By Wyn Q. Bowen, Ian J. Stewart, Daniel Salisbury | October 29, 2013
China continues to be the key source of goods and technology for the prohibited nuclear and missile programs of Iran and North Korea, with some officials estimating that China is used as a transit route for up to 90 percent of goods destined for those programs. The alleged serial Chinese proliferator Li Fang Wei (aka Karl Lee) reportedly was able to earn more than $10 million from the sale of missile-related items to Iran after the United States indicted him in 2009 on more than 100 criminal counts of falsifying business records related to illicit trade with subsidiaries of an Iranian military agency. Meanwhile, the Chinese service sector provides many of the financial and transport services through which the strategic programs of North Korea, in particular, are sustained.
Today, Chinese industry is on the cusp of attaining production capability for a wide variety of strategic commodities that are high on the list of procurement priorities for nuclear and missile programs of concern. Simply stated: Nuclear proliferation from or through China may pose the single biggest risk to the international community's nonproliferation efforts.
Nonetheless, over the past two decades, China has slowly expanded its commitments to and implementation of nonproliferation measures. The latest such step was the Chinese Ministry of Commerce’s announcement that it will implement UN sanctions on all trade with North Korea. Though China has previously prohibited the export of proliferation-sensitive goods to North Korea, the buy-in to the sanctions marks a turning point in global efforts to prevent proliferation.
The international community must now carefully calculate how best to encourage Beijing to take further action in curbing proliferation. There appear to be three basic options: inclusion, exclusion, or maintaining the status quo. The ministry’s recent announcement on North Korea, as well as our fieldwork in China and discussions with officials involved in interdiction operations all suggest that Beijing is ready to travel the path of inclusion and engagement with international nonproliferation regimes. The international community should respond positively but not naïvely. China’s nonproliferation commitments have expanded, and its record has improved, but—if China is to claim a place as a fully responsible strategic technology holder—the Chinese government must invest more resources in government agencies responsible for nonproliferation and outreach efforts to industry.
China’s nonproliferation record. Although Chinese entities have clearly played an important role in illicit trade, the type of entities involved in proliferation and the level of government complicity have changed significantly over time. In the 1980s and 1990s, a number of China’s large state-owned defense enterprises sold large quantities of conventional arms and missiles, complete nuclear and missile facilities, and dual-use and unfinished technologies to Algeria, Iran, Iraq, Pakistan, and Saudi Arabia.
More recently, the involvement of large state-owned strategic and defense companies has subsided. Today, the primary source of goods for prohibited programs is China’s private sector, particularly small- and medium-sized enterprises that often act as distributors or middlemen in trade with western manufacturers. Setting aside the questionable transfer of reactor technology to Pakistan over the past two decades, state-authorized transfers of complete missile systems and nuclear or missile production facilities have ceased. Instead, proliferation most often involves goods that are dual-use in nature or are below control-list thresholds—that is, just below the point when a specific controlled item or technology becomes subject to export licensing requirements.
It is clear that large state-owned enterprises in China are determined to protect their international business by, at least publicly, demonstrating their nonproliferation compliance policies and practices. It is true that subsidiaries of Chinese state-owned enterprises may be less well-informed than their parent companies, but the trend is clear. Smaller firms, often without a presence in Beijing, are frequently less aware of nonproliferation issues. Even though state-owned enterprises show signs of improved compliance, vast numbers of dual-use manufacturers and traders are not being similarly engaged on trade control issues.
The broad positive changes in China’s approach are illustrated by a number of developments. It has signed up to international supplier regimes, including the Nuclear Suppliers Group, and voluntarily adheres to the Missile Technology Control Regime guidelines (albeit only the 2002 lists), even though the regime has so far refused to grant China membership. Moreover, China’s domestic export licensing system is said to use the control lists and guidelines of both these regimes as well as the Australia Group, which seeks to control the trade in sensitive chemical and biological materials and technologies. Such involvement goes beyond use of the guidelines and lists, as China also actively participates in the maintenance of both. In this context, China’s active participation in the Nuclear Suppliers Group’s recent fundamental review of its control lists should be looked upon positively.
As a permanent member of the UN Security Council, China has supported a range of relevant UN resolutions on both export controls and sanctions on North Korea and Iran, even actively participating in industry awareness activities in this area. The Chinese government has also undertaken prosecutions of a small number of companies for breaching export controls, publicizing their details and imposing fines.
Given China's membership of the Nuclear Suppliers Group, some observers view decisions in recent years to sell commercial nuclear power reactors to Pakistan under a so-called “grandfather arrangement” as a significant indicator of the country's lack of commitment to nonproliferation principles. But such a view may be oversimplified. First, the reactors would be subject to International Atomic Energy Agency safeguards. Before joining the group, China had already sold several reactors to Pakistan, and the commercial light water reactors involved are at best sub-optimal for use in supporting the country’s weapons program. Moreover, the reactor sale also must be understood in the context of the US-India nuclear deal that many believe was, in part, designed to strengthen America’s relationship with India to counterbalance the rising regional influence of China. Indeed, it was only through intense US diplomacy that the Nuclear Suppliers Group exempted India from its full-scope safeguards requirement, which previously had prohibited sales of the most sensitive nuclear technologies to countries such as India and Pakistan. Because the reactors will be under safeguards, one could therefore view the sale as a way for China to respond to US-led nuclear trade relations with India without directly assisting Pakistan's nuclear weapons program.
The issue is enforcement. While no country can expect every company under its jurisdiction to comply completely with export control laws, the ratio of potentially sensitive exports to prosecutions in China does raise significant concerns. It is not clear how diligently and with what resources China monitors proliferation by Chinese companies and investigates breaches. Concerns are heightened by China’s response to Western requests for interdiction of proliferation-related trade. China is not a member of the Proliferation Security Initiative, an international mechanism for interdicting shipments of materials related to weapons of mass destruction, but Western governments frequently pass intelligence tips to their Chinese counterparts. China is known to have taken action to prevent illicit transactions in some cases, but too often there is insufficient transparency regarding the actions that have, or have not, been taken.
The Karl Li case is a stark example. A 2009 US indictment alleged that Li repeatedly sold prohibited missile-related technology to Iran. According to open sources, his activity was allowed to continue despite US requests for Chinese intervention. There is little evidence that the Chinese government undertook substantial investigative action with any consequence in this case.
China has investigated other potential breaches identified on the basis of Western intelligence tips. But Chinese officials often state that such intelligence-derived information is incomplete, and protest against what are seen as illegitimate and unfair sanctions imposed on Chinese entities for their role in proliferation.
Engaging China on nonproliferation. It is apparent that the scale of the challenge facing Chinese nonproliferation officials is immense and growing. There are purportedly thousands of exporters of dual-use technologies in China, and this number is only going to grow. The Chinese manufacturing base for proliferation-sensitive goods is expanding, as the government has authorized strategic investment in the nuclear, semiconductor, composites, and alloys sectors through multiple five-year plans. Technology from each of these sectors appears in the lists of the international export-control regimes; in fact, the listing of these technologies may be one reason that China is seeking an indigenous capability to produce them.
Despite China’s significant progress to date, Chinese authorities will have to adopt a comprehensive approach to overcome the multiple challenges associated with meeting the country’s nonproliferation obligations. Other states face many of these same challenges, although they are perhaps more acute in China. There are clearly many ways in which Western states and China could learn from each other and better meet nonproliferation objectives. Before they can do so, however, the international community must decide how it will engage China in curbing illicit trade: through including, excluding, or maintaining the nonproliferation status quo?
Sufficient progress has been made in China to warrant pursuit of an inclusive approach to engaging China in implementing nonproliferation controls. Opting for any other strategy will risk missing a great opportunity to assist with capacity building as China’s industry continues to grow.
Practically speaking, this option would entail the Missile Technology Control Regime member states laying out clear expectations as to what China must be required to do to join the regime. The international community should also be prepared to work with, and potentially provide resources to, China to help it implement a national strategy to prevent illicit trade. Such a strategy should cover all aspects of trade-control implementation.
Under this approach, relevant Western governments would continue to develop intelligence exchanges with China on proliferation issues. And the government should expand outreach programs to the private sector, perhaps through the adoption of a formal industry engagement strategy.
The principal objective would be to encourage China to resource its own outreach and enforcement activities in the medium-to-long term, so that China would eventually become a true non-proliferation partner on an equal footing with other states.
What should China do? While China has adopted domestic legislation to comply with its international obligations, both this legislation and its implementation could be improved. The main body of China’s dedicated export-control legislation was put in place in 2002, before the UN Security Council’s adoption of a 2004 resolution requiring countries to implement an “effective” system of export controls. That resolution aside, there are specific export-control improvements China should seek to implement.
Though not consolidated in a single law, China’s export-control legislation appears to provide a solid basis for Chinese officials to act when there is a need to do so. Nonetheless, the Chinese export laws do appear to lack certain controls—particularly, transshipment controls to prevent the passage through China of sensitive goods from other countries to destinations of concern. China should ensure that all necessary elements of an effective control system are included in its export-control legislation. Although there is no specific need for China to place its legislation in a single consolidated export control act, Chinese officials may nonetheless wish to explore this in the medium-to-long term.
The implementation and enforcement of export controls present a significant inter-agency challenge for all countries, requiring foreign ministries, licensing authorities, technologists, enforcement agencies, prosecution bodies and intelligence agencies to collaborate. There is growing evidence that China’s government departments and agencies are working together. Even so, there is also evidence that the inter-agency process in China still suffers from a lack of transparency and coherence. China has become increasingly responsive in recent years to information about proliferation activities, but many suspected proliferators continue to appear to go unpunished. Chinese authorities should make its interdepartmental process more transparent, among other things including providing details to international partners on what action has been taken, if any, in response to intelligence tips. Chinese officials should also consider making a statement on what investigative action was taken against Karl Li. China also needs to ensure that relevant agencies and departments at the provincial level place the same priorities on nonproliferation as does Beijing.
Beyond the challenges of deepening inter-agency cooperation, China clearly lacks the capacity to enforce nonproliferation measures across the country’s growing industries. As the number of businesses in China explodes, Chinese transport nodes are also growing in size and capacity. Beijing, Guangzhou, and Shanghai are all now among the 20 largest airports in the world. Similarly, China hosts six of the eight busiest seaports in the world, and nine out of the top 20. China’s enforcement capacity must grow to reflect the prominence of its transportation nodes in the global economy, and more central government and provincial staff must be assigned to enforce laws and conduct outreach to the private sector.
Finally, China must do more to engage exporters in nonproliferation programs. By allowing government ministries to work with international partners and hold a number of outreach events in recent years, the Chinese government has demonstrated a growing appreciation of the value of engaging export business. Workshops have been well attended, both by state-owned enterprises and by other businesses. But true nonproliferation success requires that all exporters know the risks associated with trading in sensitive goods and technologies.
Chinese authorities at both the central and provincial levels must, therefore, develop an industry-engagement strategy that includes workshops and other mechanisms to raise awareness of export controls across Chinese industry. Chinese authorities should also create a strategy to engage the international academic and research community in implementing trade-control obligations. Though face-to-face training can be effective, new tools, such as e-learning and other web-based resources, may be required to meet the growing scale of the challenge posed by industrial expansion in China.
Clear progress, with remaining challenges. China has made notable strides in its international nonproliferation commitments and domestic efforts to ensure they are met. Significant challenges remain and, given China’s expanding capacity to manufacture sensitive technologies, efforts to engage China on nonproliferation should be coordinated, so that resources can be put to best use at this crucial time.
The international community should respond positively to China’s demonstrated intention to work toward nonproliferation objectives, and international partners should work with Beijing to implement a comprehensive strategy that includes industry engagement. Pursuing an alternative course of action to engagement risks overlooking China’s gradual progress and alienating the Chinese leadership. Not only could this result in China’s commitment waning, but it could also undermine broader nonproliferation efforts around the world.
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