Export Controls:

Sensitive Machine Tool Exports to China

NSIAD-97-4: Published: Nov 19, 1996. Publicly Released: Nov 21, 1996.

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Louis J. Rodrigues
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Pursuant to a congressional request, GAO reviewed the circumstances surrounding the export of machine tools by the McDonnell Douglas Corporation to the China National Aero-Technology Import and Export Corporation (CATIC), focusing on: (1) the military and civil applications of the equipment and whether these military applications are important to China's military modernization plans; (2) the process for approving the licenses and how the process addressed the risks associated with this export; and (3) whether export control license conditions were violated and, if so, how the U.S. government responded.

GAO found that: (1) the machine tools exported by McDonnell Douglas to China have military and commercial applications; (2) these machine tools had been used in the United States to produce parts for military systems but were exported to manufacture parts for commercial passenger aircraft; (3) China needs machine tools to upgrade both its military and commercial aircraft production capabilities; (4) after a lengthy interagency review, the Department of Commerce approved the license applications with numerous conditions designed to mitigate the risk of diversion; (5) during the review period, concerns were raised about the need for the equipment to support Chinese aircraft production, the reliability of the end user, and the capabilities of the equipment being exported; (6) senior officials at Commerce, the Departments of State, Energy, and Defense, and the Arms Control and Disarmament Agency agreed on the final decision to approve these applications; (7) some of these U.S. exported machine tools were subsequently diverted to a Chinese facility engaged in military production; (8) this diversion was contrary to key conditions in the licenses that required equipment to be used for the Trunkliner program and be stored in one location until the CATIC Machining Center was built; (9) six weeks after the reported diversion, Commerce suspended licenses for four machine tools not yet shipped to China; (10) Commerce subsequently denied McDonnell Douglas's request to allow the diverted machine tools to remain in the unauthorized location for use in civilian production; (11) Commerce approved the transfer of the machine tools to the Shanghai aviation facility, which is responsible for final assembly of Trunkliner aircraft; (12) the diverted equipment was relocated to Shanghai before it could be misused; (13) some of the amended license conditions apply only after the equipment is installed, which has not yet occurred; (14) Commerce's enforcement office did not formally investigate the export control violations until 6 months after they were first reported; and (15) the U.S. Customs Service and Commerce's enforcement office are now conducting a criminal investigation under the direction of the Department of Justice.

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