US's $5 billion nuclear gamble with China
By Kaushik Kapisthalam

On the surface, it's the biggest deal in the history of the Export-Import Bank of the United States - US$5 billion to finance the building of Chinese nuclear power plants by US firms in the energy-starved economic giant. But there's much more to it than big business: closer scrutiny and interviews with experts reveal a weak, inconsistent and ultimately dangerous US policy with regard to China and its past (some say present) weapons proliferation, as well as China's own efforts to acquire nuclear reactors and other Western high technology that could be passed on to less-than-responsible states.

In effect, in the interests of big business, the US is turning a blind eye to past proliferation by Chinese entities with which it deals.

China says it's clean - no more proliferation and unauthorized exports of nuclear materials and equipment to states that should not have them. Not everyone is so sure.

America's sometimes serious, sometimes blase non-proliferation policy with respect to China hit a new low when the conservative magazine Human Events revealed that the US Export-Import Bank (Ex-Im Bank), an independent federal agency that finances exports by US firms, approved a preliminary commitment for $5 billion in loans and loan guarantees to the China National Nuclear Corp (CNNC) to finance the building of nuclear power plants by US firms.

The Ex-Im loans and guarantees are part of aggressive efforts by US officials and diplomats, including former energy secretary Spencer Abraham and current Vice President Dick Cheney, to lobby the Chinese government to sign a deal with Monroeville, Pennsylvania-based power giant Westinghouse Electric Co. Westinghouse had previously lobbied hard to obtain clearance for the sale from the US Nuclear Regulatory Commission last September.

Facing skyrocketing demand and significant electricity shortfalls, as well as numerous constraints based on the Kyoto Accord to reduce coal-burning emissions, China has emphasized the importance of new energy projects and declared a plan to invite bids for four more nuclear plants at two sites, Sanmen in Zhejiang province and Ling Ao in Guangdong province, adding to its nine operating reactors with a combined capacity of 6,500 megawatts, which is less than 2% of China's electricity demand today. In addition, Russian firms are building two 1,000MW pressurized water reactors (PWRs, known as VVERs in Russia) in Tianwan, on China's east coast. Chinese officials foresee the need for as many as 32 nuclear power plants by 2020 at an estimated cost of more than $35 billion.

Westinghouse, though considered a front-runner for the new PWR tender, is reportedly facing stiff competition from French major Framatome ANP, Atomic Energy of Canada Ltd (AECL) and the Russian firm AtomStroyExport. Such reactors are usually contracted in pairs and Westinghouse is pitching its state-of-the-art AP1,000 PWRs at $2.2 billion to $2.7 billion a pair. China formally accepted bids on February 28 and should it choose Westinghouse, the American taxpayer would be underwriting the reactor sale through Ex-Im and assuming the risk in case the Chinese buyer defaults.

At face value, this would seem to be just another example of US statecraft used to promote US companies abroad. After all, Westinghouse is unlikely to get too many new contracts to build nuclear power plants in the United States, due to the public ambivalence about and opposition to nuclear energy, and getting deals abroad could result in thousands of new US jobs.

What makes this deal different is the entity at the Chinese end - CNNC. Along with its wholly owned subsidiary, China Nuclear Energy Industry Corp (CNEIC), CNNC is known for numerous nuclear proliferation activities over many years.

Despite this, US sanctions policy for punishing proliferation is weak and contradictory. It does not sanction company B if company A is caught proliferating, even if companies B and A are owned by the same entity. That is why there is a perversely ironic situation in the Ex-Im Bank's funding of CNNC, when officially the US blames the CNEIC for proliferation - even though CNEIC is owned by CNNC.

The real story is more than the mammoth business transaction - it's the proliferation links of the Ex-Im's beneficiary (CNNC) and the series of broken promises and sanctions shell game Beijing has been able to play with Washington.

The Non-Proliferation Treaty (NPT) and other multilateral regimes have one basic premise - if a country sticks to the treaty guidelines concerning non-weaponization, it can partake in the peaceful use of nuclear technology. That's the reward for non-proliferation. For a country like Iran, the NPT commitments are to foreswear permanently the development of nuclear weapons. For China, which is one of the five allowed nuclear-weapons states (along with the United Kingdom, France, Russia and the United States), the bargain means forswearing the spreading of nuclear-weapons technology.

For decades, China had been seeking to gain access to advanced Western nuclear energy technology but was denied the chance by the Nuclear Suppliers Group (NSG) and other cartels precisely because of Beijing's perceived poor nuclear-weapons proliferation record, especially with regard to Iran and Pakistan. For its part, China initially was openly hostile to such cartels and the need for export controls and restraint in sales to troublesome countries. As a result, China was denied access to advanced reactors despite its nuclear-weapons-state status in the NPT.

In the 1990s, however, China had a change of heart. Chinese leaders agreed to formulate Western-style export-control laws to prevent unauthorized weapons-technology sales in return for a US promise of gradual entry of China into these cartels with their promise of access to technology. From the US perspective, this was a case of dangling NSG and other memberships as carrots to induce China to end proliferation, and the US backed China's membership in the Nuclear Suppliers Group.

Some well-placed sources, however, say they believe China probably has made promises not to proliferate, in order to gain entry into the cartels, while trying to evade some of its non-proliferation commitments. China denies this. The fundamental idea is that China is rewarded with Western reactor technology as long as it makes a commitment not to proliferate nuclear weapons technology or authorize any nuclear sale to facilities not under safeguards of the United Nations International Atomic Energy Agency (IAEA). It has made that commitment, though some doubt Beijing's sincerity.

In February 1996, the Washington Times, quoting intelligence sources, reported that the US had evidence that CNNC sold 5,000 ring magnets to the A Q Khan Research Laboratory in Pakistan, named after the putative "father" of Pakistan's nuclear bomb who was pardoned in February 2004 after confessing to nuclear-weapons deals with Iran, Libya and North Korea. Ring magnets are critical parts of high-speed centrifuges used to enrich uranium to weapons grade. After equivocating for a while, the US State Department officially confirmed the report. Chinese vice foreign minister Li Zhaoxing (now foreign minister) did not deny the sale but argued that it was "peaceful nuclear cooperation". Many experts, however, called the sale a clear breach of Article III (2) of the NPT. Since China had formally become a signatory to the NPT by that time, non-proliferation advocates and US lawmakers called for stringent sanctions on China.

However, it soon became clear that tough sanctions were never in the cards. A broad-based sanctions regime would have resulted in the cancellation or blocking of massive deals involving US corporate giants such as Boeing Aircraft Co and Westinghouse (which had pending deals with CNNC at that time). There was intense debate within the administration of US president Bill Clinton. After a few more months of waffling, the State Department finally announced on May 10, 1996, that the US had been unable to "make a determination" that China violated the NPT with this ring-magnet deal. As a result, the Clinton administration declared that it would not seek to impose sanctions on China or Pakistan, and Ex-Im's considerations of loans for US exporters to China were returned to normal.

Ring magnets are old news but the entities that authorized the sale are still powerful. Chinese leaders insisted they were not aware of the magnet transfer and stated that there is no evidence that the Chinese government had "willfully aided or abetted" Pakistan's nuclear-weapons program through the ring-magnet sale. They also touted an apparent "concession" by China when a Chinese Foreign Ministry spokesman made a statement that "China will not provide assistance to unsafeguarded nuclear facilities".

The US Congress passed a law closing the apparent loophole of requiring proof of willful government involvement and also requiring a presidential report on China's transfers of "technology, equipment, or materials important to the production of nuclear weapons and their means of delivery" to Pakistan.

What is new is the expected financing of a Chinese entity, CNNC, owner of CNEIC, which is known to have passed nuclear technology on to states that should not possess it.

China did not wait too long to violate its May 1996 pledge. In October 1996, the Washington Times quoted a report by the US Central Intelligence Agency stating that China sold a "special industrial furnace" and "high-tech diagnostic equipment" to unsafeguarded nuclear facilities in Pakistan. In addition, Chinese technicians in Pakistan reportedly prepared to install the dual-use equipment in September 1996. The firm involved in the deal was the CNEIC. The Washington Post reported that the CNEIC equipment was intended for a nuclear reactor being built by Pakistan at Khushab. The Khushab facility is not under IAEA safeguards, thereby making the Chinese sale a clear violation of May 1996 pledge, US laws and possibly the NPT. It later became known that the Khushab facility was the site of a heavy-water research reactor - a central element of Pakistan's program for production of plutonium and tritium for advanced compact nuclear warheads meant for ballistic missiles.

Still, the State Department did not conclude that China had violated its non-proliferation pledges of 1996 in the case of Pakistan and did not call for sanctions.

The Khushab reactor now provides Pakistan the ability to produce enough plutonium to fabricate as many as three to five bombs every year. CNNC and CNEIC have also been implicated in nuclear weapons-related sales to Iran since then. Not long after the Khushab revelation, Ex-Im approved two loans to help CNNC build nuclear power plants at the Qinshan nuclear facility near Shanghai. US major Bechtel was the primary beneficiary of that deal.

To the defenders of US nuclear trade with China, the potential Westinghouse deal is just a natural step in the Chinese re-engagement with the multilateral nuclear regimes led by Western nations. Some would point to their view that China has moved greatly along the path of non-proliferation, from a policy of open contempt and hostility in the 1970s and 1980s to accession to various treaties and informal agreements in the 1990s and the current decade. The State Department extols what it sees as great advances in China's export-control laws, which are now deemed comparable to Western standards. In fact, the State Department lobbied hard for China's 2004 entry into the NSG, a cartel of nuclear-reactor technology producers. The NSG entry directly led to China being able to buy advanced nuclear reactors from Western nations.

Another popular theory is that many such proliferation deals are not approved by the Chinese government and can be stopped by working with the Chinese government to improve and enforce its export-control laws. China's recent issuing of a White Paper on non-proliferation is cited as progress in this regard. But this theory too fails to stand up to scrutiny. Other than the simple fact that Chinese firms are state-controlled and common sense dictates that major sales cannot happen without approval at the highest levels, there is a preponderance of evidence that there is government approval for proliferation activities.

The US-China Economic and Security Review Commission notes in its 2004 report that Chinese firms involved in proliferation have links to high government and Communist Party officials. Former US secretary of state James A Baker made similar observations in his memoirs - he should know because he was involved in discussions with the Chinese regarding their pattern of broken pledges with regard to nuclear and missile proliferation.

It therefore seems clear that the engagement advocates have based their China policy more on how they hope China will behave than how China actually behaves. It is quite clear that China has joined multilateral regimes to gain prestige and derive benefits like access to advanced nuclear technology, while violating its sovereign commitments and hiding behind plausible deniability. It can be argued that China thwarts challenges to its behavior, knowing that its commercial strength can be used to stymie any moves to punish its proliferation activities.

For its part, the US government, through the outgoing Under Secretary of State John Bolton and others, has argued that Washington has taken tough action on Chinese entities engaging in proliferation, through the imposition of sanctions and other moves. But as non-proliferation expert Gary Milhollin wrote in the New York Times recently, these sanctions are part of a "shell game" wherein the US knows its effects don't sting the Chinese regime as much as it appears.

For instance, after discovering that certain subsidiaries of Sinopec, China's state-owned oil and natural-gas conglomerate, was transferring chemical-weapons-related technology to Iran, the State Department repeatedly slapped sanctions on the subsidiaries. But loopholes in the US laws allow the punishment of individual entities within a corporation while shielding others. In this case, the Sinopec subsidiaries that were sanctioned did little or no business with US firms and the sanctions therefore were meaningless.

Had the US really wanted to send a message to China, it should have hit the parent entity, Sinopec, argued Milhollin. He said further that in 2000, Sinopec raised about $3.5 billion by selling shares on the New York Stock Exchange, with ExxonMobil buying a large stake. In addition, the US firm Halliburton has since provided Sinopec a design for a new chemical plant; Bechtel has helped it build a petrochemical complex in China; and oil giant ConocoPhillips has aided it in oil and gas exploration. In 2002, Sinopec actually received a grant worth $429,000 from the US Trade and Development Agency. Clearly, by employing the logic of the left hand not knowing what the right hand does, US policy in effect winks at blatant Chinese proliferation and indeed seeks to reward violators with huge deals.

At the end of the day, America's current pusillanimous policy on Chinese proliferation has left it in a veritable no-man's land. By in effect placing trade over security, the US is playing into China's hands. For instance, once the US stymied internal objections and pushed through China's entry into the Nuclear Suppliers Group, it handed China a big club and China wasted no time in using it. Until its entry into the NSG, China listened politely to US demands that it needed to provide iron-clad guarantees that any foreign-origin nuclear-reactor technology would not be transferred, before China would be allowed to procure reactors from NSG cartel members.

But as the journal Nuclear Fuel reported in 2004, even before the ink dried on China's NSG entry papers, China blatantly told the US that it "sees no basis'' for committing itself to a deal to buy a US power reactor should the US impose any additional requirements for re-transfer assurances simply because the French and Canadians were offering the same technology to China sans any meddlesome preconditions, thanks to its newly minted NSG-member status. As a consequence, the US and other nuclear powers are now tripping over themselves to offer nuclear reactors to China with generous financial and other incentives.

It must be noted that just before China joined the NSG, it hurriedly signed a deal with Pakistan for building a 300MW unsafeguarded nuclear reactor at Chasma, near Karachi. Such a deal would be a violation had China signed it after its NSG membership became formal. Is it hard to imagine the state-of-the-art Framatome or Westinghouse PWR nuclear technology soon being sold by China to Pakistan or Iran? And should it happen, is it likely that the US would suddenly get the will to lower the boom on Chinese proliferators? US acquiescence to China's proliferation also undercuts Washington's policy on problem states such as Iran and North Korea. How can the US expect to send a tough message to China on nuclear/missile trade with Iran when it ends up financing the parent firms of the same entities that proliferate?

If the US is really concerned about nuclear proliferation, it should take muscular steps to confront China's proliferation, rather than offering rewards in big business deals to build nuclear reactors.

Kaushik Kapisthalam is a freelance defense and strategic affairs analyst based in the United States. He can be reached at contact@kapisthalam.com .

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