Cox report has fallout for fiber investments in China

Aug. 1, 1999

The Cox report, "U.S. National Security and Military/Commercial Concerns with the People's Republic of China," chaired by U.S. Rep. Christopher Cox (R-CA), roiled the political and commercial waters in Washington, DC, and Beijing.

Depending on one's viewpoint, the report is evidence of (a) the PRC government's occasional malevolence toward the U.S.; or (b) the Republican party's unending disgust with the Clinton Administration for taking campaign donations from China's government and easing export restrictions on civilian technology easily converted to military use; or (c) the Republican party's desire to distract attention from its own culpability in the major security failures, which actually occurred in the Reagan and Bush administrations; or (d) the occasional disregard of American commercial interests for American security; or (e) the exaggeration that sneaks into national security reports authored by politicians rather than by intelligence agencies. The correct answer? All of the above.

The report contains not a single word about fiber optics but has heated the political atmosphere so much that the activities of American fiber-optic producers in and with the PRC will surely be scrutinized by the U.S. government. American fiber exports and investment in China are on the verge of rapid expansion, but fiber can be used for military functions, just like many other high-tech commodities. Fiber exports from the U.S. to the Soviet Union were prohibited well into the 1980s, and fiber's military use in China has already been identified.

The chief of technology-security operations for the Defense Threat Reduction Agency, the Defense Department's group that monitors exports for their military potential, wrote a memorandum in July 1998 describing the tactical role of telecommunications for China's military: "Since 1991, China has sought to form a national integrated [military] command, control, communications, computers, and intelligence system....The combination of [American-made] satellites and terminals, along with the pending...satellite export, combined with other U.S. exports of fiber optics and sophisticated telephone switching technologies and high-performance computers, give China such an integrated infrastructure....The systematic liberalization of U.S. export controls since 1993, and subsequent lack of licensing data, suggest the cumulative strategic impact of these exports may be greater than first thought."

These are not innocuous comments in light of reaction to the Cox report. For example, The New Republic, a Washington, DC-based opinion journal read widely by federal politicos, stated, "While the Clinton Administration seeks to create a 'partnership' with China, China has targeted the United States as its enemy." However, if the "enemy" mind-set prevails in Washington, then all American technological transactions with China will be endangered.

Perhaps in anticipation of this scenario, American firms in Beijing separated themselves from the Cox report by casting it in negative terms for Reuters News Agency. A spokesman for the U.S. Information Technology Office, an American private-sector firm in Beijing supported by the U.S. Commerce Department and representing the American Electronics Association, the Semiconductor Industry Association, the Software Publishers Association, and the Telecommunications Industry Association, said, "The potential for really screwing things up for high tech is very high right now," and a spokesman for Lucent said, "If they screw...up, it will screw Lucent up pretty horribly." The Reuters story released from Beijing also makes clear what American business interests in China think of the Cox report. It was described as "inflammatory" and focusing on "alleged spying" by China's government. Although this opinion was not expressed in the domestic American press, Intel's president for the company's China operations, Jim Jarrett, was quoted as saying, "Don't assume the sentiment in Washington is only going one way. "

American businesses in China have much to lose: Lucent, for example, has rapidly increased its investment in fiber production facilities in the PRC: No one should forget the huge undersea fiber-optic cable that is supposed to stretch directly from China to a landing point at Bandon, OR. Covering this story nearly 18 months ago, Lightwave reported that the project showed the "U.S. and international telecommunications companies are clearly placing bets on China as the logical network hub in the Asia-Pacific region." Now is a good time to hedge that bet if the U.S. government sees the project as being one more way for China's government to influence American firms and one more physical path for shoveling intelligence information out of the U.S.

The contradictory nature of Sino-American telecommunications activities is represented by an odd sequence of events: The Cox report was released on May 27 with its attendant uproar, but a mile away from Cox's office and four days later, there was a large conference in Washington, DC, aimed at coaxing more American telecommunications firms to invest in China. The conference organizer, Information Gatekeepers, said, "China's senior leadership has endorsed fundamental policy reform. Private and direct foreign participation in telecommunications services has been approved as part of broad macro-economic restructuring--and will likely go forward....After years of battling prevailing policy, foreign investors may finally have cause for legitimate hope."

Attendees and speakers included the usual participants: China's Ministry of Information Industry, Shanghai PTA, Beijing University, Yangtze Optical Fibre and Cable Co., Great Dragon Telecom, Lucent Technologies, Nortel Networks, Qualcomm, Motorola, and the Chinese Embassy. Discussions included "telecom investment financing models, IP phone and fax regulations, the Internet, fiber optics and optical networking, switching, wireless, mobile satellite, VSAT, and other technologies." These are much the same topics discussed in the Defense Threat Reduction Agency's memo.

High-tech commodities are often malleable and capable of either civilian or military purpose. This issue was discussed last September during the Senate Commerce, Science and Transportation Committee's hearings on missile technology transfer to China. John Holum, the State Department's undersecretary for international security affairs, said, "The basic premise of our policy and why we require such tight controls on launch vehicle data and assistance [for China's launching of American-made satellites] is that there is a very strong crossover, correlation, between satellite launches and ICBM capabilities." William Reinsch, the undersecretary of export administration in the Commerce Department differed markedly, suggesting that commercial success brings military preparedness: "As the line between military and civilian technology becomes increasingly blurred, a second-class commercial satellite industry means a second-class military satellite industry."

This boost for the satellite industry failed. In March, the U.S. government denied Hughes Communications an export license to have the company's Asia-Pacific Mobile Telecommunications satellite launched on a Chinese rocket. An analyst bemoaned the decision, saying it "damaged efforts to create a vibrant commercial space sector." But could this situation be repeated in telecommunications equipment and software or fiber in particular? Yes, given the right circumstances.

In that technology-transfer hearing, Sen. Conrad Burns (R-MT) said, "I still say the real key to our survival is that our technology being developed is at least better than the technology that we are transferring." This comment establishes one political parameter for fiber and communications exports--keep the cutting-edge stuff at home and protect it from espionage, which surely is already aimed at the cutting-edge. But this attitude is exactly what China fears--being shut out of first-tier technology and getting second-best from foreign providers. Thus, the PRC's government is making a conscious effort to modernize its telecommunications infrastructure according to Chinese technical standards.

The Sino-American relationship is a toss-up, capable of either rapid deterioration or improvement, depending on what both sides do. Undersecretary Reinsch had the most apt warning: "Those who find it in their interest to exaggerate the threat of trade with China seem incapable of defining our any terms but those of military conflict....Treating China as a committed adversary is the quickest way to ensure that it becomes one." That is true, but it's a two-way street. The Cox report shows the PRC government secretly treating the U.S. as a committed adversary, a rude surprise to Americans hoping for a reasonable relationship with that emerging power. Despite the cordial business climate that American firms find in China, the political and military postures have not demonstrably changed. This discovery may stall or interrupt American cooperation in the modernization of China's infrastructure and ensure that China only gets second-tier technology.

Stephen N. Brown writes on public policy in telecommunications. He can be contacted by e-mail at [email protected] or telephone: (615) 399-1239.

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