New U.S. export controls on China too risky: report

WASHINGTON (Reuters) - A new U.S. government program that makes it easier to sell items with potential military uses to some companies in China should be suspended because it threatens national security, a watchdog group said on Wednesday.

The program increases the risk American goods will be illicitly sold to Syria or Iran or help China improve its armed forces, the Wisconsin Project on Nuclear Arms Control said in a report.

Two of five companies selected in October for the plan have close ties "to China's military industrial complex or to companies that have been punished by the U.S. government for proliferation or other improper export behavior," the report said.

"In view of the failure of the selection process to safeguard U.S. national security, the Commerce Department should suspend the Validated End-User program pending a Government Accountability Office (GAO) investigation," the research group, which opposes the spread of nuclear, chemical and biological weapons, said.

A U.S. Commerce Department official defended the program and said it was part of a broader initiative in June imposing new export controls on about 20 categories of high-tech goods that could be used by China's rapidly expanding military.

Commerce created the scheme, which allows approved companies in China to import certain high-tech goods for civilian uses without obtaining individual export licenses, to address U.S. firms' concerns about being locked out of the fast-growing market.

'MUCH, MUCH FINER SIFT'

"We think in the aggregate this policy...is a much, much finer sift to effectuate the purposes of our broader foreign policy with respect to China," said Mario Mancuso, undersecretary of Commerce for industry and security.

One of the first five approved companies -- Shanghai Hua Hong NEC Electronics Company Ltd. (HHNEC) -- is controlled through a corporate chain by Chinese Electronics Corporation, a Chinese government-owned conglomerate that produces military equipment as well as consumer electronics, the report said.

The State Department punished another CEC subsidiary in 2006 for proliferation "to Iran and/or Syria," it said.

The Commerce program could allow the CEC to import sensitive U.S. goods through HHNEC "and then shift the goods to one of its other subsidiaries that is outfitting the Chinese army, or supplying Iran or Syria," the Wisconsin Project said.

Another approved company -- BHA Aerocomposite Parts Co. Ltd. -- is partly owned by AVIC I, or China Aviation Industry Corp. I, a Chinese government-owned producer of fighters, nuclear-capable bombers and 90 percent of the aviation weapon systems used by the People's Liberation Army, the report said.

One AVIC I subsidiary, CATIC, is under State Department sanctions for proliferation to Iran and Syria, and the U.S. government fined the two other co-owners of BHA -- Boeing Co. and Hexcel Co. -- last year for exporting controlled items to China without authorization, the report said.

A Bush administration panel that included the Departments of State, Defense, Energy and Commerce approved the five companies after a rigorous security investigation, Mancuso said.

All five also are subject to ongoing monitoring, including disclosure of all shipments under the VEU program and an obligation to host on-site visits by U.S. government personnel, he said.

(Editing by Patricia Zengerle)