates a nuclear explosive ejevice or- terminates or abr-o(]ates an agreement provi~inQ f')r IAEA safeguards;"

Since China is a nuclear ~eapon state, the requirement for a rlght of return as set Enrth in subparagraph (4) of Section 123 a. ia not applicable. Article 7, however, makes clear that the United States 11as the right to cease further coopera­tion if China does not comply with the provisions of the AQreeme-nt.

(5) Retranster

Subparagraph (5) of Section 123 a. requires:

"a guaranty hy the cooperating party that any mate­r·ial or any Restricted Dat'l transferred pursuant to the a0rcement for cooperation and .... any produc­tion or utilizati'Jn f3.cility transferred pursuant to th.} a~Jreement tr)C cooperation or any speci3.1 nuclear material produced through the use of any such tacility 0r through the use of any rlaterial transferrcd pursuant to the agreement, will not be transferred to unal~thorized persons or jeyond the jurisdiction or control oE the cooperatin(;:J ralty '",' i tho u t the c ens e n t 0 f the U nit e d S tat e s ; "

Sec t i () n 1 0 9 I) f the A tom ice n erg y (\ c t r e q u 1 res t hat r e c i pie n t nat i I) n sal s 0 cl 9 r e e too b t a i n U. S. a p p lO \/ ,:1 1 h (> for e retansferring ~ny components, items and substances expolted f r o;n the r J nit e d S tat e s w h i c h the N u c 1 ear Re 9 u 1 a tor yeo mm iss ion ( II NRC ") has found to be "s ign if ican t for nuc lea r explos i VI?

purposes." The URC has identified a series of such components, items and substances in regulations contained in 10 eFR Part 110 '",hich are subject to this retransfer requirement.

Article S( 1) of the proposeci i\i]reement satisfies both retransEer criteria of the Atomic Energy Act by providing that material, facilities, or components or special nuclear material transferred pursuant to the proposed Agree~ent and :; pee i a 1 n u c 1 e a r- mat e ria 1 pro d u c edt h r 0 u q h t h t~ use 0 f s u c h

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in ,1 t e ria 1 ') r f ,3 C i lit i e s, " :-; hal 1 not h (~ ret r a [1 s fer r e rl to una u tho r- -l.~ r: d p I~ r S i Hl S () r, u n 1 e s s \ h e p c1 r- tie s a q Lee, t) t~ Y n n d its t I~ r r ito r y . "

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( 6 ) physical Security

Subparagraph (6 ) o f sect ion 123 a . requl res:

"a guaranty by the cooperating party that adequatephysical security will be maintained with respect toany nuclear material transferred pursuant to suchagreement and with respect to any special nuclearmaterial used in or produced through the use of anymaterial, production facility, or utilization facilitytransferred pursuant to such agreement;"

A r t i c l e 6 ( 1 ) of the p r o p o s e d A g r e e m e n t m e e t s t h i s r e q u i r e -m e n t b y p r o v i d i n g a g u a r a n t y b y C h i n a t h a t

"adequate physical security shall be maintained withrespect to any material and equipment transferred toand under its jurisdiction pursuant to this agreementand with respect to any special nuclear materialused in or produced through the use of any materialor equipment transferred to and under its jurisdictionpursuant to this agreement.”

With respect to the meaning of “adequate,” Section 127(3)of the Atomic Energy Act, as added to the law by Section 305of the NNPA, provides that physical security measures shallbe deemed adequate if they provide a level of protectionequivalent to that required by regulations promulgated by theNRC establishing levels of physical security (see NNPA Section304(d) and 10 CFR 110.43).

The balance of Article 6 and Annex II to the proposedAgreement contain implementing provisions, such as a descrip-tion of the levels of physical security contemplated andmeasures to be taken. These provisions are consistent withthe Guidelines for Nuclear Transfers published by the IAEA inFebruary 1978 and the above-mentioned NRC regulations.

Article 6(3) permits the United States to consult withChina concerning the adequacy of physical security measuresin China, and, in accordance with Article 6(4), the Chineseauthorities responsible for physical security will be madeknown to the United States. These provisions will facilitatecooperation between the United States and China on physicalsecurity matters of mutual interest, and will also enhanceU s . a b i l i t y t o b e a s s u r e d a s t o t h e l e v e l o f p h y s i c a l p r o t e c -t i o n b e i n g m a i n t a i n e d .

1 0 5

"a guaranty by the cooperatinq party that no materialtransferred pursuant to the agreement for cooperationand no material used in or produced through the useof any material, production facility, or utilizationfacility transferred pursuant to the agreement forcooperation wi1l be reprocessed, enriched or (in thecase of plutonium? uranium 233, or uranium enrichedto greater than twenty percent in the isotope 235,or other nuclear materials which have been irradiated)otherwise altered in form or content without theprior approval of the United States;"

This criterion contains several restrictions. First,Us. approval must be obtained prior to any reprocessing ofmaterial supplied under a new or amended agreement or of anymaterial produced from such material or produced or used in aproduction or utilization facility so supplied (e.g., areactor). Second, such approval must be obtained for enrich-ment, after export, of any uranium supplied under a new or anamended aqreement. Third, such approval must be obtained forany alteration of weapons useable material or irradiatednuclear material which has either been supplied under a newor an amended agreement or produced from such material or

used in any such equipment so supplied.

Paragraph 2 of Article 5 of the proposed Agreement states:

Neither party has any plans to enrich to twentypercent or greater, reprocess, or alter in form orcontent material transferred pursuant to thisaqreement or material or facility so transferred.Neither party has any plans to change locations forstorage of plutonium, uranium 233 (except as con-tained in irradiated fuel elements), or hiqhlyenriched uranium transferred pursuant to thisagreement or used in or produced through the useof any material or facility so transferred. Inthe event that a party would like at some futuretime to undertake such activities, the partieswill promptly hold consultations to agree on amutually acceptable arrangement. The partiesundertake the obligation to consider such activitiesfavorably, and agree to provide pertinent informa-tion on the plans during the consultations.Inasmuch as any such activities will be solely forpeaceful purposes and will be in accordance withthe provisions of this agreement, the parties willconsult immediately and will seek agreement within

106.

The first sentence in Article 5(2) states neither partyintends to engage in any of the activities specified inSection 123 a. (7). Should China in the future desire toundertake reprocessing, enrichment or other alteration,consultations will be held to establish long-term arrangementsfor such activities and the United States has agreed to“consider such activities favorably. ” No reprocessing,enrichment or alteration will be conducted during the periodthat such consultations are underway. If no long–term arrange-ments are agreed within six months of the initiation ofconsultations , the parties w i l l c o n s u l t o n m e a s u r e s t h a t

would allow such activities on an interim basis. Chinaagrees to refrain from any reprocessing, enrichment or altera–tion if the United States believes such activities “wouldprejudge the long-term arrangements for undertaking suchactivities or adversely affect cooperation” under the proposedAgreement. Although set forth in two stages, the text ofArticle 5(2) clearly precludes, for the first phase, anyreprocessing, enrichment or alteration while seeking toestablish long-term arrangements for such activities. Duringthe second phase when the United States and China are seekingto make interim arrangements, the Chinese cannot undertakereprocessing, enrichment or alteration if the United Statesobjects on grounds that such activity “would prejudge thelong–term arrangements or adversely affect cooperation.” ThusChina cannot unilaterally proceed with reprocessing enrichmentor alteration in the face of U.S. objection. Article 5(2)accordingly satisfies the criterion of subsection 7 of Section123 a.

1 0 7—

The proposed Agreement authorizes retransfer of onlysmall quantities of plutonium, u r a n i u m 2 3 3 o r u r a n i u m e n r i c h e dt o g r e a t e r than 20 percent in the isotope 235.

Article 4(1) provides:

“Any special nuclear material to be transferredunder this agreement shall be low enricheduranium except as provided in paragraph 4 ofthis a r t i c l e . ”

Article 4(4) states:

4. Smal l quan t i t i e s of special nuclearmaterial may be transferred for use ass a m p l e s , s t a n d a r d s , d e t e c t o r s , t a r g e t s ,r a d i a t i o n s o u r c e s a n d f o r s u c h o t h e rp u r p o s e s a s t h e p a r t i e s m a y a g r e e .

“( i ) plutonium, uranium 233, or Uranium enrichedin the isotope 235, or (ii) any other material sod e s i g n a t e d b y a g r e e m e n t o f t h e p a r t i e s . ”

The proposed Agreement addresses any change in storagelocation for such small quantities of uranium 233, uraniume n r i c h e d g r e a t e r t h a n 20 percent. in the isotope 235 or pluto-nium i n the same manner as it addresses reprocessing, enrichment.or o t h e r a l t e r a t i o n . (All these subjects are dealt with inparagraph 2 of Article 5 of the proposed Agreement which isset forth on page II-8 of this Assessment Statement. ) A s w i t hr e p r o c e s s i n g , e n r i c h m e n t o r o t h e r a l t e r a t i o n , C h i n a h a sa g r e e d n o t t o u n d e r t a k e a n y c h a n g e i n s t o r a g e l o c a t i o n w h i l et h e P a r t i e s a r e seekinq to establish long–term arrangementsfor such storage. D u r i n g t h e s e c o n d p h a s e w h i l e t h e P a r t i e sare seeking interim arrangements, t h e C h i n e s e cannot change

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the location for storage of t h e s p e c i f i e d m a t e r i a l s i f t h eU n i t e d S t a t e s o b j e c t s . Thus, U.S. approval for any change in

storage locations for these materials is guaranteed.

The proposed Agreement contains a phrase excluding pluto–nium or uranium 233 in irradiated fuel elements from theapproval requirements for changes in storage locations. Thisfollows the approach set forth in other agreements for coopera-t i o n t h a t t h e U n i t e d S t a t e s h a s e n t e r e d i n t o w i t h o t h e rc o u n t r i e s . T h i s e x c l u s i o n i s c o n s i s t e n t w i t h t h e s t o r a g ecriterion in the Atomic Energy Act because it is designed tocover material directly useable in nuclear explosives.( S e n a t e R e p o r t 9 5 - 4 6 7 , p p . 2 2 , 5 2 - 5 3 . )

The proposed Agreement does not deal with initial storagelocations, only changes in storage locations after the listedmaterials have been received. Normal practice with respectto the exports of the small quantities of the material specifiedin section 123(a)(7) includes specifying the storage locationfor such materials. Thus, at all times, storage locationswill be approved by the United States.

( 9 ) Sensitive Nuclear Technology

Subparagraph (9) of Section 123 a. requires:

“a guaranty by the cooperating party that’ anyspecial nuclear material, production facility, orutilization facility produced or constructed underthe jurisdiction of the cooperating party by orthrough “the use of any sensitive nuclear technologytransferred pursuant to such agreement forcooperation will be subject to all the requirementsspecified in this subsection.”

Article 2(4) of the proposed Agreement provides that anamendment shall be required for any transfer of sensitivenuclear technology? sensitive nuclear facilities, or majorcritical components. Since the guaranty required by thiscriterion relates only to material or facilities produced orconstructed through the use of sensitive nuclear technologytransferred under the proposed Agreement, it is inapplicableto the proposed Agreement unless and until it is amended toprovide for the transfer of such technology.

c. NNPA Section 402 -- Additional Requirements

Section 402(a) contains additional enrichmentcontrols quoted and discussed below.

“Except as specifically provided in anyagreement for cooperation, no source orspecial nuclear material hereafter exported

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from the United States may be enriched afterexport without the prior approval of theUnited States for such enrichment;”

Article 5(2) of the proposed Agreement, which deals withthis restriction, is discussed above. By limiting the needto obtain U.S. consent to enrichment of twenty percent org r e a t e r i n t h e i s o t o p e 2 3 5 , t h e U n i t e d S t a t e s i s a p p r o v i n ge n r i c h m e n t u p t o t w e n t y p e r c e n t o f m a t e r i a l s u b j e c t t o t h eproposed Agreement.

Section 402(a) further requires that:

“[N]o source or special nuclear materialshall be exported for the purpose ofenrichment or reactor fueling to anynation or group of nations which has,after the date of enactment of this Act,entered into a new or amended agreementfor cooperation with the United States,except pursuant to such agreement.”

AS applied to the present case, this provision means thatafter entry into force of the proposed Agreement, no U.S.source or special nuclear material can be exported to Chinafor enrichment or reactor fueling except pursuant to theproposed Agreement. This will foreclose transfers of sourcematerial for such purposes outside an agreement for cooperation,which would otherwise be possible under Section 64 of theAtomic Energy Act.

section 402(b) of the NNPA provides that:

“In addition to other requirements oflaw, no major critical component of anyuranium enrichment, nuclear fuelr e p r o c e s s i n g , o r h e a v y w a t e r p r o d u c t i o nf a c i l i t y s h a l l b e e x p o r t e d u n d e r a n ya g r e e m e n t f o r c o o p e r a t i o n . . . u n l e s s s u c hagreement for cooperation specificallydesignates such components as items to beexported pursuant to the agreement forcooperation.”

Article 2(4) of the proposed Agreement provides thatthere may be no transfer under the proposed Agreement of a“sensitive nuclear facility” -- defined in Article 2(14) toinclude uranium enrichment, reprocessing, and heavy waterproduction facilities as well as facilities for the fabrica-tion of nuclear fuel containing plutonium –– or “major criticalcomponents” as defined in Article 2(16), unless the proposedAgreement is amended.

1 1 0—

D. NNPA Section 307 -- Conduct Resulting inTermination of Nuclear Exports

Section 307 added Section 129 to the Atomic Energy Ac t ,

w h i c h p r o h i b i t s n u c l e a r e x p o r t s t o n a t i o n s w h i c h e n g a g e i nc e r t a i n p r o s c r i b e d a c t i v i t i e s . T h e a c t i v i t i e s i n S e c t i o n 1 2 9a r e t h o s e w h i c h a r e d i r e c t l y r e l a t e d t o w e a p o n s a c q u i s i t i o nor which could have a weapons- related motivation. Based onavailable information, it is believed that a finding underSection 129 that would preclude nuclear exports to Chinaunder the proposed Agreement is not warranted.

E. NNPA Section 309 -- Components, Items andSubstances

Section 309 of the NNPA amended Section 109 of the AtomicEnergy Act to authorize the NRC to determine that certaincomponent parts, items and substances, because of theirsignificance for nuclear explosive purposes, should be subjectto its licensing authority. For such licenses, the NRC mustf ind tha t the fo l lowing cr i te r ia or the i r e q u i v a l e n t a r e m e t :

“(l) IAEA safeguards as required by ArticleIII(2) of the [NPT] will be applied withrespect to such component, substance, oritem; (2) no such component, substance, oritem will be used for any nuclear explosivedevice or for research on or development ofany nuclear explosive device; and (3) nosuch component, substance or item will beretransferred to the jurisdiction of any othernation or group of nations unless the priorconsent of the United States is obtained forsuch retransfer.”

The NRC promulgated regulations on May 19, 1978 (10 CFRPart 110) which identified certain reactor components and twosubstances -- heavy water and nuclear graphite (moderatormaterials) -- the export of which would be subject to thesecriteria. In the case of China, the first criterion is metbecause Article III(2) of the NPT only requires IAEA safeguardson exports to non-nuclear weapon states. The second criterion(no explosive use) is met by the language in Article 5(3) .The third criterion (retransfer) can be met by having componentsand moderator material identif ied as being exported under theproposed Agreement, in which case Article 5( 1) would apply.(The Atomic Energy Act does not require that such exports bet r a n s f e r r e d u n d e r a n a g r e e m e n t f o r c o o p e r a t i o n ; h o w e v e r , t h e ym a y b e s o t r a n s f e r r e d . )

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111. OTHER NON-PROLIFERATION ISSUES

Any decision by the United States to engage in nuclearcooperation with another nation can raise a number of non-proliferation policy issues in addition to questions aboutthe legal rights, guarantees, and safeguards contained inthe applicable agreement for cooperation. These issues willvary from case to case. They could involve, for example,the scope of the cooperation envisaged under such an agree-ment, the precedential implications of particular provisionsof such an agreement, the degree to which extending nuclearcooperation may foster other non-proliferation interests, orthe general role of the state concerned in non-proliferationefforts. This part of the assessment statement addressesthose policy issues which relate to the proposed Agreement.

A. C h i n a ' s N o n - P r o l i f e r a t i o n P o l i c y

The central policy issue concerns the relationshipof the proposed Agreement to China’s non-proliferation policy.As outlined in Part I, over the recent past China has cometo accept the most critical norms and practices at the heartof efforts to prevent the spread of nuclear explosives toadditional countries. China joined the IAEA, stated that itwould require safeguards on its exports to non-nuclear weaponstates, and committed itself not to help other countriesacquire nuclear explosives. Those positive and welcome stepswent hand-in-hand with China’s interest and activities inobtaining foreign assistance for its civil nuclear program.

During the talks, the US made clear that a shared under-standing on non–proliferation was essential to provide aframework for assistance to China’s peaceful nuclear program.Discussions with other countries, including the United States,on nuclear cooperation also provided an opportunity for sub-stantial exchanges on non-proliferation issues, practices,and norms, These exchanges elevated the political importanceof this issue, and created a better understanding by the PRCof the significance of certain non-proliferation principlesand practices.

As a nuclear–weapon state, China has demonstrated thatit has the technological and scientific ability to build anuclear bomb and the capability of producing weapons-usablefissile m a t e r i a l . Until recently, it had announced no policiesa g a i n s t a s s i s t i n g a n o t h e r s t a t e t o a c q u i r e n u c l e a r e x p l o s i v e s .C h i n a i s n o t a p a r t y t o t h e N u c l e a r N o n - P r o l i f e r a t i o n T r e a t ywhich contains obligations n o t t o a s s i s t n o n - n u c l e a r - w e a p o nstates in the manufacture or acquisition of nuclear explosives.

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Thus, the potential for great harm to global non-proliferation

efforts and barriers has been present.

Since January 1984 China made a series of statementsstressing that its policy is not to assist other to acquirenuclear weapons.*

Discussions with China that have taken place since thei n i t i a l i n g o f t h e p r o p o s e d A g r e e m e n t h a v e c o n t r i b u t e ds i g n i f i c a n t l y t o a s h a r e d u n d e r s t a n d i n g w i t h C h i n a o n w h a ti t m e a n s n o t t o a s s i s t o t h e r c o u n t r i e s t o a c q u i r e n u c l e a re x p l o s i v e s , a n d i n f a c i l i t a t i n g C h i n a ' s s t e p s t o p u t a l lt h e s e n e w p o l i c i e s i n t o p l a c e .

Thus, ACDA believes that the statements of policy bysenior Chinese officials, as clarified by these discussions,represent a clear commitment not to assist a non-nuclear-weapon state in the acquisition of nuclear explosives. Onthe basis of the discussions with the PRC, the United Statescan expect that China’s policy of not assisting a non-nuclear-weapon state to acquire nuclear explosives will be implementedin a manner consistent with those basic non-proliferationpractices common to the United States and other major suppliers.

This commitment applies to all future Chinese assistance.Moreover, the Chinese are fully ‘aware of the importance oftheir non-proliferation policies to future US-China nuclearrelations. They know that should we find out about any actioninconsistent with these basic non-proliferate on measures,including requiring IAEA safeguards on nuclear exports, wewould not go forward with exports until the matter wereresolved satisfactorily.

In joining the IAEA, China will be able to participatein implementing the basic principles of that Agency whichinclude efforts to prevent the spread of nuclear explosives.China’s presence in that international forum also will bringit into contact with other countries that support a strongnon-proliferation and safeguards regime.

Because US-China peaceful nuclear cooperation must resto n s h a r e d p r i n c i p l e s o f n o n - p r o l i f e r a t i o n , i t w i l l b e i m p o r t a n tf o r t h e U n i t e d S t a t e s t o c o n s u l t r e g u l a r l y w i t h C h i n a o nn o n - p r o l i f e r a t i o n i s s u e s . We will also pay close attentionto China’s actions in this area. The United States has made

*See pages 4-5 of part 1“

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clear to China chat US-Chinese nuclear cooperation rests on

strict adherence to these principles and common basic practices.

The proposed Agreement will provide a basis for furtherconsultations between the United States and China onnon-proliferation. These consultations can strengthen themutual commitment to shared non-proliferation principles andestablish a framework for cooperation in this area. Overtime, such consultations may lead to further improvements inChina’s non-proliferation policies.

The United States has been cautious in cooperating withcountries that are not parties to the Nuclear Non-ProliferationTreaty, given the importance of the Treaty in promotingnon-proliferation. No such cooperation should be concludedin the absence of significant non-proliferation benefits.ACDA believes that the proposed Agreement meets this test.

In summary, as a country outside the non-proliferationregime, China posed a serious potential risk to internationalnon-proliferation efforts. China has now declared its opposi-tion to proliferation and taken concrete steps toward globalnon-proliferation norms and practices. Along with the dis-cussions with other countries, the prospect of the proposedAgreement played an important role in bringing about thisevolving attitude on the part of China.

B. “Consultations and Visits”

As noted in Part II, the proposed Agreement meetsall of the requirements of US law, including a pledge thatmaterial and equipment subject to the agreement will not beused for nuclear explosives or any military purpose. Theprovisions of the proposed Agreement which relate to thea b i l i t y o f t h e U n i t e d S t a t e s t o v e r i f y t h i s a s s u r a n c e a r eu n i q u e a n d r e c o g n i z e t h a t C h i n a i s a n u c l e a r - w e a p o n s t a t e .

The United States is not obligated, either by domesticlaw or by the nuclear export provisions of the Nuclear Non-Proliferation Treaty, to condition n u c l e a r e x p o r t s t o n u c l e a r -w e a p o n s t a t e s o n t h e a c c e p t a n c e o f I A E A s a f e g u a r d s . E v e ns o , t h e U n i t e d S t a t e s d i d s e e k C h i n e s e a c c e p t a n c e o f I A E As a f e g u a r d s o n U S s u p p l y u n d e r t h e a g r e e m e n t , b u t t h e C h i n e s ea d a m a n t l y r e f u s e d - - a s t h e y h a v e t o d a t e w i t h o t h e r n u c l e a r -w e a p o n s t a t e s . (The Chinese reportedly did agree to IAEAsafeguards on any “sensitive” assistance they receive fromthe UK. The US-China agreement does not permit cooperationin those a r e a s d e f i n e d a s “ s e n s i t i v e n u c l e a r t e c h n o l o g y ”u n d e r U S l a w , n o r i n o t h e r ‘ s e n s i t i v e ” areas such as exportsof significant quantities of highly enriched uranium orplutonium.)

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Acceptance of IAEA safeguards by nuclear-weapon statesc a n s e r v e t o m i n i m i z e d i s c r i m i n a t i o n a g a i n s t n o n - n u c l e a rweapon states<, and thus can help to sustain broad politicalsupport for international non-proliferation institutionssuch as the IAEA safeguards system. For that reason, theUnited States, United Kingdom, France, and the Soviet Unionhave all voluntarily permitted the IAEA to apply its safeguardson at least some of their respective civil nuclear facilities.As noted above, it appears China has agreed in principle toaccept IAEA safeguards on imports from certain non-nuclear-weapon states. As a practical matter, however, there are nosuch safeguards yet applied in China.

Article 8 of the agreement provides for “mutually accept-able arrangements for exchanges of information and visits”in connection with transfers under the agreement. Thesearrangements will be established through diplomatic channelsprior to the licensing by the United States of nuclear exportsunder the agreement, and will include provision for exchangesof information and visits by US personnel to relevant sitesin China where US material or equipment subject to the agree-ment is located. The United States and China will alsoexchange views and information on their respective nationalaccounting and control systems for nuclear material subjectto the agreement.

The scope of cooperation permitted by the proposed Agree-ment also is important when considering provisions relatedto verification. Cooperation under the agreement is limitedto reactors, their major components, and low enriched uraniumfuel. As noted previously, it does not authorize the exportof more than gram quantities of plutonium and highly enricheduranium, nor does it authorize the export of sensitive facili-ties capable of producing such material. A separate agreement --including Congressional review -- would be necessary toauthorize the transfer of such items. Moreover, as describedbelow, mutually agreed arrangements for reprocessing areprovided in the agreement.

As a nuclear-weapon state, China has nuclear facilitiesdedicated to the production of fissile material for nuclearweapons. Any effort by China to divert material from a civilfacility for military purposes would result in the terminationof any US assistance to China’s civil nuclear program, andin all probability that of other foreign suppliers as well.Both factors reduce any incentive for China to divert materialor equipment from its civil program.

Given these circumstances, ACDA believes that the pro-visions of the proposed Agreement are adequate to provideconfidence against the misuse of any items subject to thep r o p o s e d A g r e e m e n t . A C D A h a s c o n s i d e r a b l e e x p e r i e n c e i n

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designing systems aimed at deterring the diversion of anynuclear material from peaceful to military uses, and expectsto participate actively with other relevant agencies in estab-lishing the mutually acceptable arrangements in connectionwith proposed exports under the agreement.

c. Consent Rights ,

As noted in Part II, ACDA believes that the relevantprovision in the proposed Agreement (Article 5, paragraph 2)satisfies the statutory requirement of US consent rightsover certain fuel cycle activities, including reprocessing.The Chinese have stated that they have no plan to undertakereprocessing of spent fuel from power reactors for at leastfifteen years. In fact, there is no existing facility inChina capable of reprocessing such fuel.

Should China desire to undertake any of these activities,the United States and China will attempt to reach agreementwithin six months on long-term arrangements to govern theconditions for such activity. These long-term arrangementscould take many forms.

In particular, ACDA believes that in connection withany future discussions on long-term arrangements and thepossible exercise of the United States consent rights overreprocessing, it will be important to ensure that the proce-dures called for under Article 8 are adequate to help verifythat any separated plutonium is being used consistent withthe provisions of the agreement. Any procedures for informa-tion exchange and visits previously agreed for the transferof reactors and low enriched uranium fuel may not be suffi-cient for separated plutonium. However, the provisions ofthe proposed Agreement are fully adequate to ensure thatsuch arrangements are agreed before any reprocessing takesplace. ACDA fully supports the outcome on consent rights;it solved the last major obstacle in the negotiations priorto the April 1984 initialing, and preserved the significantnon-proliferation benefits of the proposed Agreement.

D . Summary

The proposed Agreement is unique in comparison toother agreements for cooperation concluded since the NuclearNon-Proliferation Act. It is the first such agreement witha nuclear weapon state since the passage of that Act. Further,China had only recently accepted the basic norms and practicesof non-proliferation . An appreciation of this context isessential in making a balanced judgment on the non-proliferationbenefits of the proposed Agreement.

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China’s desire to o b t a i n f o r e i g n a s s i s t a n c e f o r i t scivil nuclear program provided an opportunity for substantialdiscussions with the United States and other suppliers ont h e m a j o r f e a t u r e s o f t h e n o n - p r o l i f e r a t i o n r e g i m e . Moreover ,t h e p r o s p e c t o f a s s i s t a n c e w a s a m a j o r i n c e n t i v e f o r c o n -s i d e r a b l e e v o l u t i o n o f C h i n a ' s p o s i t i o n o n n o n - p r o l i f e r a t i o n .

China has joined the IAEA, and stated that it will requireIAEA safeguards on its nuclear exports. China has committeditself not to assist other countries to acquire nuclearexplosives. And the United States can expect that China’spolicy of not assisting a non-nuclear-weapon state to acquirenuclear explosives will be implemented in a manner consistentwith those basic non-proliferation practices common to theUnited States and other major suppliers. The Chinese arealso fully aware that their continued support for and effectiveimplementation of these basic practices is a sine qua nonfor US nuclear cooperation under the proposed Agreement.

Entry into force of the proposed Agreement would con-tribute importantly to the ability of the United States tocontinue working with China in non-proliferation. The agreement=

not only recognizes the evolution in China’s non-proliferationpolicies, but also provides a framework for continued exchangesin this area.

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IV. CONCLUSIONS

On the basis of the analysis in this assessment statementand all pertinent information of which he is aware, the Directorof the United States Arms Control and Disarmament Agencyhas:

o concluded that the proposed Agreement meets all ofthe substantive requirements in the Atomic Energy Act andthe NNPA applicable for new or amended agreements forcooperation.

o reached a favorable net assessment of the adequacyof the provisions of the proposed Agreement to ensure thatany assistance furnished thereunder will not be used tofurther any military or nuclear explosive purpose.

o concluded that execution of the proposed Agreementwould advance the non-proliferation program, policy, andobjectives of the United States; and

o joined in the recommendation of the Secretary ofState and the Secretary of Energy that the president determinethat the performance of the proposed Agreement will promote,and will not constitute an unreasonable risk to, the commondefense and security, and that the president approve andauthorize the execution of the proposed Agreement.