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From the New York Times, Apr. 13, 1998


U.S. Business Role in Policy on China is Under Question


In the 1992 election, many of America's aerospace manufacturers backed Bill Clinton. But when President Clinton took office, he immediately disappointed some of them on a key issue, barring them from launching their most lucrative satellites on China's low-cost rockets.

The aerospace companies' counterattack was vehement--and effective. After a lobbying campaign that included appeals to the President by C. Michael Armstrong, then the chief executive of Hughes Electronics, Mr. Clinton gradually came to take the industry's side.

But there was an important caveat: The companies had to keep a tight rein on sophisticated technology sought by the Chinese military.

So in May 1997 the Administration was jolted by a classified Pentagon report concluding that scientists from Hughes and Loral Space and Communications had turned over expertise that significantly improved the reliability of China's nuclear missiles, officials said.

The report, whose existence has been secret, prompted a criminal investigation of the companies, which officials said was undermined this year when Mr. Clinton approved Loral's export to China of the same information about guidance systems. Loral's chairman was the largest personal donor to the Democratic Party last year.

An examination of the Administration's handling of the case, based on interviews with Administration officials and industry executive, illustrates the competing forces that buffet Mr. Clinton on China policy. In this instance, the President's desire to limit the spread of missile technology was balanced against the commercial interests of powerful American businesses, many of which were White House allies and substantial supporters of the Democratic Party.

`From the Chinese point of view, this was the key case study on how the Administration would operate on contentious issues,' an Administration expert on China said. The message, the official added, was that Administration policy on issues like the spread of weapons and human rights abuses `could be reversed by corporations.'

The White House denied any political interference in the issue.

`I am certainly not aware that our policy has been influenced by domestic political considerations,' said Gary Samore, the senior director for nonproliferation and export controls at the National Security Council. `From where I sit, this has been handled as a national security issue: seeking to use China's interest in civilian space cooperation as leverage to obtain nonproliferation goals.'

The Administration's China policy has come under intense scrutiny in the last year. Congressional investigators have been examining whether China sought to influence policy through illegal campaign contributions to Democratic candidates in 1996. The connection, first suggested in intelligence reports and echoed by Senator Fred Thompson, the Tennessee Republican who led hearings on campaign finance, was never proved.

The handling of the satellite case raises questions about the influence of American contributors on China policy, according to officials.

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Since 1991, the aerospace industry has divided its political contributions equally between Democrats and Republicans. In the same period, however, Loral and Hughes tilted toward the Democratic Party, giving $2.5 million to Democratic candidates and causes and $1 million to the Republicans.

Administration officials say the contributions played no role in the decisions to permit China to launch American satellites.

`The Government has to balance risks: the risk in not letting American companies get their satellites launched by the Chinese, which would reduce our high-tech advantages, and the inherent risks of technology transfer,' said James P. Rubin, the State Department spokesman.

`That's why we impose such strict safeguards, and we are determined to investigate and use our laws to prevent that possibility,' Mr. Rubin said.


The criminal investigation of Hughes and Loral has its roots in 1989, when sanctions were imposed after the massacre of pro-democracy demonstrators at Tiananmen Square, requiring a Presidential waiver for satellite launchings. Eleven such waivers have been granted by President Clinton and his predecessor, George Bush.

But in late 1992, American intelligence discovered that Chinese companies had sold missile technology to Pakistan, raising tensions on the subcontinent.

In the first months of Mr. Clinton's Presidency, Democrats and Republicans in Congress pressed the Administration to take action. Mr. Clinton responded with
sanctions that barred American companies from sending military goods to any of the Chinese concerns involved in the Pakistan deal.

The move had the effect of halting several pending and future American satellite deals because the Chinese rocket-launching company was one of those under sanctions.

Mr. Armstrong of Hughes, a subsidiary of the General Motors Corporation, wasted no time in getting the President's attention. He wrote two blunt letters in September and October 1993 that reminded Mr. Clinton of his support for several Presidential policy initiatives like the North American Free Trade Agreement, officials said.

He bemoaned his company's loss of business to foreign competitors and requested Mr. Clinton's personal involvement. Hughes's biggest loss, the company says, was the opportunity for a joint satellite manufacturing plant in China, which the Chinese awarded to a European competitor.


A key issue was whether Hughes satellites were civilian or military, a murky question in the export control laws. If the satellites were labeled commercial, the sanctions invoked over the Pakistan deal did not apply. Mr. Armstrong told Mr. Clinton, officials said, that Hughes satellites should not be considered military because their technology did not have military applications.

Soon after the letters, Mr. Clinton assured Mr. Armstrong in an open meeting that he was trying to resolve the tussle between the State Department, which licensed military exports and wanted to keep authority over satellites, and the Commerce Department, which licensed all other exports and was on the side of the satellite industry.

`I'm trying to get on top of this to decide what to do,' Mr. Clinton told Mr. Armstrong.

At about the same time, the Administration gave signals that it was moving toward the industry's position. After one signal, Mr. Armstrong sent a letter to a senior White House official relaying a positive reaction from Chinese officials, White House officials said.

In early January 1994, the President sent another positive signal--what Hughes officials then called a `a good first step.' Three satellites were lableded as civilian, including one slightly modified Hughes satellite, which allowed their launchings to proceed.

Mr. Clinton's decision helped the industry. But the satellite makers wanted a broader decision that made the Commerce Department the primary licensing authority for virtually all satellites. The Commerce Department weighs the economic consequences when it considers an export license. The State Department looks at security concerns.

In 1994, Loral's chairman and chief executive, Bernard L. Schwartz, went to China with Commerce Secretary Ron Brown. Mr. Brown helped Loral close a mobile telephone satellite network deal in Beijing.

A few weeks later, the President's top political aide, Harold Ickes, wrote a memo to Mr. Clinton in which he said Mr. Schwartz `is prepared to do anything he can for the Administration.'

In December 1994, the President selected Mr. Armstrong to head his Export Council.

And the sanctions stemming from the Pakistan sale were lifted in late 1994 as China promised to curb missile sales to other countries.

Still, the satellite industry had not achieved a major objective. So in 1995, Mr. Armstrong sent another letter to Mr. Clinton, signed by Mr. Schwartz, arguing that the Commerce Department should become the primary licensing authority for satellite exports, an industry executive said. (Mr. Armstrong, who recently became the chief executive of AT&T, declined through a spokeswoman to comment.)

The debate not only affected national security but also had enormous commercial implications. The businesses that rely on satellites are highly competitive, and European companies were more than willing to take advantage of China's low-cost services. Without the Chinese, American companies faced long waits to get their satellites sent into orbit because of a shortage of rockets. Satellite technology is crucial to an increasing number of businesses, from cellular telephone networks to global broadcast conglomerates.


Finally in March 1996, Mr. Clinton shifted major licensing responsibilities for almost all satellites to the Commerce Department. The State Department retained control over a few highly sophisticated satellites as well as any sensitive support activities, or technical assistance, in connection with civilian satellites.

The industry and the Chinese applauded the action. But the events that followed a failed launching in China immediately raised questions about whether the new policy sent a wrong signal.

On Feb. 15, 1996, a Chinese rocket carrying a $200 million Loral satellite crashed 22 seconds after liftoff at the Xichang Satellite Launching Center in southern China.

Chinese officials needed to figure out what went wrong. By April an outside review commission, headed by Loral, was assembled to help the Chinese study the accident. It included two scientists from Hughes.

On May 10, the commission completed a preliminary report, based on over `200 pages of data, analysis evaluation and reports,' documents show. It found that the cause of the accident was an electrical flaw in the electronic flight control system.

But the report, which was promptly shared with the Chinese, discussed other sensitive aspects of the rocket's guidance and control systems, which is an area of weakness in China's missile programs, according to Government and industry officials.

The State Department learned about the report and made contact with Loral.

Loral, in what officials said was a cooperative effort, provided the review
commission's report and a long letter explaining what happened. Loral told other commission members, including the two Hughes scientists, to retrieve all copies of the report because of the serious security concerns of the Government, officials said,

But the two Hughes employees believed that there was no legal obligation to comply with the request, officials also said. In late May, Hughes received a letter from the State Department charging that the transfer of information was a violation of the arms export control laws, according to officials. Loral received no such letter.

One year later, the Pentagon completed its damage assessment of the incident. It concluded, officials said, that `United States national security has been harmed.'

The Pentagon report prompted a criminal investigation into Loral and Hughes by the Justice Department and the Customs Service. The companies say their employees have acted properly, but they decline to discuss the matter.

One key issue is whether the data turned over to the Chinese required a State Department license and, if so, whether the company officials were aware of that fact. The criminal inquiry has found evidence that several days before the review committee had its first meeting with Chinese officials, Loral executives were told by their security advisers that any sharing of information required a State Department license, according to Administration officials. Loral never sought a license, but it may have sounded out the State Department.

An industry official said Loral had immediately told the State Department about the review commission meeting with the Chinese but had received no reply.

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Whatever the evidence, criminal charges may never be brought because Mr. Clinton approved the export to China by Loral of similar satellite guidance information two months ago. He acted despite the strong opposition of the Justice Department, whose officials argued that the approval would seriously undercut any criminal case.

The required notice to Congress by the President of his action was sent during a recess.

Administration officials say the decision was politically sensitive but correct because no wrongdoing had been proven and Loral had subsequently acted responsibly.

Since the inquiry began, Beijing and Washington have been exploring even more space cooperation.

Last fall President Jiang Zemin visited the United States and stopped at a Hughes site to talk about satellites. In advance of Mr. Clinton's trip to China in June, the Administration is seeking a broader agreement with Beijing on space cooperation.

But the chairman of the House International Relations Committee, Benjamin A. Gilman, Republican of New York, says the Administration should provide a `thorough review' of the Hughes-Loral case to Congress before it goes ahead with a plan to expedite approvals for American satellite launchings by China.



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