The New China Syndrome

The Cox Report casts a pall over the political and business climate

When Newt Gingrich created a special committee last year to probe possibly illegal transfers of technology to China, the then-House Speaker thought he had a winner. Gingrich hoped to embarrass President Clinton for approving a satellite launch by Loral Space & Communications Ltd. in China while the company was under scrutiny for leaking technology to Beijing. As a bonus, the panel might even uncover an impeachable offense: The approval looked like a favor for Loral CEO Bernard L. Schwartz, who had donated $600,000 to Clinton's reelection campaign.

But what congressional investigators uncovered is far more explosive and politically dicey: an effort by China spanning Republican and Democratic Administrations to steal America's top-secret military treasures--from nuclear warhead data to missile technology and neutron-bomb plans. An 860-page report by the committee headed by Rep. Christopher Cox (R.-Calif.) not only suggests that the Clinton Administration was far from vigilant in protecting U.S. nuclear secrets, but it also throws into question two decades of U.S. policy toward China. That policy, established under the Reagan and Bush Administrations, is known as "constructive engagement" and calls for creating close economic ties with Beijing while pressing the Communist regime to adopt various reforms.

Constructive engagement--and the Washington-sanctioned push for more U.S. business dealings with China--are likely to be the first casualties. The U.S. effort to bring China into the World Trade Organization, already delayed, may now languish. And the telecommunications and electronics companies that rushed into the Chinese market may soon find themselves engulfed in a hellish tangle of export licensing red tape. A U.S. diplomat in Beijing says an American investor group about to take the plunge on a shopping mall in Chengdu suddenly is getting cold feet. Other investors may follow suit.

Despite its bipartisan authorship, the Cox Committee's report is already turning China policy into a political football. Republicans are howling for scalps, including those of Attorney General Janet Reno, whose Justice Dept. nixed wiretaps on a Chinese spy suspect, and National Security Adviser Samuel R. Berger, who the GOP says was slow to sound the alarm when the spying was brought to his attention. Even Democrats concede the findings are damaging.

This means that the aftershock of the Cox Report will be felt for months, perhaps years. Here are the issues:

WHAT THE REPORT DOCUMENTS. China pilfered secret design information from national labs on every nuclear weapon the U.S. possesses, according to the report. It concludes that such secrets gave China nuclear design information on a par with America's. It also says the Chinese stole anti-satellite technology and obtained neutron-bomb secrets. Part of the espionage plan: a network of 3,000 U.S.-based front companies that swept up publicly available technical information. Cox believes the spying continues "to this day."

The report has ignited a debate within the intelligence community over whether China has the knowhow--or even the intention--to use the purloined secrets to develop new strategic weapons. Robert A. Manning, a China specialist at the Council on Foreign Relations, says that the Chinese have a poor track record so far. "In the last 30 years, every weapon system [China tried to reverse-engineer] has failed," he says.

THE CHINA CARD. With the 2000 campaign looming, Republicans hope to use the Cox Report to prove that the Chinese leaders were duplicitous--and that the Clinton Administration's foreign policy was inept and dangerously naive. George W. Bush, the front-runner for the GOP nomination and son of the President most responsible for constructive engagement, quickly weighed in on the Cox Report on May 25, calling for a new relationship: "China is not America's strategic partner," he said. "China is a competitor."

With such sentiments in the air, says David J. Rothkopf, a former top Commerce Dept. official, the task for the remainder of President Clinton's term, "is going to be to avoid falling into a new cold war stance with China." At a minimum, Republican assaults will add more baggage to the already burdened White House bid of Vice-President Al Gore.

But playing the China card could be a dangerous game for the GOP. Party strategists hope China-flogging will energize the GOP's anti-communist base. At the same time, GOP Hill leaders want to continue the push--sought by their corporate allies--to broaden commercial links with China. Cox and Senate Majority Leader Trent Lott (R-Miss.) want Beijing in the World Trade Organization. After all, U.S.-China merchandise trade now tops $100 billion annually and could explode with China in the WTO. But the spying backlash may endanger that. The GOP stance "splits [Republican] donors from their voters," says Democratic pollster Mark S. Mellman.

TIGHTER EXPORT RULES. Business will be hard-pressed to persuade Congress not to impose harsher controls over sales of high-tech goods. The Cox panel wants to revive an international pact that would impose tough curbs on products with military and commercial uses. Even if other countries balk, the panel wants to tighten U.S. oversight of the most critical technologies, including high-end computers.

This isn't playing well in Techland. "Ceding the Chinese computer market to foreign competitors would be detrimental to U.S. national security," insists Lewis E. Platt, CEO of Hewlett- Packard Co. Adds Rick Younts, Motorola Inc.'s special adviser on Asian affairs: "If we go beyond where we are today with export control, it would make business difficult."

Even before the Cox Report, export licensing was slowing. Douglas H. Paal, president of the Asia Pacific Policy Center, a Washington think tank, believes even innocuous exports could be slowed. "A detergent factory will get denied," he predicts, "because it has phosphates, which are precursors to chemical weapons."

Citing the arrival of 603 supercomputers into China--where they could be used to simulate new nuclear weapons--Cox urges the Administration to adopt by Sept. 30 a tough verification program to keep new supercomputers away from the People's Liberation Army. Otherwise, he says, the White House should tighten standards for supercomputer shipments--or deny licenses altogether.

SATELLITE WOES. The Cox Report accuses both Loral and General Motors Corp.'s Hughes Electronics Corp. of illegally providing China with knowhow that could help it launch nuclear weapons. Criminal investigations are ongoing, and both companies could face indictment. Both deny wrongdoing.

Meanwhile, the satellite industry could be facing a harsher future. Hughes, Loral, and others went to China to launch satellites because there was not enough capacity in the U.S. and they hoped to save money. The companies' alleged violations occurred after they helped show the Chinese why their Long March rockets had failed.

Now, the companies have to make other plans--and face higher costs. In March, Hughes wrote down $92 million after it failed to get export licenses to complete a $450 million contract for regional telecommunications satellites, which U.S. authorities said could be used by the Chinese military. Loral is likely to write down about $10 million for its remaining satellite for China, says Vijay Jayant, a managing director and analyst at Bear Stearns & Co.

CHINESE ANGER. China's hardliners are using the deteriorating relations to push their agenda, perhaps tipping the balance of power away from moderates such as President Jiang Zemin and Premier Zhu Rongji.

Damage to U.S.-China relations will take years to mend. The Administration, Manning says, should work to dissuade Beijing from undertaking a strategic weapons buildup. But for the rest of Clinton's term--and maybe Jiang's, too--the operative term will be damage control. Ultimately, China scholars hope, the overarching economic needs of the two great powers will again thrust them together. But thanks to Chris Cox's gumshoes--and China's zealous agents--that day seems a long way off.

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