When Companies Leak

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ADAM COHENThe launch of Loral's Intelsat 708 communications satellite in Sichuan province in February 1996 was a fiery disaster. The Chinese-made Long March rocket that was supposed to propel the American satellite into space crashed into a hillside 22 seconds after lift-off and exploded, raining flaming rocket fuel and red-hot shards of the 3-ton satellite on a nearby village. China initially said six villagers choked or burned to death, and later upped the number to 56, but U.S. estimates put the fatalities closer to 100.

Loral's ill-fated launch may also have caused collateral damage of a different kind. In the wake of the crash, a committee of Western aerospace experts, headed by a top Loral official, was tapped to investigate. It drew up a preliminary report on specific reasons the Long March may have failed--and faxed it over to the Chinese. This technical feedback, a federal investigation concluded, may have helped China improve the accuracy of its rocket and missile programs. The Defense Department found that Loral and Hughes, another satellite company on the committee, had engaged in a serious export-control violation by performing an unlicensed defense service. The State Department asked the Department of Justice to consider criminal prosecution.

Loral's exploded satellite--which was going to be used to beam TV programs into Latin America--shows just how thin the line can be between harmless commerce and military assistance. Representative Christopher Cox sternly warned last week that China has been inducing its U.S. business partners to provide it with military-related technology, and momentum is growing in Congress for a crackdown on this kind of seepage. But the tech industry, and some outside observers, say the risks are being overblown--and some of the tighter rules being considered would be ineffective or even counterproductive.

Restrictions on the sale of strategic products to China began loosening with the end of the cold war, and industry rushed in as the doors to China's large and largely untapped markets opened. In the commercial-satellite business alone, China imported $168 million worth of satellites and launch equipment last year, up from $4 million in 1994. Sales of dual use products--nonmilitary items with military applications--to China have long had security lapses. In 1994 McDonnell Douglas sold China machine tools for a civilian machine center in Beijing. The company learned later that they had been diverted to a military complex nearly 1,300 km away. A report by the Wisconsin Project on Nuclear Arms Control found that from 1988 to 1998 a large and steady flow of strategic equipment went to China with the U.S. Commerce Department's blessing. Among the items sold to China legally: computers nominally for the Chinese Academy of Sciences that could be used in nuclear-fusion projects.

But others say the potential harm has been overstated. The Cox report is all worst-case scenarios, says Hughes spokesman Richard Dor. The information Hughes is criticized for sharing with the Chinese, he says, was certainly not of a sensitive, national-security nature. Loral chairman Bernard Schwartz insisted to shareholders last week that his company didn't help the Chinese discover what went wrong with their rocket, but simply reviewed China's own analysis. In general, though, it may actually serve American strategic interests to have China use U.S. technology. There are lots of reasons why we'd want the Chinese to make phone calls on open equipment that we sold them rather than closed equipment that they made themselves, says Under Secretary of Commerce Bill Reinsch.

Then there's the question of whether rules against technology sharing are even effective. The tech industry, not surprisingly, argues they often aren't. Current law requires chipmakers to submit applications to sell powerful microprocessors to countries (such as China and the former Soviet Union states) that are subject to highly restrictive export controls. But Intel argues that it's impossible to prevent the chips it sells to friendly countries from ending up in less friendly ones. We make microprocessors in the millions each month and ship them to thousands of distributors all over the world, who aren't prevented from selling to China, says Intel spokesman Bill Calder. There's a disconnect there.

Despite the current backlash, no one is really expecting substantial changes. Indeed, the tech industry's supporters argue that a crackdown would drive China to European or Japanese suppliers, which could put more information in the hands of the Chinese military. No country is as strict about technology transfers as the U.S., says Hughes' Dor. The way to keep the lid on is to keep them dealing with American businesses.

Reported by Cathy Booth/Los Angeles, Michael Krantz/San Francisco, Elaine Shannon and Adam Zagorin/Washington and Mia Turner/ Beijing