U.S. Department of State, Science and Technology Cooperation, Dec. 2006

The full report is available at the link below. Here is an excerpt from the Executive Summary.

Executive Summary

The Agreement on Cooperation in Science and Technology is the oldest Agreement between the United States and the People’s Republic of China. Scientific and technological (S&T) exchanges began in the early 1970s with informal academic exchanges among American and Chinese scientists. This informal relationship provided the impetus for what would become an expansion of S&T- related academic exchanges, government-to-government collaboration, and an acceleration of growth in China’s economy.

President Nixon’s visit to China in 1972 marked a turning point in U.S. - Sino relations. Both countries pledged to work toward the full normalization of diplomatic relations with the signing of the Shanghai Communiqué at the conclusion of his visit. By the end of 1972, 100 American scientists and scholars traveled to China and the first group of Chinese scientist arrived in the United States. This exchange led to an expansion of cooperative agreements. On January 1, 1979, the United States and China established normalized diplomatic relations. On January 31, 1979, Presidents Deng Xiaoping and Jimmy Carter signed the first formal cooperative Agreement between the Government’s of the People’s Republic of China and the United States of America on Cooperation in Science and Technology (S&T). This Agreement is among the longest standing U.S. – China accords and provides a framework for promoting bilateral S&T exchanges. These exchanges have fostered cooperative research in a diverse range of fields such as the environment, fisheries, earth and atmospheric sciences, basic research in physics and chemistry, agriculture, civil industrial technology, geology, health, disaster research, and energy-related areas. The S&T Agreement has withstood the test of political turmoil and has provided a stabilizing influence on U.S. – Sino relations.

The establishment of diplomatic relations and signing of the S&T Agreement coincided with China’s economic development strategy. As China began to move away from industrial development, economic reforms began to occur across a wide spectrum of areas such as science and technology. China began to implement dozens of policies to stimulate the development of S&T. These policies include increased manufacturing and home grown innovation, exports, foreign investment, and S&T reform of high-tech enterprises. The most prominent programs include the 863 Program, the Spark Program, the Torch Program, the 973 Program, and most recent, the implementation of the 11th Five-Year Plan and China’s most recent Guidelines on National Medium to Long Term Program for S&T Development, which envisages China to become a major player in innovation by 2020. According to China’s State Council, research and development spending is expected to rise above 2.5% of its GDP. Science and technology advances accounts for more than 60% of China’s economic growth, and its dependence on foreign technologies will fall to under 30% of its economic growth by 2020.

Consistent with findings in 2004, the Department of State finds no direct evidence that the S&T Agreement has contributed to the development of China’s military capabilities. While a recent Pentagon report indicates that “Chinese military acquisitions by the People’s Liberation Army (PLA) is generating military capabilities beyond a Taiwan scenario,” State has found no direct evidence that cooperative exchanges and activities under the S&T Agreement has contributed to the transfer of technology and development of China’s military. State’s analysis has also found no area in which China’s acquisition of militarily-useful technologies or information can be attributed with any degree of certainty to cooperative S&T activities under the Agreement.

There is however no denying that China seeks to improve its military capabilities through civilian channels. However, with stringent controls on U.S. exports, the vast majority of military technologies acquired by China are acquired from other sources. For example, 90% of China’s semiconductor market is reliant on foreign imports. China maintains agreements for military, commercial, industrial, and S&T cooperation with many countries. Comparatively, transfers of technology to China are highest among European countries, Japan, and Russia than from transfers from the United States. With Europe’s lack of security concerns over China as a potential threat, Europe has now become an attractive market for China to acquire new advanced technologies such as the sale of semiconductor manufacturing equipment. Likewise, Japan’s need to develop close economic ties to China for the sake of its own economic and regional security also creates an attractive acquisition market. Russia has also become an attractive market for the Chinese to procure aircrafts and defense related technologies.

When China became a member of the WTO in 2001, China committed to eliminating technology transfer requirements and offsets as a condition for investment approval or importation. The terms and conditions of any transfer of technology must be agreed upon between the parties to a contract and not imposed by the government. Companies are permitted to negotiate these terms without interference from the Government of China. China also committed to providing better intellectual property protection for technology that is transferred and eliminate requirements mandating that the Chinese partner in a joint venture gains ownership of trade secrets. Prior to China’s WTO accession, technology transfer requirements were as high as 100%. While many firms remained hesitant to comply with this requirement, others found the financial profits more attractive and were often willing to comply with the technology transfer requirement. However, in spite of China’s WTO commitments, it is common among state-owned enterprises and local governments to use industrial policies to encourage tax incentives and technology transfers in exchange for investment. Another example of an industrial policy imposed to encourage domestic goods over foreign goods is China’s adoption of its Government Procurement Law which became effective on January 1, 2003. At present, China is not a member of the WTO Agreement on Government Procurement (GPA); however, this law attempts to follow the spirit of the GPA and incorporates provisions from the United Nations Model Law on Government Procurement of Goods. China’s Government Procurement Law also directs central and sub central governments to give priority to local goods and services. Many companies complain that, these policies discourage imports on government purchases of foreign goods and promote domestically manufactured products to strengthen China’s innovation and broaden its role in the global economy.

China has used foreign direct investment (FDI) to spur economic and technological development. The largest volume of technology transfers to China comes from the FDI of international firms seeking to gain market access as compared to S&T exchanges operating under the U.S. – China umbrella S&T Agreement. China’s open door policy has caused foreign firms to race to gain a presence in China. According to a report by the U.S. Department of Commerce, the majority of transfers on technology occur through private sector foreign direct investments. The Organization of Economic Cooperation and Development reports, China is one of the world’s most favored destinations for FDI and receives more foreign direct investment than any other developing nation. China was the largest recipient of FDI inflows in 2004, not only among all countries in the regions but among developing countries. Worldwide, China was the second largest destination for FDI after the U.S.5 In 2004, China had a cumulative total of $563.8 billion in FDI. The U.S. remains the second largest foreign investor in China after Hong Kong. By year end 2004, the stock of total U.S. investment in China totaled US$15.4 billion on a historical cost basis, much of which was invested in manufacturing enterprises. Foreign investors in high-tech industries face Chinese government pressure to transfer technology, both through incentives, such as rebates and lower tariff rates, and explicit requirements not imposed on domestic competitors, including local content provisions, production export quotas, and/or collaboration in production, research, or training. Multinational companies are encouraged to invest in research and development activities in China and often agree to signing investment agreements that systematically include some form of technology transfer. A common practice in China is the use of “offset deals” in which firms provide industrial and commercial benefits to foreign governments as inducements or conditions in order to do business. These may involve the establishment of a laboratory, center or institute intended for joint research and development in key industries such as ICT, telecommunications, electronics, chemicals, and other areas. “Offset deals” can be described as de facto coercion by Chinese officials to transfer technology as a price of admission to the Chinese market.

While U.S. export control laws are designed to ensure that direct exports from the United States and re-exports of U.S. origin items from third countries are consistent with U.S. national security and foreign policy interests, and U.S. persons are not involved in any activity related to the proliferation of chemical, biological, or nuclear weapons, State has not pinpointed any specific instances of transfers of dual-use technologies to China under the S&T Agreement. Additionally, no direct link has been found between U.S. Government agencies engaged in S&T activities and the PLA. However, given the complex nature of China’s close cooperation with commercial enterprises, military, research and development institutes, civil-military linkages cannot be entirely ruled out.

In light of other sources and avenues open to China to acquire dual-use technologies and scientific information, it is State’s belief that, if indeed any technologies of military utility were transferred to China in the context of S&T cooperation under the Agreement –the impact on the enhancement of China’s military capabilities would have been minimal and of little significance in the larger context of PRC efforts to strengthen its military.

Both the U.S. and China have immensely benefited from the bilateral S&T relationship. The Agreement has promoted scientific, economic, and social progress which has produced mutually beneficial outcomes. Because of the shortfall of American students enrolled in graduate and higher education programs, the U.S. research establishment – academia, industry, and public research institutions relies on educated and scientific engineering students from overseas. China among other countries is a leading source for providing students, scholars, researchers, and skilled technicians with strong science and engineering backgrounds. These students work in U.S. laboratories in both the academic and private sectors and help to make vital contributions to U.S. research efforts in the scientific community. While these students and researchers represent a powerful tool that the PRC can exploit to gather information on virtually every sector of the U.S. science and technology development, they also form an important avenue for the U.S. to exert influence on the PRC and advance social change in China.

Benefits to the U.S. also include: sharing of satellite, meteorological, climate, and seismic data; enhanced nuclear power plant safety in China; access to fusion experiments and data; new fossil fuel technologies; precise subatomic particle measurements in energy regimes unavailable in the U.S.; advances in regional water management; aquaculture, the successful conversion of Chinese industry away from ozone-layer destroying Chlorofluorocarbons (CFCs) which are nontoxic, nonflammable chemicals containing atoms of carbon, chlorine, and fluorine used in aerosol sprays, and other agents to more environmentally-friendly substitutes; computer software development; promotion of the U.S. system of measurements and standards; improved climate data forecasts testing and development of U.S. environmental monitoring technologies and agricultural market analysis. Certainly, cooperative activities under the agreement have also provided some economic benefit to China, in ways such as helping to develop China’s minerals, mining and petroleum industries, increasing agricultural production, enhancing energy efficiency, reducing pollution and improving public health (which equates to increased economic performance).

S&T cooperation with China has also provided enormous economic benefits and paved the way for unprecedented commercial opportunities across a wide spectrum of industries. Exports are a direct result of “commercialization,” which is the process of turning basic research into technologies that are then brought to market. Scientific research and information technology has made the world smaller through connecting people, nations, ideas, and innovation. Private firms have globalized research and development and technological innovation. During the 1990’s, multinational corporations dispersed manufacturing, research, and development around the world. Information technology has made it possible to locate all aspects of the R&D process throughout the world, and U.S. companies’ use of licensing agreements, R&D alliances, and foreign subsidies has expanded. The Internet has made scientific information and technical data available around the world at little or no cost. China now leads the way in Asian and ranks seventh in the world for high-tech exports, which make up 21% of manufactured exports. According to Chinese export statistics these exports fall in to the following categories: computers and telecommunications, life sciences, electronics, weaponry, computer-integrated manufacturing, aeronautics and space, opto-electronic technology, nuclear technology, biotechnology, and material design. In 2005, China became the U.S. third largest trading partner behind Canada and Mexico and fastest growing export market in the world for U.S. exports. U.S. export goods totaled $US 41.8 billion, up 20 percent from 2004. China is now importing more high-tech goods such as chips from other Asian countries rather than from the EU and the U.S. OECD figures show that trade between China and other Asian countries grew last year, while ICT exports to China and Asia from the European Union and the U.S. declined.

In response to the Congressional request, this submission thus has three components: State’s unclassified report; a compendium of unclassified attachments as submitted by the agencies; and a summary of the classified assessment by the Intelligence Community. This unclassified report is based on State’s consultation with and information submitted by all relevant technical agencies identified as having conducted bilateral S&T cooperation with China during 2004-2005. The report will also provide an assessment of how the Agreement has influenced China’s policies toward cooperation with the U.S.; the involvement of Chinese specialist in nuclear weapons, intelligence, and military affairs in the activities under the Joint Commission; an examination of the extent to which activities conducted under the Agreement has enhanced China’s military and defense industrial base; recommendations for improving monitoring activities of the Commission; and an accounting and estimated cost to the U.S. to administer the Agreement. The legislative mandate for this report recommends the scope to include those activities conducted under the auspices of the 1979 S&T Agreement; however, State determined that it would be reasonable and useful to report on all cooperative activities with China which were 1) conducted or funded by a U.S. government agency other than the Department of Defense; 2) scientific or technological in nature; and 3) done bilaterally-cooperation through multilateral institutions is not included. These materials were submitted to the Intelligence Community for independent analysis, and their findings will be submitted as a classified annex to this report.