LEXIS-NEXIS® Academic Universe-Document

LEXIS-NEXIS® Academic

May 12, 1999, Wednesday, Home Edition

SECTION: Part A; Page 1; Financial Desk

LENGTH: 1410 words

HEADLINE: A TWO-EDGED SWORD IN TECH EXPORT RULES

BYLINE: EVELYN IRITANI, TIMES STAFF WRITER

BODY:
As Washington waits out the storm over NATO's bombing of the Chinese Embassy in Belgrade, the U.S. technology industry nervously awaits another bomb: the release of a potentially explosive congressional report on alleged Chinese theft of sensitive U.S. technology.

And with its implied threat to the future of U.S.-China commercial ties on technology, nobody will be watching with greater skepticism than John Gage, the chief of research at technology giant Sun Microsystems Inc.

The mere mention of restricting technology exports is enough to trigger a rant from Gage about the futility of trying to "keep technology in a bottle."

"I can wander around Shanghai and find some Intel boards to put together with Sun software and build a computer that is 10 times more powerful than the one we are restricted to sell to China," Gage says.

Cutting off sales of high-end computers to China might or might not be an exercise in futility. But that is exactly what's on the agenda in Washington, where allegations of Chinese espionage have created what Commerce Secretary William Daley describes as the "worst climate for high-tech trade with China in 20 years." While the Energy Department was announcing a crackdown Tuesday on security at the federal laboratories where espionage may have taken place, at least half a dozen congressional committees are weighing a raft of actions aimed at commercial deals: tighter restrictions on the sale to China of high-end computers, satellites and other sensitive technology; extending U.S. export controls to Hong Kong, now under Chinese control; and increasing the penalties for export-control violations.

"Do we really want to be teaching them how to manufacture advanced products?" asks Henry Sokolski, head of the Nonproliferation Policy Education Center.

U.S. executives insist controls are already unnecessarily broad. They argue the restrictions not only stifle their efforts to stay ahead of European and Asian competitors, but undercut a U.S. military increasingly dependent on Silicon Valley's off-the-shelf technology.

And there is the conviction that a U.S.-built information highway connecting China's 1.2 billion people to the world will doom that country's authoritarianism, just as wireless phones and the Internet helped raise the Iron Curtain and oust Indonesia's President Suharto.

The struggle over technology and China has raged since President Nixon visited the mainland in 1972. But the stakes have since grown exponentially, due to the huge investments U.S. firms have made there and the growing concern in Washington that a technologically adept China poses a threat to the world.

"When you begin to view China as a potential adversary, not as a long-term ally, then a whole series of assumptions change," says Greg Mastel, vice president at the Economic Strategy Institute in Washington.

China is indeed advancing rapidly. Double-digit growth will transform it into one of the world's leading technology markets by early in the next century--with or without U.S. know-how.

And ironically, U.S. moves to tighten the export rules come as China's leaders have been cracking open their most lucrative technology markets to foreign firms.

Hoping to join the World Trade Organization, China made two surprising concessions in April: It agreed to quit demanding technology transfers in deals with U.S. firms, and it offered to open up its telecommunications industry.

To be sure, such concessions could become short-term victims of the embassy bombing. But the opportunity to bring China's consumers into the 21st century remains a sort of commercial Holy Grail, and the example of the Industrial and Commercial Bank of China suggests why. "They have 32,000 offices in China," says Bill Nuti, vice president of Cisco Systems Asia. "Citicorp has 2,500 locations worldwide."

Nuts-and-bolts tech ventures by U.S. firms have mushroomed in China. Cisco is helping to build China's first Internet exchange, install telecommunications equipment in major banks and set up telecom training programs.

Microsoft is developing a "digital nervous system" to wire 40 leading government ministries. It is also collaborating with China's scientists to produce a cheap device that will allow the nation's television viewers to surf the Internet.

But as the life cycle of new technology shrinks, U.S. firms argue they are increasingly hamstrung by outmoded export controls that restrict sales of even their most basic products.

One example: This year, China hopes to buy at least 22,000 multiprocessor computers that would probably be powerful enough to trigger current U.S. controls, according to a reputable study. China could buy most of those computers freely in Europe or Asia.

"It isn't a question of whether the Chinese are going to get these machines or not," says Rich Lehmann, a spokesman for IBM. "It's a question of who's going to sell it."

Restricting U.S. technology sales to China will also exacerbate the nearly $ 60-billion trade imbalance with China. The U.S.' top three exports to China--in aerospace, power generation and electronics--all contain restricted technology.

But Rep. Christopher Cox (R-Newport Beach) is convinced that the U.S. government's zeal to open lucrative markets to U.S. firms has gone too far.

Findings by Cox's bipartisan committee have already led to tighter controls on satellite sales to China. The panel's report, expected to be released this month, documents China acquiring military technology through commercial deals, Cox said.

"Our own security interests should always trump short-run commercial benefits," he said.

But William Reinsch, the undersecretary for export administration at the Commerce Department, argues that the U.S. will lose its technological edge if sales are lost to Asia and Europe, where China is not viewed with the same alarm.

Even within the Wassenaar Arrangement--a 33-country pact that monitors exports to countries considered security risks--some other nations have relaxed their controls on deals with China, Reinsch said.

The effect can be seen in semiconductors. On track to become the world's No. 2 chip market, China has ambitions to make many of those chips itself.

But the U.S. wants to keep China "at least two generations behind" because the equipment used to make high-end chips has military uses, according to lobbyist Victoria Hadfield of Semiconductor Equipment & Materials International.

Japan has no such qualms. Japanese electronics giant NEC recently opened a chip-making facility in Shanghai, according to Hadfield. But Palo Alto-based Hewlett-Packard was reportedly denied a U.S. permit to sell high-end testing equipment to that same Shanghai plant. "The Chinese . . . know they can get around whatever controls by just going to other suppliers," she said.

More is at stake than profits, according to Reinsch, who says current controls are adequate. His department is expected to urge the relaxation of controls on computer sales to China.

Defense cutbacks and gains in commercial technology have made the Pentagon dependent on off-the-shelf items, unlike the old days when it commissioned weapons and computing systems for defense. And the high-tech firms producing these dual-technology items depend on foreign markets for more than 50% of their revenues.

The biggest minefields lie in telecommunications and satellites, in part because China's military keeps turning up in such deals.

Last year, the Cox committee accused satellite makers Hughes and Loral Space & Communications of transferring sensitive technology to the Chinese. Both companies deny the charges.

In response, Congress tightened the licensing requirements for satellite exports to China and transferred export oversight from Commerce to the State Department, which is seen as tougher.

The uncertainty has frightened off foreign buyers of U.S. satellites, a Hughes spokesman said.

Meanwhile, not everyone thinks it's so terrible for China to be using U.S. technology to eavesdrop on its enemies. By this theory, better America's enemies spy on us with our own equipment because its orbits and encryption designs are more easily decipherable.

"Although they would never state it, the U.S. intelligence agencies are delighted when the Chinese buy U.S. satellites," said a knowledgeable official.

* BOMBING AFTERMATH

China has signaled a willingness to resume trade talks. C1

LOAD-DATE: May 12, 1999