*Chapter 10
Contents*
**Export
Controls on Machine Tools**
**Export
Administration Regulations**
**The
PRC's Machine Tool Capabilities and Foreign
Acquisitions**
**Findings
of the U.S. General Accounting Office**
**The
U.S. Government's Actions in Approving the Export Licenses**
*Intelligence
Community Assessments*
*Changes
to the Trunkliner Program*
*Discussions
in the Advisory Committee for Export Policy*
*The
License is Issued*
**McDonnell
Douglas's Plans**
*McDonnell
Douglas's Limited Role at the Machining Center*
*Trunkliner
Program*
**Commerce
Department Delays Investigating Machine Tool Diversion for Six
Months**
*The
Commerce Department's Actions in April 1995*
*The
Commerce Department's Actions in October 1995*
*Allegation
that the Commerce Department Discouraged the Los Angeles Field
Office's Investigation*
*The
Office of Export Enforcement's Los Angeles Field Office's Request for
a Temporary Denial Order Against CATIC*
**PRC
Diversion of Machine Tools**
*CATIC
Letter Suggests Trunkliner Program at Risk*
*CATIC's
Efforts to Create the Beijing Machining Centerwith Monitor
Aerospace*
**Diversion
of the Machine Tools to Nanchang Aircraft Company**
**Nanchang
Accepts Responsibility**
**PRC
Targeting of Garrett Engines**
**U.S.
Government Approval of** the Initial Garrett Engine Exports
**Commerce
Department Decontrol of the Garrett Jet Engines**
**The
Interagency Review of the Proposed Export** of Garrett Jet
Engines
**Consideration
of Enhanced** Proliferation Control Initiative Regulations
**Consideration
of COCOM** and Export Administration Regulations
**Resolution
of the Garrett Engine Controversy**
####
*Chapter 10
Summary*
achine tool and jet engine technologies
are priority acquisition targets for the PRC. This chapter presents
two case studies relating to the PRC's priority efforts to obtain such
technology - its 1994 purchase of machine tools from McDonnell Douglas,
and its efforts in the late 1980s and early 1990s to obtain jet engine
technology from Allied Signal's Garrett Engine Division.
**McDonnell Douglas Machine
Tools**
**In 1993, China National Aero-Technology Import and Export
Corporation (CATIC) agreed to purchase a number of excess machine tools
and other equipment from McDonnell Douglas, including 19 machine tools
that required individual validated licenses to be exported.** CATIC told
McDonnell Douglas it was purchasing the machine tools to produce parts for
the Trunkliner Program, a 1992 agreement between McDonnell Douglas and
CATIC to build 40 MD-82 and MD-90 series commercial aircraft in the
PRC.
**During the interagency licensing process for the machine tools, the
Defense Technology Security Administration sought assessments from the
Central Intelligence Agency and from the Defense Intelligence Agency,
because of concerns that the PRC could use the McDonnell Douglas five-axis
machine tools for unauthorized purposes, particularly to develop quieter
submarines.** Since the PRC wishes to enhance its power projection
capabilities and is making efforts to strengthen its naval forces, the
five-axis machine tools could easily be diverted for projects that would
achieve that goal.
**Initially, CATIC told McDonnell Douglas it planned to sell the
machine tools to four factories in the PRC that were involved in the
Trunkliner commercial aircraft program. **When those efforts reportedly
failed, CATIC told McDonnell Douglas it planned to use the machine tools
at a machining center to be built in Beijing to produce Trunkliner parts
for the four factories.
**In May 1994, McDonnell Douglas applied to the Commerce Department
for licenses to export the 19 machine tools to the PRC.** Even after it
became apparent that only 20 of the 40 Trunkliner aircraft would be built
in the PRC, the U.S. Government continued to accept McDonnell Douglas's
assertion that the machine tools were still required to support the
Trunkliner production requirements. Accordingly, Commerce approved the
license applications in September 1994 with a number of conditions
designed to limit the risk of diversion or misuse.
**In April 1995, the U.S. Government learned from McDonnell Douglas
that six of the licensed machine tools had been diverted to a factory in
Nanchang** known to manufacture military aircraft and cruise missile
components, as well as commercial products. However, Commerce's Office of
Export Enforcement (OEE) did not initiate an investigation of the
diversion for six months.
**The Commerce Department declined an Office of Export Enforcement Los
Angeles Field Office request for a Temporary Denial Order** against
CATIC. The case remains under investigation by OEE and the U.S. Customs
Service. With the approval of the U.S. Government, the machine tools have
since been consolidated at a factory in Shanghai.
**Garrett Engines**
**The PRC has obtained U.S. jet engine technology through diversions
of engines from commercial end uses, by direct purchase, and through joint
ventures. **Although the United States has generally sought to restrict
the most militarily sensitive jet engine technologies and equipment, the
PRC has reportedly acquired such technologies and equipment through
surreptitious means.
**Prior to 1991, Garrett jet engines had been exported to the PRC
under individual validated licenses** that included certain conditions
to protect U.S. national security. These conditions were intended to
impede any attempt by the PRC to advance its capability to develop jet
engines for military aircraft and cruise missiles.
**The 1991 decision by the Commerce Department to decontrol Garrett
jet engines ensured that they could be exported to the PRC without an
individual validated license or U.S. Government review.** In 1992, the
Defense Department learned of negotiations between Allied Signal's Garrett
Engine Division and PRC officials for a co-production deal that prompted
an interagency review of Commerce's earlier decision. The interagency
review raised a number of questions regarding the methodology Commerce had
followed in its decision to decontrol the Garrett jet engines.
**The PRC continues its efforts to acquire U.S. jet engine production
technology.** The PRC may have also benefited from the direct
exploitation of specially designed U.S. cruise missile engines. According
to published reports, the PRC examined a U.S. Tomahawk cruise missile that
had been fired at a target in Afghanistan in 1998, but crashed en route in
Pakistan.
*Chapter 10
Text*
MANUFACTURING
PROCESSES PRC EFFORTS TO
ACQUIRE MACHINE TOOL AND JET ENGINE TECHNOLOGIES
he People's Republic of China's long-term
goal is to become a leading power in East Asia and, eventually, one of
the world's great powers. To achieve these aims, the PRC will probably
enhance its military capabilities to ensure that it will prevail in
regional wars and deter any global strategic threat to its security.1
From the PRC's perspective, the 1991 Gulf War was a watershed event in
which U.S. weapons and tactics proved decisive. The war provided a window
on future warfare as well as a benchmark for the PRC's armed forces.2
After the Gulf War, senior PRC military leaders began speaking of the
need to fight future, limited wars "under high-tech conditions." 3 Senior
PRC political leaders support the military's new agenda.4
In a 1996 speech, Li Peng, second-ranking member of the Politburo,
then-Prime Minister, and currently Chairman of the National People's
Congress, said:
*We should attach great importance to strengthening the army
through technology, enhance research in defense-related science, . . .
give priority to developing arms needed for defense under high-tech
conditions, and lay stress on developing new types of
weapons.5*
Senior PRC leaders recognize that enormous efforts must be made to
"catch up" militarily with the West.6 According to the Defense
Intelligence Agency, the PRC's ability to achieve this goal depends in
part on its "industrial capacity to produce advanced weapons without
foreign technical assistance." 7
**Two technologies that have been
identified as priority acquisition targets for the PRC are machine tools
for civil and military requirements, and jet engine technology.8** This
chapter presents two case studies relating to the PRC's efforts to obtain
such technologies - its 1994 purchase of machine tools from McDonnell
Douglas, and its efforts in the late 1980s and early 1990s to obtain jet
engine technology from Allied Signal's Garrett Engine Division.
These case studies illustrate the methods the PRC has used to acquire
militarily-sensitive technologies through its skillful interaction with
U.S. Government and commercial entities.
However, the case studies do not assess the degree to which the PRC has
enhanced its aerospace and military industrial capabilities through the
acquisition of U.S. technologies and equipment.
A third technology priority for the PRC - composite materials - is
discussed in the Technical Afterword to this chapter.
## PRC Targeting of Advanced Machine
Tools
The PRC is committed to the acquisition of Western machine tool
technology, and the advanced computer controls that provide the foundation
for an advanced aerospace industry.
Although the PRC acquires machine tools from foreign sources in
connection with commercial ventures, it also seeks foreign-made machine
tools on a case-by-case basis to support its military armament
programs.
Moreover, the proliferation of joint ventures and other commercial
endeavors that involve the transfer or sale of machine tools to the PRC
makes it more difficult for foreign governments and private industry to
distinguish between civilian and military end-uses of the equipment.
**The China National
Aero-Technology Import-Export Corporation's (CATIC) purchase of used
machine tools from McDonnell Douglas**, now part of Boeing, is one
illustration of the complexities and uncertainties faced by private
industry and the U.S. Government in these endeavors.
Traditional machine tools cut, bend, and shape metals and non-metal
materials to manufacture the components and structures of other machines.
Machine tools form the foundation of modern industrial economies, and are
widely used in the aerospace and defense industries.
The capability of machine tools is typically indicated by the number of
linear or rotational motions - of either the tool or the workpiece - that
can be continuously controlled during the machining process, and by the
machining accuracy that can be achieved. The latter is measured in
microns, that is, millionths of a meter.
Advanced machine tools can provide five axes of motion - typically
horizontal, lateral, and vertical movement, and rotation on two
perpendicular axes. Less widely used or required are six- and seven-axis
machines, which are sometimes used for special applications.
Machine tools used in aircraft and defense manufacturing today are
generally numerically controlled (NC). More advanced equipment is computer
numerically controlled (CNC). CNC machine tools are essential to batch
production of components for modern weapon systems, and can reduce
machining times for complex parts by up to 90 percent compared to
conventional machine tools.
In addition, these modern machines require operators with less skill
and experience and, when combined with computer-aided design software, can
reduce the manufacturing cycle of a product, from concept to production,
from months to days.
**Machine tools are essential to
commercial industry, and high precision, multiple-axis machine tools
broaden the range of design solutions for weapon components and structural
assemblies.** Parts and structures can be designed with advantages in
weight and cost relative to what could be achieved with less advanced
machine tools. For military and aerospace applications, the level of
manufacturing technology possessed by a country directly affects the level
of military hardware that can be produced, and the cost and reliability of
the hardware.9
The military/civilian dual-use production capability of various types
of machine tools is indicated in the following table.
**Export
Controls on Machine Tools**
The PRC's access to foreign multi-axis machine tools and controllers
has increased rapidly with liberalized international export
controls.10
During the Cold War, the Coordinating Committee for Multilateral Export
Controls (COCOM) established multilateral controls on exports to the
Warsaw Pact allies and the PRC of machine tools that restricted linear
positioning accuracy below 10 microns.11 However, the consensus for
relatively strict export controls dissolved after the Soviet Union's
collapse.
The post-Cold War control regime is embodied in the 1996 Wassenaar
Arrangement, and the 1978 Nuclear Suppliers Group Agreement (NSG)
governing the export of machine tools that can be used for nuclear weapons
development. This current regime has a different focus, as indicated in
the following table.
The Wassenaar and Nuclear Suppliers Group Agreement regimes have
adopted similar control parameters for machine tools. Generally speaking,
lathes and milling machines must be licensed for export if their accuracy
exceeds six microns. Grinding machines are controlled at four microns. The
Wassenaar Arrangement controls all machine tools capable of simultaneous,
five-axis motion, regardless of machining accuracy. The Nuclear Suppliers
Group Agreement exempts certain machines from this restriction.12
The PRC is not a proscribed destination for machine tools and other
commodities under the Wassenaar Arrangement. This means that Wassenaar
regime members treat exports to the PRC according to their individual
national discretion. On the other hand, exports to the PRC of Nuclear
Suppliers Group Agreement-covered items require individual validated
licenses.13
**Export
Administration Regulations**
The Wassenaar and Nuclear Suppliers Group Agreement parameters for
machine tool controls have been incorporated in the U.S. Commerce
Department's Commodity Control List of dual-use items (the list appears in
the Export Administration Regulations).14 Machine tools are listed under
Category 2 (Material Processing), Group B (Inspection and Production
Equipment).15
The Commodity Control List further classifies machine tools - as it
does other dual-use items - by an Export Control Classification Number
that reflects the item's category, group, types of associated controls,
whether the item is controlled for unilateral or multilateral concerns,
and a sequencing number to differentiate among items on the Commodity
Control List.16
**The PRC's
Machine Tool Capabilities and Foreign Acquisitions**
Observers of the PRC's machine tool capabilities do not believe that
the PRC can indigenously produce high precision, five-axis machines that
approach the quality of Western products.
The U.S. General Accounting Office estimates that the PRC has the
capability "to manufacture less sophisticated machine tools, but cannot
currently mass produce four- and five-axis machine tools that meet Western
standards." 17
According to a 1996 Defense Department assessment, however, the PRC's
indigenous machine tool production capability is increasing
markedly.18
The PRC has long sought to compensate for its deficiencies in machine
tool technology by importing foreign systems. This approach has been
facilitated by COCOM's dissolution and the resulting international
relaxation of controls on machine tool exports.
**Since the end of COCOM in March
1994, PRC military industries have acquired advanced machine tools that
would be useful for the production of rocket and missile guidance
components, and several five-axis machines for fighter aircraft and parts
production. **Five-axis machines were controlled under COCOM and are
purportedly controlled by Wassenaar.19 U.S. industry sources note
that:
*China has proved able to buy [machine tools] from a variety of
foreign makers in Japan and Europe. Between 1993 and 1996, fifteen
large, 5-axis machine tools were purchased by Chinese end users - all
fifteen were made by Western European manufacturers.*
*Furthermore, Shenyang Aircraft purchased twelve 5-axis machine
tools [in 1997]. These machine tools came from Italian, German and
French factories.20*
In addition, the PRC may be enhancing its ability to produce advanced
machine tools through license production arrangements with Western
manufacturers.
**Other countries developing
nuclear weapons and missiles have also apparently benefited **from the
PRC's ability to acquire advanced machine tools on the world market. As
one recent Defense Department assessment noted, the PRC's "recent
aerospace industry buildup and its history of weapons trade with nations
under Western embargoes makes this increase in key defense capacity of
great concern." 21
The Clinton administration has determined that specific examples of
this activity cannot be publicly disclosed without affecting national
security.
## CASE STUDY: McDonnell Douglas Machine
Tools
**Findings of
the U.S. General Accounting Office**
The Select Committee has determined that the U.S. Government is
generally unaware of the extent to which the PRC has acquired machine
tools for commercial applications and then diverted them to military end
uses.
he McDonnell Douglas case illustrates that the PRC will attempt
diversions when it suits its interests.
At the request of Congress, the U.S. General Accounting Office in March
1996 initiated a review of the facts and circumstances pertaining to the
1994 sale of McDonnell Douglas machine tools to CATIC. The GAO issued its
report on November 19, 1996.
The report can be summarized as follows:
**ï¿½ In 1992, McDonnell Douglas
and China National Aero-Technology Import and Export Corporation (CATIC)
agreed to co-produce 20 MD-82 and 20 MD-90 commercial aircraft** in
the PRC. Known as the Trunkliner Program, the aircraft were to serve the
PRC's domestic "trunk" routes. In late 1994, a contract revision reduced
the number of aircraft to be built in the PRC to 20, and added the
purchase of 20 U.S.-built aircraft.
**ï¿½ CATIC is the principal
purchasing arm of the PRC's military** as well as many commercial
aviation entities. Four PRC factories, under the direction of Aviation
Industries Corporation of China (AVIC) and CATIC, were to be involved in
the Trunkliner Program.
**ï¿½ In late 1993, CATIC agreed to
purchase machine tools and other equipment from a McDonnell Douglas
plant** in Columbus, Ohio that was closing. The plant had produced
parts for the C-17 transport, the B-1 bomber, and the Peacekeeper
missile. CATIC also purchased four additional machine tools from
McDonnell Douglas that were located at Monitor Aerospace Corporation in
Amityville, New York, a McDonnell Douglas subcontractor.
**ï¿½ The machine tools were
purchased by CATIC for use at the CATIC Machining Center in Beijing - a
PRC-owned facility that had yet to be built** - and were to be wholly
dedicated to the production of Trunkliner aircraft and related work.
McDonnell Douglas informed the U.S. Government that CATIC would begin
construction of the machining center in October 1994, with production to
commence in December 1995.
**ï¿½ In May 1994, McDonnell
Douglas submitted license applications for exporting the machine tools
to the PRC and asked that the Commerce Department approve the
applications quickly** so that it could export the machine tools to
the PRC, where they could be stored at CATIC's expense until the
machining facility was completed. Following a lengthy interagency
review, the Commerce Department approved the license applications on
September 14, 1994, with numerous conditions designed to mitigate the
risk of diversion.
**ï¿½ During the review period,
concerns were raised about the possible diversion of the equipment to
support PRC military production**, the reliability of the end user,
and the capabilities of the equipment being exported. The Departments of
Commerce, State, Energy, and Defense, and the Arms Control and
Disarmament Agency, agreed on the final decision to approve these
applications.
**ï¿½ Six of the machine tools were
subsequently diverted to Nanchang Aircraft Company, a PRC facility
engaged in military and civilian production** over 800 miles south of
Beijing. This diversion was contrary to key conditions in the licenses,
which required the equipment to be used for the Trunkliner program and
to be stored in one location until the CATIC Machining Center was
built.
**ï¿½ Six weeks after the reported
diversion,** the Commerce Department suspended licenses for the four
machine tools at Monitor Aerospace in New York that had not yet been
shipped to the PRC. Commerce subsequently denied McDonnell Douglas's
request to allow the diverted machine tools to remain in the
unauthorized location for use in civilian production. The Commerce
Department approved the transfer of the machine tools to Shanghai
Aviation Industrial Corporation, a facility responsible for final
assembly of Trunkliner aircraft. The diverted equipment was relocated to
that facility before it could be misused.
**ï¿½ The Commerce Department did
not formally investigate the export control violations until six months
after they were first reported.** The U.S. Customs Service and the
Commerce Department's Office of Export Enforcement are now conducting a
criminal investigation under the direction of the Department of
Justice.22
**The U.S.
Government's Actions** in Approving the Export Licenses
On December 23, 1993, the China National Aero-Technology Import and
Export Corporation (CATIC) reached an agreement to purchase machine tools
from McDonnell Douglas. CATIC officials signed the purchase agreement with
McDonnell Douglas on February 15, 1994.
A May 27, 1994 e-mail message to Assistant Secretary of Commerce for
Export Administration Sue Eckert from Deputy Assistant Secretary for
Export Administration Iain Baird noted:
*We received 23 applications covering all of the material involved
in this project two days ago. [McDonnell Douglas] plans on shipping to
CATIC.*
*We have a long history with CATIC, which has been the consignee on
numerous occasions - approved and denied based on licensing policies in
effect at the time. CATIC was also the entity that attempted to buy the
Machine Tool plant in the Northwest that was "denied" under the CFIUS
process.*
*. . . .*
*Because of the sensitivity of this case, I think we should get it
* to the ACEP [Advisory Committee for Export Policy] ASAP. We are
going to suggest to the other agencies that we forgo the 60-90 [day]
review process and, instead, bring together all the relevant experts in
a special [Operating Committee] meeting in 2-3 weeks to make a
recommendation.
*If it is not agreed to approve the transaction at that point (and
it won't be), * we'll get the issue before the next ACEP.
*Stay tuned. 23*
Subsequently, according to a June 8, 1994 memorandum to Deputy
Assistant Secretary of Defense for Counterproliferation Policy Dr. Mitchel
Wallerstein from Acting Director of the Defense Technology Security
Administration Peter Sullivan:
*An interagency meeting was held 7 June 1994. Defense, State and
Commerce were in attendance; Energy and CIA were invited but did not
attend.*
*McDonnell Douglas representatives outlined their proposal. They
would like closure on their license applications by 5 July 1994.*
*The possibility of meeting that request seems remote. First,
initial staffing within DoD was accomplished 7 June 1994, when we
received the required documentation from Commerce. Second, all parties
agree that the prospects for escalation within the [U.S. Government]
seem high, due to the scope of the proposed program, and the precedence
[sic] it may establish. We will keep you informed of additional
developments.24*
**Within the Defense Department,
the McDonnell Douglas license applications were a cause of concern and
internal debate.** Specifically, the uniformed military services (Joint
Staff) initially recommended denial.
The Joint Staff based its recommendation of denial upon an analysis
indicating a high probability that this technology would be diverted for
PLA end use.25 Moreover, the Joint Staff noted that, "Even with DoD
recommending approval with conditions, this would be a less-than-prudent
export to the PRC. This is particularly true in light of Chinese
involvement in the world arms market."
The Staff of the U.S. Commander in Chief, U.S. Pacific Command, agreed,
noting in an August 1, 1994 memorandum to the Joint Staff that it "concurs
with the Joint Staff position to deny"
The Licensing Officer at the Defense Technology Security Administration
who was initially assigned responsibility for the McDonnell Douglas
license applications also recommended denial. The Licensing Officer
reiterated concerns as to CATIC's role in both civilian and military
production, and stated that "[n]o quantitative data has been supplied by
the exporter, which establishes a clear need for this equipment in China
[the PRC]."
__Intelligence Community
Assessments__ Because of concerns that the McDonnell Douglas
machine tools would give the PRC manufacturing production capabilities in
excess of what was required for the Trunkliner Program, the Department of
Defense asked for information that would assist it in determining whether
these machine tools could be diverted to production of PLA military
aircraft.
A July 27, 1994 Defense Intelligence Agency response to a request from
the Defense Technology Security Administration provided an assessment.26
It warned that, while similar machine tools were available from foreign
sources, there was a significant risk of diversion. There was also the
additional risk that the PRC could reverse-engineer the machine tools, and
then use them in other commercial or military production. This would be
consistent with the PRC's practice of reverse-engineering other Western
technology for military purposes.
**On August 9, 1994, the Defense Intelligence Agency provided
a supplemental report explaining the results of its thorough assessment of
the applicability of the McDonnell Douglas machine tools to three known
PLA fighter aircraft programs, each of which incorporated stealth
technologies.** The report concluded:
The establishment of an advanced machine tool facility presents a
unique opportunity for Chinese military aerospace facilities to access
advanced equipment which otherwise might be denied.
*Similarly, placing these machine tools in one facility would
reduce the financial outlay needed to acquire duplicate advanced machine
tools for multiple military aircraft programs.*
*DIA . . . maintain[s] that the production capacity resulting from
the McDonnell Douglas sale is above and beyond the requirement necessary
for exclusive production of 20 MD-82 and 20 MD-90 McDonnell Douglas
[aircraft], which is the stated end use in the export license
application.*
*In fact, recent press reporting indicates China [the PRC] has
dropped plans to build 20 MD-82s and will limit future production to
just 20 MD-90 aircraft.27*
The Defense Technology Security Administration had received information
from informants in September 1993 - prior to CATIC's agreement to purchase
the machine tools, and a full year before the license was granted - that
CATIC personnel had visited McDonnell Douglas's Columbus, Ohio plant and
videotaped the machine tools in use, a potentially illegal technology
transfer.
The Defense Technology Security Administration reported the information
to the U.S. Customs Service, and its agents later paid a visit to the
Columbus, Ohio plant. However, following the visit, the U.S. Customs
Service determined that no further investigative action was warranted.
During the interagency licensing process for the machine tools, the
Defense Technology Security Administration also sought assessments from
the Central Intelligence Agency and from the Defense Intelligence Agency,
because of concerns that the PRC could use the McDonnell Douglas five-axis
machine tools for unauthorized purposes, particularly to develop quieter
submarines. Since the PRC wishes to enhance its power projection
capabilities and is making efforts to strengthen its naval forces, the
five-axis machine tools could easily be diverted for projects that would
achieve that goal.
**The Defense Technology Security
Administration received additional information from informants indicating
that CATIC had provided the Shenyang Aircraft Factory, an unauthorized
location, with a list of the Columbus, Ohio equipment** that had been
purchased from McDonnell Douglas.28 Circles around some of the items on
the list, according to the translation of a note from Shenyang that
accompanied the list, indicated that the Shenyang Aircraft Factory was
interested in obtaining those items from CATIC.
The Shenyang list was reportedly obtained from the discarded trash at a
CATIC subsidiary in California.
This list was viewed as proof that CATIC intended to divert the machine
tools to unauthorized locations. These concerns were reported to the U.S.
Customs Service in the summer of 1994.
__Changes to the Trunkliner
Program__ When McDonnell Douglas applied for export licenses on
May 26, 1994, the applications noted that the machine tools would be used
by the Beijing CATIC Machining Center primarily for the Trunkliner
program. According to those license applications, McDonnell Douglas had a
contract with CATIC to co-produce 20 MD-82 and 20 MD-90 aircraft.29
In June 1994, McDonnell Douglas representatives provided a series of
briefings to officials from the Commerce, State, and Defense Departments
regarding the nature of the Trunkliner program and McDonnell Douglas's
other activities in the PRC.30 In July 1994, however, Flight International
magazine announced that the Trunkliner Program had been significantly
changed.31
Instead of co-producing 20 MD-82 and 20 MD-90 aircraft in the PRC, only
20 MD-90 aircraft would be built there. Although the PRC would still
acquire 20 additional aircraft, those would now be built at McDonnell
Douglas's Long Beach, California plant - albeit with many parts that were
to be fabricated in the PRC.
**Prompted by the press reports,
the Defense Department sought additional information** from McDonnell
Douglas in late July and early August 1994 regarding how the machine tools
would be employed if the number of aircraft to be co-produced in the PRC
was to be reduced.32
In letters to the Defense Technology Security Administration dated
August 8 and August 12, 1994, McDonnell Douglas provided further
clarification regarding the number and complexity of the parts that were
to be manufactured in the PRC.
Commerce Department Licensing Officer Christiansen recalls that
Commerce was not concerned that the number of aircraft to be co-produced
in the PRC might be reduced, since parts for the aircraft would continue
to be fabricated in the PRC.33
The Defense Technology Security Administration and the Defense
Department, on the other hand, were concerned since they thought the
machine tools might represent significant excess manufacturing capacity
that the PRC might be tempted to divert to other, unauthorized uses.
The actual agreement that reduced the number of aircraft to be
assembled in the PRC was signed on November 4, 1994.34
__Discussions in the Advisory Committee
for Export Policy__ The McDonnell Douglas export license
applications were discussed at the June 24, 1994 meeting of the Advisory
Committee for Export Policy (ACEP).
According to the minutes of that meeting, no decision was reached. The
Defense Department representative at the meeting advised against approving
the licenses that day, because internal Defense Department review was
continuing. The Defense Department believed the applications could be
approved if reasonable safeguards were put into place to prevent the
machine tools from being used for unauthorized purposes.35
Among the other agencies in attendance, the State Department agreed
with the Defense Department that further review was required. The
Department of Energy deferred to the Defense Department on whether
licenses should be approved.36
The license applications for the McDonnell Douglas machine tools were
again discussed at a meeting of the Advisory Committee for Export Policy
on July 28, 1994. Again, the matter was deferred until the next Advisory
Committee meeting. The minutes reflect that "a final decision on this
transaction would have to be remanded until the next meeting of the ACEP,
or as soon as possible before that date, if all the agencies complete
their reviews earlier."
According to the ACEP minutes, the respective positions of each agency
on the applications were as follows:37
**ï¿½ [The Department of Defense]
said that, if it had to vote at that time, it would recommend denial of
the licenses** because of concerns that the machine tools would be
diverted. Moreover, there were concerns that the McDonnell Douglas
machine tools would give the PRC excess production capacity, thus
allowing other machine tools in its inventory to be diverted from
civilian to military production.
**ï¿½ [The Department of] Energy
indicated that, without further review, "it would have to defer to
Defense in denying this transaction and the underlying
applications."**
**ï¿½ [The Department of] State
recommended approval**, provided that appropriate safeguards and
conditions could be formulated to minimize the risk of diversion.
**ï¿½ [The] Arms Control and
Disarmament Agency agreed with DOD [the Defense Department]'s position,
noting that it would recommend denial** of the license applications
should it have to vote at that time.
**ï¿½ [The Department of] Commerce
recommended approval **with conditions to minimize the risk of
diversion to unauthorized uses.
__The License Is Issued__ The
Advisory Committee member agencies later agreed to issue the export
licenses with 14 conditions.38
Those conditions required, among other things, that:
**ï¿½ The machine tools were to be
stored in one location pending completion of the Beijing CATIC Machining
Center**
**ï¿½ McDonnell Douglas was to
provide quarterly reports to the Department of Commerce and the Defense
Technology Security Administration should the Beijing CATIC Machining
Center not be completed when the machine tools
arrived39**
As a final part of the licensing process, a Department of State cable
was sent to the U.S. Embassy/Beijing on August 29, 1994 requesting that a
senior CATIC official provide a written end use assurance that the machine
tools would only be used for specified purposes.40
In a September 13, 1994 response, the U.S. Embassy/Beijing reported
that it had obtained the assurance from CATIC Deputy Director Sun Deqing.
However, the cable also noted that Deqing had indicated to the embassy
officials that:
*CATIC plans to establish several specialized factories under their
new CATIC Machinery Company, and that [the CATIC Machining Center] would
be one of those plants. [The CATIC Machining Center] will be established
either near Beijing . . . or in Shijianzhuang at the Hongxing Aircraft
Company . . .41*
**McDonnell
Douglas's Plans**
__McDonnell Douglas's Limited Role at the
Machining Center__ Although McDonnell Douglas was planning to
place up to four of its employees at the Beijing CATIC Machining Center,
this was not to occur until late 1995 at the earliest.
Moreover,
the Machining Center was not to be a joint venture between CATIC and
McDonnell Douglas. Rather, it was to be a CATIC facility that supported
CATIC's responsibilities to the Trunkliner Program.
__Trunkliner Program__ Media
reports indicated in July 1994 that McDonnell Douglas and the PRC were
engaged in negotiations over the number of Trunkliner aircraft to be
assembled in the PRC.42
Notes from a June 7, 1994 briefing that McDonnell Douglas provided to
U.S. Government officials regarding its license applications indicate that
McDonnell Douglas's representatives made references to the fact that the
company was negotiating with the PRC over changing the mix of aircraft to
be built in the PRC.43 CATIC was to remain responsible for the fabrication
of large numbers of parts both for the aircraft that would be assembled in
the PRC, and for the aircraft that were to be built in the United States
under an "offset" agreement.
When queried by DOD officials
regarding the continued PRC need for the machine tools in light of
possible changes to the Trunkliner program, McDonnell Douglas responded in
an August 8, 1994 letter to Defense Technology Security Administration
Acting Director Sullivan. The letter provided further explanation
regarding CATIC's proposed use of the machine tools. A subsequent August
12, 1994 McDonnell Douglas letter to the Defense Technology Security
Administration's Colonel Henry Wurster noted:
*. . . The PRC factories that are participating in the Trunk
Aircraft Program . . .do not have the capability individually, nor
collectively, to accomplish the work share the PRC has agreed to (75
percent of the airframe) . . . If the licenses are denied, the PRC would
purchase these types of machines somewhere else . *. .
**Commerce
Department Delays Investigating** Machine Tool Diversion for Six
Months
__The Commerce Department's Actions in
April 1995__ As part of the licensing conditions for the machine
tools, the machines tools were to be stored in one location pending
completion of the Beijing machining center, and McDonnell Douglas was
required to ". . . notify the [U.S. Government] of the location of the
machine tools and update the [U.S. Government] with any changes of
location prior to plant completion."
In April 4, 1995 letters to the Commerce Department's Office of Export
Enforcement, Washington Field Office, and to the Technical Information
Support Division/Office of Exporter Services, McDonnell Douglas reported
that the machine tools were located at four different places:
**ï¿½ Nine of the machine tools
were located at two sites in the port city of Tianjin, a two hour drive
from Beijing**
**ï¿½ Four other machine tools had
yet to be exported and were located at Monitor Aerospace Corporation in
Amityville, New York**
**ï¿½ Six machine tools were
reported to be at the Nanchang Aircraft Company 44**
According to the letters, a McDonnell Douglas employee had physically
observed the machine tools in Tianjin, and confirmed that they remained in
their original crates. He had not personally viewed the machine tools at
the Nanchang Aircraft Company. However, the McDonnell Douglas letters
reported that:
*. . . CATIC did provide the attached letter to substantiate the
list of equipment stored there. CATIC stated that the equipment has not
been unpacked and remains in the original crates. [Emphasis in
original]*
The April 4 McDonnell Douglas letters did not trigger any kind of
investigative response.
On April 20, 1995, an interagency meeting was held in which two
McDonnell Douglas officials discussed the status and locations of the
machine tools. The McDonnell Douglas officials reported that there had
been changes in the number of aircraft that would be built jointly with
the PRC, and changes in the location of the machine tools.
**Since the machine tools were not
stored in one authorized location, this violated the licensing conditions.
**McDonnell Douglas representatives responded by stating that the
machine tools had inadvertently been moved to more than one location
contrary to what had been specified in the export licenses, but that the
building for the machine tools had not been completed and the tools had to
be stored somewhere in the interim.
Six months later the Office of Export Enforcement received additional
information from Commerce Department Licensing Officer Christiansen that,
in conjunction with a formal request from the Defense Technology Security
Administration, finally triggered the opening of a formal investigation
into the diversion.
__The Commerce Department's Actions in
October 1995__ An October 5, 1995 e-mail from Christiansen to a
number of Commerce Department officials, including Office of Export
Enforcement Acting Director Mark Menefee, reported that one of the six
machine tools in storage at the Nanchang Aircraft Company had been
uncrated, and was in the final stages of assembly.
**In clear violation of the export
license, the machine tool - a hydraulic stretch press **- had been
installed in a building that apparently had been built specifically to
accommodate that piece of equipment.
In his e-mail message, Christiansen stated:
*For OEE [the Office of Export Enforcement], please investigate to
determine who was responsible for both the diversion of the equipment
originally and second who is responsible for the decision to install the
equipment at Nanchang.*
The formal request from the Defense Technology Security Administration
for an investigation consisted of an October 4, 1995 letter from its
Director of Technology Security Operations.45 The Defense Technology
Security Administration informed the Acting Director of the Office of
Export Enforcement, Mark Menefee, that:
*During last week's ACEP [Advisory Committee for Export Policy]
meeting a package of materials were handed out concerning the violation
of McDonnell Douglas's export license to the Chinese.*
*The facts of the case are that CATIC has intentionally misused the
export licenses to put controlled technology at a facility not
authorized to receive [it].*
*This facility as confirmed by the Chinese is involved in the
manufacture of both missiles and attack aircraft. I will be forwarding a
copy of those materials to you separately.*
*We believe that this is a very serious matter and that the Office
of Export Enforcement should conduct a serious investigation into this
matter . . .*
The Office of Export Enforcement determined that an active
investigation was warranted, and opened a case file in early November
1995. The case was forwarded to the Office of Export Enforcement's Los
Angeles Field Office for investigation because McDonnell Douglas Aircraft
in Long Beach, California - the exporter of record for the machine tools -
was located in the Los Angeles Field Office's area of responsibility.
__Allegation that the Commerce Department
__ Discouraged the Los Angeles Field Office's Investigation On
June 7, 1998, the CBS program "60 Minutes" suggested that the Commerce
Department or other U.S. Government entities were not necessarily
interested in a complete and thorough investigation of the machine tool
diversion. Among other things, the program included a brief appearance by
Marc Reardon, a former Los Angeles Field Office special agent, who had
initially been assigned to investigate the case. According to the official
CBS transcript of the program:
*[CBS journalist Steve] KROFT: (Voiceover)** And
there's still some debate over just how hard the Commerce Department
tried to find out who the bad guys really were. It took them six months
to open an investigation. And Marc Reardon, the Commerce Department case
agent assigned to investigate, * says higher ups in Washington didn't
seem anxious to get to the bottom of things.
*Did you feel like you were getting support from the
department?*
*Mr. Marc REARDON:** No. Not at all.*
*. . . .*
*KROFT: (voiceover)** Reardon, who is now an
investigator with the Food and Drug Administration, says he was told who
to interview and what questions he could and couldn't ask.*
*Has that ever happened before?*
*Mr. REARDON:** Not in my career.*
*KROFT:** What did you make of it?*
*Mr. REARDON: **That somebody didn't really want the
* truth coming out.46
**The Select Committee conducted an
investigation of these allegations.** However, the Justice Department
has requested that the Select Committee not disclose the details of its
investigation to protect the Justice Department's prosecution of CATIC and
McDonnell Douglas.
On February 5, 1996 U.S. News and World Report reported that the
machine tools had been diverted, and that an investigation was underway.
The Commerce Department received inquiries from then-Chairman Alfonse M.
D'Amato of the Senate Committee on Banking, Housing and Urban Affairs, and
from Chairman Benjamin A. Gilman of the House Committee on International
Relations, concerning these reported allegations.47 Subsequently, Chairman
Floyd D. Spence of the House Committee on National Security and
Representative Frank Wolf asked the General Accounting Office to review
the facts and circumstances relating to the licensing and export of the
machine tools. The results of the General Accounting Office review are
summarized earlier in this chapter.48
The February 5, 1996 U.S. News and World Report also claimed that "a
confidential U.S. Commerce Department investigative report" had been
obtained and used in the article. Concerned that the disclosure of such a
report to U.S. News and World Report may have violated the confidentiality
provisions of Section 12 (c) of the Export Administration Act, the Office
of Export Enforcement initiated an internal inquiry. Responsibility for
the disclosure was never determined.
__The Office of Export Enforcement's Los
Angeles Field Office's __ Request for a Temporary Denial Order Against
CATIC Under the provisions of Part 766.24 of the Export
Administration Regulations (EAR), the Assistant Secretary for Export
Enforcement is authorized to issue a Temporary Denial Order (TDO):
*. . . upon a showing by [the Bureau of Export Enforcement] that
the order is necessary in the public interest to prevent an imminent
violation of the [Export Administration Act], the [Export Administration
Regulations], or any order, license * or authorization issued
thereunder.49
In late November 1995, the Los Angeles Field Office requested that the
Commerce Department issue a TDO against CATIC.50 The TDO request was
prepared as a means to compel CATIC to comply with the terms of the
machine tool export licenses by preventing the approval of future export
licenses.
**The Commerce Department declined
to issue the TDO.** In a December 7, 1995 memorandum, the Office of
Export Enforcement Headquarters returned the TDO case report because it
contained a number of technical deficiencies, including:
**ï¿½ Did not include licensing
determination for each commodity that was exported.** Licensing
determinations were necessary elements of proof that the commodities
required a license to be exported.
**ï¿½ Did not include any
documentary evidence such as shipping and export control documents**
to confirm that the exports had occurred.
**ï¿½ Did not include a
schedule** of violations that described the specific violations that
allegedly had occurred.
**ï¿½ Did not use the proper form
and format** that Office of Export Enforcement regulations specified
in the Office's Special Agent Manual.
Headquarters, noted, however, that "the violations do appear to be
deliberate and substantial." It instructed the Los Angeles Field Office to
give the investigation a high priority. Moreover, it instructed them to
conduct additional interviews and to obtain relevant documentation.
The Los Angeles Field Office was concerned that Headquarters was using
those technical deficiencies as a bureaucratic rationale for not seeking
Commerce Department approval of the TDO request.
At the date of the Select Committee's Final Report (January 3, 1999),
the Office of Export Enforcement and the U.S. Customs Service reportedly
are continuing to investigate the machine tool diversion under the
direction of the U.S. Attorney for the District of Columbia.
**The PRC's
Diversion of the Machine Tools**
__CATIC Letter Suggests Trunkliner
Program at Risk__ In a September 30, 1993 letter to McDonnell
Douglas Aircraft Company President Robert Hood, CATIC Vice President Tang
Xiaoping expressed concerns that negotiations were at an impasse for
CATIC's purchase of the machine tools and other equipment.51 The letter
seemed to suggest that the Trunkliner Program would be at risk if a deal
could not be worked out. According to the letter:
*. . . I think for sure, whether or not this procurement project
will be successful shall have a big influence on the trunk liner
programme [sic] and long term cooperation between [Aviation Industries
Corporation of China] and [McDonnell Douglas]. . .*
McDonnell Douglas characterized Tang Xiaoping's letter as nothing more
than a negotiating ploy to try to get McDonnell Douglas to lower the price
that it was asking for the machine tools. McDonnell Douglas officials said
they did not consider the letter to be a veiled threat by CATIC to cancel
or alter the Trunkliner Program if a deal for the machine tool equipment
could not be worked out.
According to the Defense Department, however, CATIC had a longstanding,
productive relationship with McDonnell Douglas, had made major investments
in the Trunkliner Program, and was not going to jeopardize those
investments and the Trunkliner Program in a dispute over the price of used
machine tools.
Indeed, the purchase price that was eventually agreed to between
McDonnell Douglas and CATIC was acceptable to both parties. The value of
the machine tools was based upon an appraisal provided by a commercial
auctioneer. McDonnell Douglas added a 20-30 percent markup. CATIC acquired
all of the machine tools it had originally sought, as well as various
other tools, equipment, furniture and other items as part of the $5.4
million purchase agreement.
The machine tools and other equipment purchased by CATIC were excess to
McDonnell Douglas's needs. According to McDonnell Douglas, the more modern
machine tools and equipment from the Columbus, Ohio plant were not sold to
CATIC but were redistributed to other McDonnell Douglas facilities.
According to the March 1, 1994 appraisal, the value of 31 machine tools
sold to CATIC - including the 19 machine tools that required export
licenses - was $3.5 million.52 This appraisal did not assess the value of
other tools, equipment, and furnishings that were included as part of the
purchase agreement.
__CATIC's Efforts to Create the Beijing
__ Machining Center with Monitor Aerospace Doug Monitto was
the President of Monitor Aerospace Corporation, an Amityville, New
York-based company that manufactured aircraft components. In the fall of
1993, Monitto met with CATIC representatives in the PRC to discuss joint
venture opportunities.
During those discussions, CATIC expressed an interest in subcontracting
with Monitor Aerospace for the production of aircraft parts. Specifically,
Monitor would assist the PRC in the production of certain aircraft parts
that CATIC was to manufacture for Boeing as part of an offset
contract.
Monitto says he proposed that CATIC convince Boeing to transfer $10
million of the offset work directly to Monitor for one year. During that
year, Monitor Aerospace would assist CATIC in designing and laying out a
new machining center.53 Thereafter, CATIC itself, with Monitor's
assistance, could provide all subsequent manufacturing for the Boeing
parts.
Representatives of CATIC, Aviation Industries of China, and Monitto
signed a Memorandum of Understanding (MOU) regarding the machining center
joint venture on January 24, 1994.54 CATIC officials took Monitto to an
industrial park in Beijing where the machining center was to be built.
In a letter dated January 27, 1994, CATIC informed Boeing that it had
signed the joint venture MOU, and asked if Boeing would consider providing
Monitor Aerospace with the offset work.55 However, Boeing, in an April
1994 letter, declined CATIC's offer.56
In the spring of 1994, Monitto says CATIC officials again approached
him about a machining center joint venture.
**Although negotiations were
intermittent, Monitto says CATIC informed him in the summer of 1994 that
it had purchased machine tools from McDonnell Douglas. **As Monitto
recalls, CATIC officials asked for his assistance in reassembling the
machine tools, and placing them in a machining center. However, he says
the precise location of the machining center had not been determined at
that time.57
A July 29, 1994 letter from Monitto to Sun Deqing, CATIC's Deputy
Director, states:
*As a result of your visit we have prepared an alternative approach
that will help us achieve our mutually desired goal of building a "State
of the Art" profile milling machine shop in China.*
*Monitor Aerospace would like to offer its assistance to CATIC in
entering this new marketplace as both a partner and as a technical
expert in the field.*
*The most significant feature of this new approach would be the
fact that Monitor would also be the launch customer of the new joint
venture.58*
Additional discussions between CATIC and Monitor Aerospace regarding
establishing the machining center appear to have continued into the fall
of 1994, after the export licenses for the McDonnell Douglas machine tools
had been approved.
According to a September 23, 1994 letter to CATIC's Sun Deqing,
Monitto proposed that, as part of a joint venture to manufacture
aircraft parts in the PRC, CATIC would:
*. . . supply an
appropriate building located in the Beijing-Tianjin metropolitan area
which permits growth. CATIC will provide other necessary infrastructure
and planning support, including arranging for appropriate utility
hook-ups, tax concessions, customs clearance, etc.59*
**Sometime in the fall of 1994,
Monitto recalls that CATIC informed him that it intended to place the
McDonnell Douglas machine tools at a facility located in the city of
Shijiazhuang. **Monitto drove to the facility to check out the offer but
decided the location was too far from his base of operations in Beijing to
be viable. It was "not something I wanted to do," Monitto comments.60
According to Monitto, he has had no further substantive discussions
with CATIC regarding the establishment of a machining facility, although
he does remain in contact with CATIC on other business-related matters.
According to Monitto, McDonnell Douglas was never a party to any of his
negotiations with CATIC regarding the establishment of the machining
center.61
According to McDonnell Douglas, the first indication it had that CATIC
would not establish the machining center took place during a phone call
with a CATIC official in May 1995. Subsequently, in a letter dated July 5,
1995, CATIC Supply Vice President Zhang Jianli formally advised McDonnell
Douglas that an agreement could not be reached with Monitor Aerospace for
a machining center, and that Nanchang Aircraft Factory was interested in
purchasing the six machine tools that were stored at that factory.
According to the letter:
*You were aware that we planned to set up a joint venture with
Monitor Aerospace, which would be the enduser [sic] in applying [for]
the license. Unfortunately both sides couldn't reach agreement. Without
this agreement we muse [sic] find other uses or purchasers in China.
62*
According to McDonnell Douglas, it believed that CATIC was serious in
its plans to build a machining center in Beijing to produce airplane parts
for the Trunkliner Program.
McDonnell Douglas acknowledges, however, that it never asked for, nor
was it shown, architectural drawings, floor plans, or other information to
indicate that plans for the facility were progressing.
**Diversion of
the Machine Tools to Nanchang Aircraft Company**
When the machine tools arrived in the PRC, McDonnell Douglas personnel
discovered that nine of the machines were stored at two different
locations in the port city of Tianjin.63
Moreover, a March 27, 1995 letter from Zhang Jianli, the Vice President
of CATIC Supply Company, to McDonnell Douglas's Beijing office explained
that six more of the machine tools had been shipped to Nanchang for
storage. These machine tools, CATIC represented, remained in their
crates.64
**Two McDonnell Douglas
representatives visited Nanchang to inspect the tools on August 23, 1995
and learned that one of the machine tools - a hydraulic stretch press -
had been uncrated and was situated inside a building. **Moreover, the
building had been built specifically to accommodate that piece of
equipment.
Although electrical power had not yet been connected,65 the size of the
building and the manner of its construction suggested to them that this
facility had been custom built to house McDonnell Douglas equipment, and
had been planned for several years:
**ï¿½ Possibly as early as December
23, 1993, **when CATIC and McDonnell Douglas signed an agreement for
the purchase of machine tools and other equipment from McDonnell
Douglas's Columbus, Ohio plant
**ï¿½ Perhaps even as early as late
1992,** when CATIC first expressed interest in the
purchase
CATIC (USA) documents66 indicate that an official of "TAL Industries"
was primarily responsible for supervising the PRC team that coordinated
and supervised the packing and crating of the machine tools and other
equipment at the Columbus, Ohio plant.67 According to its responses to a
series of Select Committee interrogatories, TAL Industries is a subsidiary
of CATIC Supply in the PRC. CATIC Supply, in turn, is a wholly-owned
subsidiary of CATIC.68 According to TAL Industries, CATIC Supply owns 90
percent of its stock, and CATIC (USA) owns the remaining 10 percent.69 TAL
Industries is located at the same El Monte, California address and has the
same telephone number as CATIC (USA).70
**Some of the McDonnell Douglas
equipment had been sold or given by CATIC to the Nanchang Aircraft
Company. At least some of these transfers of ownership must have occurred
before any of the equipment was exported from the United States.** In
addition, the PRC team that coordinated the disassembly and packing of the
equipment at the Columbus, Ohio plant included representatives from the
Nanchang Aircraft Company, who apparently were responsible for overseeing
the packing of the equipment it was obtaining from CATIC.
Internally, CATIC specifically referenced the cargo as Nanchang's
equipment.
Separately, the Nanchang Aircraft Company's Technology Improvement
Office submitted inquiries to CATIC concerning the location of various
pieces of its-Nanchang's-equipment.
Since most of the Columbus, Ohio equipment that was purchased by CATIC
did not require an export license,71 CATIC's subsequent sale of that
equipment to Nanchang Aircraft Company would not violate U.S. export
controls.72 But the CATIC (USA) documents pertaining to Nanchang Aircraft
Company's equipment do not explicitly identify the equipment, including
the six machine tools that were later found at the Nanchang Aircraft
Factory in violation of the export licenses.73
**Nanchang
Accepts Responsibility**
In a September 13, 1995 letter to McDonnell Douglas China Program
Manager Hitt, the Vice President of the Nanchang Aircraft Company accepted
full responsibility for uncrating and installing the hydraulic stretch
press in a newly constructed building. According to the letter:
*Now I would like to review the detail and apologize for the result
caused by the action we made. The following is the reason why we put the
[hydraulic stretch] press into the pit.*
*When we heard that the agreement had not been made between CATIC
and Monitor [Aerospace] concerning the cooperation. [sic] We expressed
our intention to CATIC that we would like to buy some of the machines
and at that time CATIC also intended to sell to us.*
*But they mentioned to us for several times that the cases can not
be unpacked until the amendment of enduser [sic] is gained from the
Department of U.S. Commerce. We do not think that there is any problem
to get the permission for the second hand press, which has not got new
technology because we have the experience that when we import the press
from [a foreign manufacturer of machine tools].*
*Under this guidance of the thought, we started to prepare the
fundation [sic] in order to save time.74*
The letter went on to argue that, because of its size, the hydraulic
stretch press had to be uncrated in order to move it to Nanchang from its
port of entry in Shanghai. Moreover, the stretch press had then been moved
into the "pit" that it would occupy so the new building could be built
around it. To do otherwise, the PRC letter said, would have disrupted the
construction of the new building.75
The Nanchang Aircraft Company official also apologized for the events
that had occurred, and provided assurances that no further installation of
the hydraulic stretch press would take place at the Nanchang Aircraft
Factory until permission to do so was given by the U.S. Government.76
A July 5, 1995 letter to McDonnell Douglas China Program Manager Hitt
from CATIC Supply Vice President Zhang Jianli reflects CATIC's knowledge
that prior U.S. Government approval for the transaction was required.
According to the CATIC Supply letter:
*Nanchang Aircraft Factory is very much interested in 6 sets of the
equipment. We would like to sell to them if we are allowed to do so
because we understand that the licenses are only good for the Beijing
machining center as it was approved originally.*
*Is it possible to request the United States Commerce department
[sic] to approve selling the machines to Nanchang Aircraft Company? The
machines are being stored there now, and they are required not to be
unpacked until we receive approval from the Department of Commerce of
the U.S.A.77* [Emphasis added]
When Hitt and a colleague visited the Nanchang Aircraft Company on
August 23, 1995, the Nanchang Aircraft Company officials informed them
that one of the machine tools delivered to Nanchang had been placed inside
a building "to protect it from the elements."
**At the insistence of McDonnell
Douglas's Hitt, the PRC officials took him to the building, where he found
a hydraulic stretch press installed in a building that appeared to have
been specifically built for it.** The building had actually been built
around the hydraulic stretch press, since Hitt observed no openings or
doorways that were large enough to have allowed the machine tool to be
moved into the building from elsewhere. Parts for the machine were strewn
about the building in such a manner as to indicate that efforts were
underway to reassemble the machine and restore it to operational
condition. Although electrical power had not been connected to operate the
stretch press, trenches for the power cables had been dug and other
electrical work had been completed.
Hitt says the storage explanation he originally was given by Nanchang
officials was, without question, disingenuous.
Concerned over Hitt's expressions of anger at seeing the partially
installed stretch press, Hitt says Nanchang officials tried to reassure
him that they only intended to use the stretch press for civilian
production at the factory.
Since early 1996, the McDonnell Douglas machine tools have been stored
at Shanghai Aviation Industrial Corporation (SAIC).
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