LEVEL 1 - 1 OF 29 STORIES Copyright 1989 The Center for Strategic and International Studies and the Massachusetts Institute of Technology The Washington Quarterly 1989 Winter SECTION: RESEARCH SURVEY; Vol. 13, No. 1; Pg. 217 LENGTH: 9733 words HEADLINE: Technology Management as an Alliance Issue: A Review of the Literature BYLINE: - Sherry Rice is an analyst at the Center for Strategic and International Studies. Sherry C. Rice HIGHLIGHT: Each issue of The Washington Quarterly concludes with a survey of the state of knowledge in a specific field of policy concern where research is struggling to keep up with a changing world. This issue explores the literature on the international management of high technology in an era of dramatic East-West and West-West change, addressing the need for some form of continued control adjusted to new realities. BODY: A SUBJECT OF EPISODIC concern and sometimes fractious debate among Western policymakers has been how much and what kind of technology to export from the developed economies of the industrialized West to the less technologically sophisticated Communist world. After a period of relative quiescence following the heated Western dispute of the early 1980s about technology for the Siberian pipeline project, the issue is reemerging. The technology transfer issue is being revisited today, however, in a substantially altered international environment. Dramatic changes in the Soviet Union have sharpened questions about Soviet interests in Western technology, about Western interests in Soviet, perestroika, and about the place of East-West trade in overall East-West relations. The Atlantic alliance is coping with a serious defense resources crunch as defense budgets now fail even to keep up with inflation. Western Europe is profoundly distracted by its efforts to build a truly unified common market by 1992. The United States is struggling with its own declining economic hegemony vis-a-vis the industrialized world in the increasingly globalized economy and the concerns this stimulates about sharing technology with allies who are emerging as tougher trade competitors. Throughout the alliance, the public support that has given the West Peace for 40 years is being assaulted by the master salesman in Moscow. How to share and protect the advanced technology that is central to modern weapon systems and to NATO's defense in the light of these changed circumstances will be a central debate within the alliance during the early 1990s. This survey of the current literature reflects the recently heightened debate over technology management as a potential threat to the future of the Atlantic alliance. After a thorough review of the extensive body of literature that exists as well as several ongoing research projects, a number of issues emerged as being at the center of the dispute and as central to alliance concerns. The analysis that follows distills the key debates and state of thinking about four problems: (1) differing interpretations of reform in the Soviet Union and how they alter the national security rationale for technology protection, (2) the United States' declining hegemony in a rapidly changing international economy, making many of the current U.S. restrictions impractical, (3) the continuing sharp disagreements between the Department of Defense and the Department of Commerce that stymie armament cooperation proposals, and (4) the sharing of military technologies among the CoCom states. On these subjects the Reagan administration divided itself into bellicose feuding departments and serious worry currently infects the Commission of the European Community. Furthermore, there is disagreement over not just policy options but over the facts themselves. Sorting out the literature and ongoing research is a step toward more coherent and effective policy in the United States and elsewhere in the years ahead. Such coherence has not always been present. Continuing battles within the U.S. bureaucracy are manifested in an inconsistent U.S. policy toward CoCom. The United States must protect its competitiveness in the international economy. However, its policymakers must understand that disputes over technology management stand in the way of the cooperative arms development projects on which alliance security rests. The United States must find a balance between these economic and security interests in a new technology transfer policy. Without such a policy, both economic and security interests could be jeopardized. The Emergence of the Current Control Regime If history is any guide, the burgeoning debate over technology transfer is unlikely to be resolved to everyone's satisfaction. In the years since World War II, the United States has emphasized technology exploitation over sheer manpower in its military forces and in order to preserve its technological edge has sought to keep Western military technology out of the hands of the Soviet Union and Warsaw Pact countries. In 1949, the United States established the Coordinating Commission of Multilateral Export Controls (CoCom), whose members include Japan and all NATO members except Iceland, to limit the amount of military technology acquired by nonallied nations. CoCom continues to be the primary organization for controlling allied technology exports to Communist nations. By the mid-1970s, the civilian sector had begun to gain primacy over the military sector in generating new technology with military applications, especially in computers. Such dual-use technology (this term refers to technology with both commercial and military applications) changed the way the West needed to think about preserving its technological edge. Computers, for example, were developed primarily by private corporations, were not considered military hardware per se, and therefore were not covered originally by CoCom regulations. Establishing the criteria for militarily-sensitive technologies became increasingly difficult and friction developed as the civilian sector chafed under export controls imposed in the interest of national security. Moreover, new technology developed by corporations, often multinationals, posed the difficult, practical problem of restricting technology that was not under any one government's jurisdiction. There is no doubt that such technology needed some form of protection -- dual-use technology was sought aggressively be legitimate and other means by the Soviet Union and its allies. In 1976 a Department of Defense task force issued a landmark report on the problem. Entitled An Analysis of Export Control Technology and nick-named the Bucy Report after its chairman J. Fred Bucy of Texas Instruments, the report encapsulated the findings and recommendations of the Defense Science Board Task Force on the Export of U.S. Technology. It recommended a reorientation of U.S. efforts away from the protection of defense hardware to the denial to Communist countries of manufacturing techniques. The Export Administration Act of 1979 drew heavily on the findings of the Bucy Report in attempting to cope with the problem of dual-use technology. The act restricted not only technology that might strengthen Soviet military power; it also restricted technology that might strengthen the entire Soviet industrial base and energy infrastructure. The Reagan administration took an extremely firm line on limiting Soviet access to militarily-significant technology and the policy that developed under the leadership of then assistant secretary of defense Richard Perle, and Stephen Bryen, deputy under secretary of defense for technology security, was well known for its restrictiveness and combativeness vis-a-vis less watchful allies of the United States and anti-control advocates in the U.S. Department of Commerce (DOC). The legacy of this mixed historical record is an export control system with multiple components that often confuse and sometimes conflict with one another. Lists of critical technologies have been created by various parts of the U.S. government and other entities. There are several: a CoCom list which is agreed upon by all CoCom partners; a much broader Commodity Control List (CCL) maintained by the U.S. Department of Commerce for dual-use technologies and that the United States would like its CoCom allies to adopt; the Militarily Critical Technologies List (MCTL) maintained by the U.S. Department of Defense (DOD); and the Munitions Control List that is administered by the U.S. Department of State. The MCTL and the State Department lists contain weapons and weapon systems exclusively so they are not in dispute. The other lists are the subject of heated debate. The DOD usually recommends adding (and certainly not reducing) the CCL while the rest of CoCom would prefer to see it shortened. Generally, the allies balk at U.S. recommendations to lengthen what they consider an already too long CoCom list of controlled technologies. How Have the Soviets Changed the Debate? The interpretation given to Soviet reforms, their durability, and the extent to which the Soviet Union remains a threat to Western security, bears directly on how much effort should be expended in guarding Western technology from the Soviet bloc. The Department of Defense, in its annual report, Soviet Military Power: An Assessment of the Threat, states its view that perestroika and glasnost have not yet led to significant changes in the structure or capabilities of Soviet military forces, and concludes that continued stringent technology protection is crucial in protecting Western security interests. The 1988 report predicts continuing Soviet relentlessness in developing technology to try to catch up or maintain superiority in various military areas. The report urges the United States to concentrate on continuing to develop new technology in order to maintain its edge. Although DOD does not speak from the U.S. government as a whole, this report reflects the somewhat skeptical views of two conservative U.S. administrations. Stephen Bryen leads the thinking of many conservative Americans on this subject. In a lecture sponsored by the Heritage Foundation, Bryen cautioned that the Europeans are being overly-optimistic in acting on the basis of Soviet rhetoric instead of awaiting systemic changes. Consequently, he condemns as premature the newly increased loans and joint ventures between Europe and the USSR. The State Department's current senior representative for strategic technology policy, Allan Wendt, is quoted in a Wall Street Journal article saying ". . . pressure to relax trade restrictions is widespread among European allies," and expressing his concern that many Europeans will proceed incautiously in an effort to help Gorbachev. Not surprisingly, European perceptions differ from those of the United States. Manfred Von Nordheim of Messerschmitt-Boelkow-Blohm charges in Selling the Rope to Hang Capitalism? (Perry and Pfaltzgraff, eds.) that some in the United States under estimate the concern of West Europeans to protect technology, especially technology with developed military uses. Nordheim emphasizes the essentiality of an allied consensus, arguing that even if controls are looser than the United States would like, multilateral agreement is preferable to unilateralism by the United States. Perestroika and new thinking have not, evidently, diminished the appetite of the Soviet for Western technology nor altered their willingness to conduct a massive effort to obtain such technology surreptitiously. While the body of literature on this topic is too large to review here, there is a consensus on the efficacy of the enormous organized effort that the Soviets continue to make. Carol Rae Hansen, acting as rapporteur for a series of roundtables at the John Hopkins School of Advanced International Studies, concludes the "When foreign policy controls are applied by the United States, they are almost universally undercut by Soviet bloc approaches to U.S. allies. The Soviets eventually get what they want, even if they have to approach several different sources in a number of countries." Selling the Rope to Hang Capitalism? contains several essays addressing the efficacy of Soviet acquisitions and technology assimilation. Perry and Pfaltzgraff review the effectiveness of Soviet illegal acquisition efforts and survey current likely acquisition priorities, concluding that U.S. and CoCom controls should target specifically those technologies being sought actively by the Soviet Union. Jan Sejna draws upon his experience as former chief to staff to the Czech minister of defense to argue that the West underestimates the size and effectiveness of Soviet intelligence efforts in technology acquisition. Arguing that acquisition by illegal means will remain a top priority as long as Communist economies fail to encourage technology development and exploitation, Sejna echoes the recommendations of Perry and Pflatzgraff that the West should attempt to determine what is on the Soviets' wish list (for example, robotics) and then try to protect those specific technologies. Given these continuing Soviet efforts, many authors contend that stringent technology protection remains essential. "The assimilation of Western technology is so broad that the United States and other Western nations are thus subsidizing the Soviet military buildup," according to Soviet Acquisition of Militarily Significant Western Technology: An Update. Stephen Bryen (Heritage Lecture), noting estimates that approximately 50 percent of Soviet technical progress in the military sector can be attributed to acquisitions both legal and illegal from the West, concludes that CoCom must not liberalize its technology export policy. This will compel the Soviets to make a choice between either civilian economic reform or a continued military build up. Many of these analyses have emphasized the value of targeting lists of technologies defined by the Soviets themselves as significant ("wish lists") and hence the target of acquisition programs, technologies that by implication should be protected buy those who possess them. This policy approach is embodied in the most recent (1986) report to Congress by the DOD's Defense Technology Security Administration (DTSA). As the DOD agency with primary responsibility for technology controls, it is curious that DTSA has not published a subsequent report. In a recent variation of the wish list approach, the Central Intelligence Agency (CIA) has developed and proposes the implementation of a new system called Starbase. The system relies on the intelligence community's ability to identify and forecast future Soviet military systems and works backward to determine individual parts and ocmponents that make up the system, thereby identifying the technology that the West should protect. The unclassified brochures from the CIA's Technology Transfer Intelligence Committee (TTIC) describing Starbase are careful to point out that Starbase will aid technology export control decisions, not replace current control lists. Critics of the system point to the uncertainties of intelligence not only in predicting future Soviet military goals but in forecasting how the Soviets would build a system. This could result in export control recommendations for a wide variety of technologies, thus expanding, rather than contracting, the current list. Furthermore, serious alliance disputes could arise if the United States demands that CoCom members simply trust classified information that the United States will not reveal. Although illegal Soviet technology acquisitions are well documented, some critics contest the wisdom of efforts to control the wisdom of efforts to control militarily-relevant technologies on the basis of what the Soviet Union actually does with such technologies (particularly civilian or dual-use technologies with undeveloped military uses) once it has them. In general, these authors tend to conclude that CoCom and the United States safely can shorten their lists of controlled technology because systemic difficulties make the Soviets unable to assimilate much of the technology they are acquiring or seeking to acquire, a problem as yet unchanged by perestroika. Balancing the National Interest concludes that ". . . for most types of dual use technology the Soviet Union is approximately 5 to 10 years behind the West and does not appear to be closing the gap. The situation is different for military technology." Talbot Lindstrom, deputy under secretary of defense for international programs and technology in the office of the under secretary of defense for research and engineering, concluded in a speech to an International Public Policy Foundation conference that the Soviets do not have the indigenous technological capability to keep up with the West. Still, their complex system for acquiring Western technology is extremely effective, and results, especially in the military sector, are quite visible. Writing in Selling the Rope to Hang Capitalism?, Marshall Goldman, professor of economics at Wellesley College and associate director of the Russian Research Center at Harvard, argues that the Soviets do not and cannot assimilate Western high technology. Goldman concedes that the Soviets make better use of stolen military technology than they do of purchased civilian technology, but, he says, it is the lack of spare parts, inadequate maintainance, and other factors that limit the utility of such stolen technology. In a study by the Institute for East-West Security Studies (Larrabee, ed. Technology Change and East-West Relations), Michael Kaiser describes a number of factors causing the technology gap between East and West to widen rather than close. Among them are the isolation of research and development from production facilities, lack of incentives for innovation in technological R&D, emphasis on quantity over quality in production, and the disincentives of a nonmarket price system. John Hardt, associate director of the Congressional Research Service, argues (in Perry and Pfaltzgraff, eds.) that the Soviets' ". . . overcentralized, innovation-unfriendly system and their inability to utilize available Western technology effectively have been major stumbling blocks in attaining a scientific and technological revolution." Jack Vorona, former assistant deputy director for scientific and technical intelligence at the Defense Intelligence Agency, disagrees with those who feel that the Soviets are not able to make good use of Western technology. Vorona cites (in Perry and Pfaltzgraff, eds.) numerous pieces of military hardware (for example, T-64, T-72, and T-80 tnaks and advanced firecontrol radar for new fighter aircraft) that capitalize on Western technology. Economic arguments sometimes are used by those opposed to protecting technology from the Soviets. Two Finnish scholars, Pekka Tarjanne and Mauri Elovainio, writing in the Institute for East-West Security Studies volume cited above, argue that technology can integrate Eastern Europe and the Soviet Union into the world economy and that it constitutes a driving force in global economic growth. A contrary view was offered recently by Phillip Merrill, a member of the Defense Policy Board, who reminded the audience at the CSIS conference on "The New East-West Communications Framework" that the size of the market in the Eastern bloc is still very small. A miniscule market combined with the lack of hard currency makes any economic benefits from sharing Western technology with the Soviet bloc extremely dubious. Political and ideological arguments sometimes also are used in favor of broadened technology cooperation between East and West. Simmons, Wiatr, and Seitz (see Larrabee, ed.) hold that technological exchanges would bring the kind of information and communication resources to the Soviet Union that would provide Soviet bloc citizens with the means to compare their own government with Western democracies, thus increasing pressures for democratization in the USSR. In the view of William Root (Bertsch, ed.), CoCom also could foster Soviet dependency on the West through technology transfer. Henrik Bischof, a West German scholar at the Friedrich Ebert Stiftung, promotes a common European belief (Opportunities for Technological Cooperation Between East and West) that a developed Europe with East-West interdependencies is a stable one. Referring to the Final Act of the 1975 Helsinki Conference,he argues that further cooperation in science and technology is desirable for the security of Europe. Bischof, believing that the Soviet Union and its allies possess technology from which the West could benefit, proposed a joint technology program with the Soviet bloc in a 1988 lecture to the Science and Technology Committee of the North Atlantic Assembly. A further argument for changing the current efforts to restrict the flow of Western technology to the East is that these efforts are ineffective and too costly to enforce. Eugene Skolnikoff, a professor at the Massachusetts Institute of Technology, and Andrzej Karkoszka, a senior research fellow at the Polish Institute for International Affairs (see Larrabee, ed.), both make this point to argue that export controls should be abandoned. Nothing that the Soviet defense industry is not dependent on Western technology and that the increasingly dual-use nature of technology makes civilian versus military distinctions obsolete, Karkoszka and Skolnikoff feel that the costs in terms of East-West conflict and potential intra-West conflicts are too expensive for such dubious returns. In sum, recent changes in the Soviet Union and Easter Europe have only exacerbated the long-standing debate about the degree to which the West should continue to protect its technology. One school of thought clings to the philosophy of stringent control, arguing that technology transfer has had damaging military consequences and that any easing of control would make it easier for the Soviets to turn away from the path of reform. A contrary school of thought believes that fewer controls are desirable, either because the system of control is too costly or is irrelevant because of systemic difficulties in the assimilation of technology by the Soviet Union, or because more advanced technology in the Soviet economy might contribute to desired changes in the Soviet Union such as democratization and perestroika. In general, the literature suggests a U.S. consensus urging caution and continued technology control in contrast to our CoCom partners who generally are more optimistic about the durability of change in the Soviet Union and its implications for Western security and who advocate relatively prompt relaxation -- although not necessarily complete removal -- of technology controls. Commercial and Trade Considerations In recent years, the United States' declining hegemony in the international economy has made many U.S. technology export restrictions impractical because the United States no longer enjoys sufficient leverage to enforce them. Further, maintaining effective export controls without undermining U.S. or European business interests has become an increasingly important aspect of the policy debate over export controls and a major point of transatlantic dispute. Research by the National Academy of Sciences, published in 1987 as Balancing the National Interest but commonly referred to as the Allen Report after the study's chairman, General Lew Allen, USA (ret.), is the most recent major study of the connection between commercial concerns and international technology transfer issues. Most of the other recent research available on this theme shares the general conclusions of the National Academy of Sciences. The Allen report argues that technology export controls in the early 1980s went too far in restricting technology exports, concluding that U.S. economic interests were adversely affected and, more importantly, costly and unnecessary transatlantic conflict arose. The report estimates that in 1985 the costs to the U.S. economy of export controls were $ 9.3 billion in annual sales, primarily to friendly, Western countries, and some 188,000 jobs. Arguing that strong economic relations among the allies are more important than protecting technology from the Soviet bloc, the report recommends that U.S. competitiveness, economic health, and allied goodwill be given primacy over military secrets except in the rarest of circumstances. Much of the current literature tries to place the export control mechanisms of the 1979 EAA in the context of the emerging global marketplace of the 1990s. Two factors stand out as particularly relevant -- the spread of high technology around the world and the relative decline of U.S. dominance over that marketplace at the same time that foreign trade has become a more important part of the U.S. economy. The distribution of high technology around the world has occurred rapidly. The growing importance of R&D from foreign sources and the need to produce in economies of scale has sharpened the issue of the competitiveness of U.S. firms in high technology sectors, not only in international markets but in the U.S. domestic market as well. Many multinational corporations (MNCs) are developing agreements to share high technology with host countries and among their subsidiaries. For example, some of the newly industrializing countries (such as Korea, Taiwan, Brazil, and India) are requiring MNCs located in their country to train local employees in order to develop indigenous expertise. One implication of these changes is the U.S. dominance in high-technology is ebbing. Non-CoCom nations, particularly the newly industrializing countries of Asia, have joined Europe as producers of increasingly sophisticated technology. Personal computers, previously manufactured only by the United States and some CoCom partners, are now available from seven non-CoCom countries -- Korea, India, Singapore, Malaysia, Taiwan, China, and Brazil. Many believe Japan to be as sophisticated as the United States in terms of its ability to generate and apply advanced technology. Secretary of Commerce Robert Mosbacher has cited (speech, 5/89) two indicators of declining U.S. leadership in technology -- the deficit in high technology trade run by the United States beginning in 1986 and the fact that nearly 50 percent of U.S. patents were owned by foreign inventors in 1987. A report of the Technology Policy Task Force commissioned by the U.S. House of Representatives Committee on Science, Space, and Technology, Technology Policy and its Effect on the National Economy, points ot some of the same problems, arguing that technology transfer barriers have inhibited U.S. access to foreign technology. Further, the proliferation of advanced technology around the world points to a problem in which further research is needed to find methods for involving the newly industrializing countries in the control of militarily-significant technology to common opponents. As a 1988 National Academy of Sciences study (Global Trends in Computer Technology) points out, the potential risk to the United States in the computer industry is that too-tight export controls could restrict U.S. access to technologies available elsewhere and diminish U.S. commercial competitiveness. The United States remains in a position of technological preeminence in the world, albeit a much-reduced one. Efforts by the United States to protect those high technology items produced or patented in the United States have created their own set of problems internationally. The United States seeks to control the reexport of technology sold in foreign markets which sometimes means applying extra-territorial regulations to non-American companies. This is, not surprisingly, a major source of antagonism between the United States and its CoCom partners. CoCom partners view U.S. reexportation policy as subjecting foreign distributers and users to U.S. controls. In 1986, Europeans were so enraged as to ask the European Community Commission to consider seeking a European Court of Justice ruling on whether U.S. reexport regulations violate the Treaty of Rome by infringing upon national sovereignty (for a discussion of this, see Merrill in Keeping Pace). Where the United States does not hold a monopoly and cannot obtain Western consensus, its efforts to control technology export may prove counterproductive and damaging to U.S. interests. In a 1987 speech in London, William F. Dwyer cites the example of the Siberian pipeline episode that, rather than punishing the Soviets, caused Caterpillar Tractor Co. to lay off 2,000 workers in the United States while the Soviets located alternative suppliers. A general relaxation of reexport controls by the United States is discussed by Merrill in Keeping Pace and in the Allen Report. The arguments in favor of such a relaxation include the belief that they have become more irritating than beneficial for the allies; that compliance is low, especially among foreign-owned firms based in CoCom countries; and that the United States has practically no chance of convincing CoCom members to institute as restrictive as its own measures. Merrill argues that if a country is lax in enforcing CoCom rules, it probably will not be any more assiduous in applying U.S. reexport requirements. Recent decades also have seen a growing U.S. dependency on foreign trade. The increasing importance of trade to domestic prosperity causes the U.S. economy to be more sensitive to trade policy than in the past. The Allen Report conducted a survey of U.S. business that found ". . . the relative stringency of U.S. controls is, with increasing frequency, causing Free World customers to turn to non-U.S. suppliers or to begin to explore alternate sources including internal development." In a speech at a recent Brookings Institution conference, Honeywell International President Michael Bonsignore discussed how export restrictions damage U.S. business interests, citing as an example the decision of the European builders of the Airbus A320 project not to use avionics supplied by Honeywell because of U.S. threats of extraterritorial actions to control some of the technology involved. Some writers argue that export controls do not seriously interfere with the internationalcompetitive position of the United States because of the small size of the requests that are denied and the relative insignificance of Soviet bloc markets due to their lack of foreign currency. This point of view, however, fails to take into account the significant Western markets lost to U.S. firms that also result from export license denials. As cited in an article by Karl Willenbrock, former Congressman Don Bonker (D-Wash.) asserts that restrictions on high technology exports cost the U.S. economy more than $ 8 billion annually in lost sales, undercut the competitiveness of U.S. companies, and cause needless friction with our allies that actually endanger U.S. security interests. Europeans such as Von Nordheim (Selling the Rope) assert that the United States does not fully appreciate Europe's greater reliance on foreign trade or the impact of history in shaping European attitudes favoring trade and cooperation with the East. Several essays in the Bertsch volume explore this difference in perspective between Europeans and Americans and predict increasing discord between the two unless the United States learns to better accommodate European trade interests by lifting some existing technology restrictions and not insisting upon new controls. Conversely, the DOD believes that overall U.S. interests are damaged more by Soviet military capabilities than by the loss of U.S. business opportunities (see DOD, The Technology Security Program). They also point tot he economic costs of having to develop new strategic technology to replace critical items that the Soviets acquire from the West. For Example, millions of dollars had been spent to develop the submarine-quieting technology that was sold to the Soviets in the Toshiba/Kongsberg case. The Omnibus Trade Act of 1988 acted on many of the recommendations of the Allen report to promote commercial interests. The Act: (1) substantially reduces licensing requirements for exports to U.S. allies and friendly countries; (2) relaxes controls on the reexport of controlled U.S. commodities from one third country to another when U.S. content is less than 25 percent; (3) strengthens procedures for determining whether a controlled technology is or is not available from another foreign country, potentially leading to its decontrol or delicensing (foreign availability); (4) clarifies that the basis of the DOD's review is limited to national defense controls; and (5) establishes sanctions against foreign companies whose CoCom violations seriously erode the strategic balance of forces (this was a reaction to the Toshiba/Kongsberg case). The bill also authorizes procurement and import bans against future violators. Valuable guides explaining the Act and its technology transfer implications have been developed by both an Aspen Institute policy seminar and the international division of the U.S. Chamber of Commerce. Harald Malmgren, an adjunct professor at Georgetown University and director of the Trade Policy Research Centre in London, writing in Keeping Pace, discusses a growing tendency toward economic nationalism, based on traditional conceptions of how to use trade policy to improve competitiveness: boosting exports,limiting imports, and artificially enhancing home-based production and jobs. The consequence is that mutually conflicting policies are being generated among the Western nations that threaten to fragment their economic and political interests. Looking to 1992, an economically united Europe will only complicate the problems of competitiveness and technology transfer. The Europe 1992 issue has several implications for technology transfer issues: (1) Japanese and Americans want to be assured of continued access to European markets; (2) technology control barriers must be eliminated within Europe while at the same time strengthening the wall of protection between Western Europe and the East; and (3) a unified Europe will enjoy greater bargaining power over the United States -- this means U.S. negotiators will have to work toward consensus decisions and may have to settle for more compromises than they have in the past. This is a particularly salient point since CoCom is based on a gentlemen's agreement rather than a formal treaty and compliance with CoCom decisions is voluntary. It is interesting to note that no literature exists on the type of framework needed to control technology within the common European market after 1992. Hence, declining U.S. economic hegemony, in part stemming from the international proliferation of technology and decreased U.S. dominance over it, greater U.S. reliance on foreign trade, continuing U.S. reexport restrictions that apply to foreign companies, concerns in the United States over competitiveness and the trade deficit, and disparate views between the United States and Europe over how big a part economics play in NATO security are all combining to increase the potential for conflict between the United States and its CoCom partners over the appropriate management of technology. Defense vs. Commerce: Foreign Availability To this point, this essay has tended to generalize the views of the U.S. government on technology transfer issues and to downplay the inevitable divisions within the government about policy. This approach cannot be sustained, however, when assessing the ways in which existing technology controls change as new circumstances prevail. In particular, the profound division between the Departments of Defense and Commerce over technology export controls, and the question of their continued utility when the item controlled is readily available from non-U.S. producers in other markets has recently reemerged in a sharpened public clash. This is a sad but classic case of government division and policy paralysis that spills over into CoCom disagreements caused by inconsistent U.S. policy. The DOC generally takes the position that growing U.S. trade deficits, and underlying competitiveness concerns,offer as big a challenge to national security as does Mikhail Gorbachev's Soviet Union. Commerce, therefore, has recommended liberalizing technology export controls in order to promote trade. This brief survey cannot address adequately the body of literature that discusses how to rectify this DOD-DOC conflict through legislative reform and governmental reorganization. However, the recent public confrontation over foreign availability issues and the decontrol of an advanced class of microcomputers (so called AT-compatible) illustrates the principles in dispute. The decontrol of technology that is also available in foreign markets has been required since 1977 under the terms of the Export Administration Act. However, the process for determining foreign availability has been criticized widely. In February 1988, the U.S. General Accounting Office conducted a study of ways to improve the process, published as Export Controls: Commerce's Assessment of the Foreign Availability of Controlled Items Can Be More Effective, and cited three basic weaknesses in the department's assessment procedures: they are too time-consuming, they do not specify the kind of information that will satisfy criteria for determining foreign availability, and too little information is shared with DOD. The 1988 Omnibus Trade Act (Sec. 2418) addresses these criticisms by setting a five month time limit for reviews, providing a list of types of information acceptable as evidence of foreign availability, and requiring that Commerce share information (however, no specific procedures are laid out for sharing data). These new procedures were put to the test in July 1989, when Secretary of Commerce Robert Mosbacher approved the decontrol and export of AT-compatible microcomputers to the Soviet Union. Secretary of Defense Richard Cheney strenuously objected to the computer sale on the grounds that the Soviets previously did not have access to the same quality and quantity of computers. A report of the Center for Security Policy entitled A Formula for Disaster: Computers for the Soviet Military condemns Mosbacher's actions with a detailed, though inadequate, critique. Secretary Mosbacher currently is using foreign availability as the sole criterion for eliminating technology from the control lists. In order to satisfy the condition of foreign availability, DOC's Office of Foreign Availability (OFA) conducts a review of four criteria: (1) non-U.S.-origin: are there manufacturers of the product outside the United States who are not using U.S.-licensed technology? (2) comparable quality: is there uncontrolled technology that can perform the same function as the controlled technology? (3) sufficient quantity: does the Soviet bloc have access to so much of the technology that selling U.S.-made technology to them will not provide an advantage in procurement? (4) available in fact: will alternate producers of the technology actually sell it to the Soviet Union or do they have their own export controls that would restrict such a sale? Based on these factors, OFA makes a recommendation to the Secretary of Commerce who then decides whether or not to decontrol the technology. The decision to decontrol personal computers was made on the basis of a classified foreign availability study (an unclassified version, U.S. Department of Commerce, Foreign Availability Assessment: AT-Compatible Microcomputers, is available to the public) consisting of institutional analysis by the DOC, information gained from inspection trips to various nations for a study of comparative technology available, and reports from the private sector on alternate availability. The conclusion was that 19 countries could produce the personal computers in question. Furthermore, OFA determined that the computers are available "in fact" and in sufficient quantity from at least seven non-CoCom nations. Mosbacher blamed DOD objections on ". . . our little bureaucracy at work" (Washington Post, 7/20/89, p. A10). The recent FSX fighter aircraft deal with Japan, however, represents a fascinating role reversal for a DOD usually committed to military utility as the key criterion and a DOC usually committed to foreign availability as the key criterion. The DOC opposed the FSX deal because it felt the deal would harm the ability of the U.S. aerospace industry to compete if Japan were to obtain the latest technological innovations. The DOD favored the deal to enhance Western military capabilities. Although the FSX case admittedly dealt with protecting technology from U.S. allies while the decontrol of computers was an issue of West versus East, this new protectionist stance by the DOC may signal a new era in promoting U.S. competitiveness by sheltering U.S. technological leads rather than in encouraging open international trade. Furthermore, the DOC's apparent opposition to armaments cooperation is sure to touch off a new round of bureaucratic fighting. The U.S. General Accounting Office recently has issued a report, entitled Export Controls: Extent of DOD Influence on Licensing Decisions, recommending that the Departments of Defense, Commerce, and Energy work together to clarify conditions for approving export licenses. The National Academy of Sciences has proposed additional criteria for shaping decisions to decontrol critical technologies, including low pricing and ready availability of substitutes, in the study Computer Technology cited earlier. The bureaucratic in-fighting in the United States manifests itself in a wavering and inconsistent U.S. policy toward its CoCom partners and NATO allies. At a time when the future of the alliance depends on cooperative efforts, it is imperative that the U.S. resolve its internal difficulties in order to be able to act effectively on resolving technology transfer disputes. Military Technology-Sharing Within CoCom Armaments cooperation has emerged as a major theme of the alliance debate of the late 1980s and early 1990s. In this era of declining defense budgets, current NATO attempts to bolster its conventional forces depend upon cooperative R&D and production efforts among the allies. Only joint projects will allow the modernization and new weapons development necessary to maintain NATO's military strength. Any such joint project requires sharing technology, however. Some authors balk, for security reasons, at sharing technology even with our allies. Others would rather maintain U.S. dominance over certain technology for competitive reasons. Thus, alliance conflict over technology transfer issues threatens cooperative armament development projects upon which alliance security depends. The importance of a technology management strategy for NATO is the central theme of Michael Moodie's book, The Dreadful Fury. Such a strategy should have two objectives: (1) the rapid application of new technology within both the military and the civilian sectors, and (2) minimizing technology as a source of political friction among the allies. He recommends the expansion of programs such as the Balanced Technology Initiative and the Competitive Strategies project. Moodie observes that both the United States and its European allies have indicated their willingness to share technology in such efforts. Effective technology management not only improves deterrence and defense, but also promotes cohesion among allies. Former NATO ambassador David Abshire, in his book Preventing World War III: A Realistic Grand Strategy, discusses how economic, political, and defense considerations must be pulled together to form a grand strategy to preserve the peace enjoyed under the current alliance system. Abshire devotes several chapters to discussing the benefits that would derive from an alliance resources strategy and technology strategy (for example, how cooperative R&D contribute to equivalent military effectiveness across the alliance). He asserts that the United States must be careful not to overprotect its technology because that, in turn, slows the rate at which it can be incorporated into operational battlefield systems. A 1989 study that the Senate Armed Services Committee commissioned from the Office of Technology Assessment, entitled Holding the Edge, outlines issues that Congress will need to address in order to provide for a continuing strong U.S. technology base and explains how relying solely on U.S. defense manufacturers will result in a backward, noncompetitive defense industry. The study urges policymakers to give increased attention to coordinating trade policy with security issues. Other advantages to sharing MCTL technology within CoCom include progress toward the perennial alliance objectives of interoperability and standardization. The disadvantages, however, include a loss of business for some U.S. arms producers,with a corresponding strengthening of their European counterparts (Louscher and Salomone), loss of American jobs, the sacrifice of even a minimum level of production capabilities in some areas (Schneider), and the possibility that U.S. allies will not be as stringent as the United States in protecting technology from the Soviet bloc. Another point of allied contention is rooted in European perceptions that the United States and Japan are pulling ahead of Western Europe in their development and implementation of new technology. Richard Role discusses what he sees as a widening technology gap, arguing that increasing military-technology asymmetry between Western Europe and the United States provides the latter with the option of not defending Europe. The technology gap is also explored in Andrew Pierre's edited volume, A High Technology Gap? Europe, American and Japan. The essays collectively acknowledge the gap and conclude that while it is ultimately the responsibility of Europeans to remedy the situation, restrictive U.S. policies for the export of the most advanced technology on national security grounds have grated on allies as have past attempts to cancel contracts with European subsidiaries and partners over policy differences on the export of technology to non-NATO countries and the Soviet bloc. A unified Europe, with many pan-European technology projects already in place, such as the European Research Coordination Agency (Eureka), the European Strategic Program for R&D in Information Technology (ESPRIT), Basic Research in Industrial Technologies for Europe (BRITE), and the European Cooperative Long-Term Initiative for Defense (EUCLID), will allow more efficient and cost-effective R&D efforts. The United States always will be more security-oriented in comparison to the economic-trade emphasis found in Japan and Europe, according to Henry Nau (see Bertsch, ed.). By harmonizing effective controls and enforcements vis-a-vis the East, and liberalizing licensing within the West, CoCom could achieve a balance to offset the inherent security-vs-trade alliance conflict. The debate sharpens as Europeans accuse Americans of economic protectionism while policymakers in DOD content that the controls are, in fact, for the sole purpose of keeping technology out of Soviet hands, thus protecting the U.S. national interest. Richard Perle ("Technology Security, National Security, and U.S. Competitiveness,") argues that Europeans' noncompetitiveness problems are rooted in European institutional arrangements and policy decisions. He does not believe that CoCom squabbles over technology transfer policy are serious enough to harm alliance relations and thus damage U.S. security interests. However, the recent U.S. controversy over cooperation with Japan on the FSX illustrates the type of problems we may face soon in Europe, while violations like the Toshiba/Kongsberg case illustrate the damage that can result from an ineffective technology export control system. Numerous books and articles offer case studies of CoCom violations and the consequences of protected technology getting into Soviet hands. The primary issue in the debate is how enforcement should be encouraged in the future and what type of sanctions should be levied on violators. The Toshiba/Kongsberg case naturally captured a great deal of attention, inducing a chapter in Moodie's The Dreadful Fury that concludes that "higher fences around fewer goods" and increased NATO cooperation could solve the problem of enforcing existing CoCom regulations. William Triplett, in a Policy Review article, raises the question of whether violators should be made to compensate financially other CoCom partners for their failure to enforce export control laws. U.S. policymakers seem to have reached the conclusion that tougher penalties are called for, given the severity of sanctions provided in the 1988 trade bill. Thus, in the critical area of NATO armaments cooperation, there are several interrelated conflicts over technology transfer. There are defense experts who see value in sharing technology with our allies to strengthen the alliance militarily, pitted against those who feel that, because our CoCom partners are lax in protecting Western technology, the United States must guard its military technology secrets -- even from its allies. Then there are DOC advocates who generally want to promote technology exports to enhance trade -- except when sharing technology serves to strengthen competitors to U.S. industry. Outside the United States, NATO allies are upset by lost opportunities for a strengthened allied defense, what they see as a lack of political will and cooperation, and by U.S. protectionism. Conclusion Research on the difficult questions of which high technology goods and when to export to the Soviet bloc reflects the significant forces currently reshaping policy. The rise of Mikhail Gorbachev, the decline of Western defense budgets, the prospect of an integrated European market, and basic changes in the international political economy have cast serious doubt on the assumption that the technology export management concepts and institutions of the postwar era can or should survive into the 1990s. On balance, however, the research reflects a growing dissensus among students of the subject and, in too many instances, an absence of agreement about the facts to say nothing of their policy implications. On the security side of the debate, the literature disagrees over how reforms in the Soviet Union and Eastern Europe should affect technology export controls; whether systemic difficulties in a Soviet-style, controlled economy make technology protection a moot point; whether broadening East-West trade could alleviate Western security concerns; and, whether Western technology export controls should rely on intelligence sources to pinpoint Soviet technological needs. On the economic side of the equation, the literature discusses how the global diffusion of technology, declining U.S. hegemony over technology and trade, and U.S. competitiveness concerns are manifesting themselves in alliance disputes on control over and access to technology. Unfortunately, the literature has yet to address how to cope with these alliance issues within the framework of Europe 1992, although the National Academy of Sciences has begun the study mandated by the 1988 Omnibus Trade Bill that will examine this important topic. Results will not be available until 1991. Incoherent policies and unpredictable decisions entail costs that cannot be borne lightly. As the nations of the West argue about management of their high technology, they face an urgent need to improve cooperation in the development and production of modern weapons systems. Because any cooperative arms development effort would involve sharing the latest technological innovations, alliance disputes over technology management carry the potential to block arms cooperation and thus threaten force improvements crucial to NATO. The author would like to thank Mike Moodie and Sam Taylor for their invaluable help in preparing this survey. References Abshire, David. Preventing World War III: A Realistic Grand Strategy, New York: Harper & Row, 1988. The Aspen Institute. Economic Dynamism and Export Controls: International Technology Transfer in a Knowledge-Intensive World. Aspen, Colo.: The Aspen Institute, 1988. Bertsch, Gary, ed. Controlling East-West Trade and Technology Transfer: Power, Politics, and Policies. Durham, N.C.: The Center for East-West Trade Policy, University of Georgia/Duke University Press, 1988. Bischof, Henrik. Opportunities for Technological Cooperation between East and West. (in German) Bonn: Friedrich Ebert Stiftung, 1987. Bischof, Henrik. "The Status of Science and Technology in the East-West Context." Lecture given to the Scientific/Technological Committee of the North Atlantic Assembly Hamburg, November 1988. Bonsignore, Michael R. "U.S. Export Control Policy: Balancing National Security Concerns and Global Competitiveness." Lecture at the Brookings Institution, Washington, D.C., June 1988. Bryen, Stephen. "U.S.-Soviet Technology Transfers in the Post-Glasnost Era." Lecture at the Heritage Foundation, Washington, D.C., October 1988. Center for Strategic and International Studies. "The New East-West Communications Framework: The London Information Forum and Beyond." Symposium of the International Communications Program, CSIS, Washington D.C., June 1989. Central Intelligence Agency. Starbase information packet from the Technology Transfer Intelligence Committee. Washington, D.C.: CIA, 1989. the Center for Security Policy. "A Formula for Disaster: Computers for the Soviet Military." A working paper. The Center for Security Policy, July 1989. Dwyer, William F. "Controlling the Export of Sensitive Materials from the United States." Speech at the Second Financial Times Defence Conference: Entering the American Market; London, January 1987. Greenberger, Robert S. "U.S. Aide Says Allies Too Eager to Relax Limits on Technology Sales to East Bloc." Wall Street Journal, October 27, 1988. Hansen, Carol Rae. U.S.-Soviet Trade Policy. FPI Policy Brief, Washington, D.C.: SAIS, 1988. International Public Policy Foundation. Technology, World Competition and National Security. Conference proceedings, Washington, D.C., April 1984. Larrabee, F. Stephen, ed. Technology and Change in East-West Relations. Boulder, Colo.: Westview Press/Institute for east-West Security Studies, 1988. Louscher, David J. And Michael D. Salomone. Technology Transfer and U.S. Security Assistance: The Impact of Licensed Production. Westview Special Studies in National Security and Defense Policy. Boulder, Colo.: Westview Press, 1987. Moodie, Michael. The Dreadful Fury: Advanced Military Technology and the Atlantic Alliance. CSIS Washington Papers Series, no. 136. New York: Praeger, 1989. Mosbacher, Robert. "America's Economic Security." Sppech at the Economic Club of Detroit, Detroit, Michigan, May 1989. National Academy of Sciences. Balancing the National Interest: U.S. National Security Export Controls and Global Economic Competition. Washington, D.C.: National Academy Press, 1987. (Commonly referred to as the Allen Report.) National Academy of Sciences. Global Trends in Computer Technology and Their Impact on Export Control. Washington, D.C.: National Academy Press, 1988. Perle, Richard N. "Technology Security, National Security, and U.S. Competitiveness." Technology Security (October 30, 1986). Perry, Charles M. and Robert L. Pfaltzgraff, Jr., eds. Selling the Rope to Hang Capitalism? The Debate on East-West Trade & Technology Transfer. A joint publication of the International Security Studies Program, The Fletcher School of Law and Diplomacy, Tufts University, and the Institute for Foreign Policy Analysis, Inc. Cambridge, Mass./Washington, D.C.: Pergamon-Brassey's, 1987. Pierre, Andrew, ed. A High Technology Gap? Europe, American and Japan. New York: Council on Foreign Relations, 1987. Rode, Richard. "High-Tech: A Janus Face." Bulletin of Peace Proposals. 17:2(1986): pp. 185-194. Soviet Acquisition of Militarily Significant Western Technology: An Update. Washington, D.C., 1985. Triplett, William C. "Crimes Against the Alliance." Policy Review no. 44 (Spring 1988): pp. 8-13. U.S. Chamber of Commerce, International Division. The Omnibus Trade and Competitiveness Act of 1988: A Straightforward Guide to Its Impact on U.S. and Foreign Business. Washington, D.C.: U.S. Chamber of Commerce, 1988. U.S. Congress. House. Armed Services Committee, Subcommittee on Investigations. "U.S. Japan FS-X Codevelopment Program." Statement of Frank C. Conahan, assistant comptroller general, National Security and International Relations Division, General Accounting Office, May 16, 1989. U.S. Congress. Office of Technology Assessment. Holding the Edge: Maintaining the Defense Technology Base. OTA-ISC-420. Washington, D.C.: GPO, 1989. U.S. Department of Commerce, Bureau of Export Administration, Office of Foreign Availability. Foreign Availability Assessment: AT-Compatible Microcomputers (U). Washington, D.C.: U.S. Department of Commerce, 1988. U.S. Department of Defense, Officer of the Director of Defense for Research and Advanced Engineering. An Analysis of Export Control of U.S. Technology -- A DOD Perspective. Washington, D.C.: GPO, 1976. (Commonly referred to as the Bucy Report.) U.S. Department of Defense. The Technology Security Program: A Report to the 99th Congress, Second Session. Washington, D.C.: GPO, 1986. U.S. Department of Defense, Secretary of Defense. Soviet Military Power: An Assessment of the Threat. Washington, D.C.: GPO, 1988. U.S. General Accounting Office. Export Controls: Commerce's Assessment of the Foreign Availability of Controlled Items Can Be More Effective. Washington, D.C.: GPO, 1988. U.S. General Accounting Office. Export Controls: Extent of DOD Influence on Licensing Decisions. Washington, D.C.: GPO, 1989. Willenbrock, F. Karl. "Information Controls and Technological Progress." Issues in Science and Technology 3:1 (Fall 1986): pp. 88-905. Yochelson, John, ed. Keeping Pace: U.S. Policies and Global Economic Change. Cambridge, Mass.: Ballinger Publishing Co., 1988. GRAPHIC: Picture, no caption ============= LEVEL 1 - 1 OF 3 STORIES Copyright 1982 The Center for Strategic and International Studies and the Massachusetts Institute of Technology The Washington Quarterly 1982, Autumn SECTION: THE ENERGY DEBATE; Vol. 5, No. 4; Pg. 52 LENGTH: 4847 words HEADLINE: U.S. Controls and the Soviet Pipeline BYLINE: Jonathan B. Stein - Jonathan B. Stein is research associate for the CSIS Program on Energy and National Security. He would like to thank James Hayes for his research assistance. HIGHLIGHT: The president's decision to reverse the U.S. position at the Versailles summit and try to prevent the construction of the Soviet pipeline can only widen the rift between the United States and its allies without forcing an effective end to the project. BODY: When the "Big Seven" economic partners met at Versailles in early June of this year, one issue clearly dominated the crowded agenda. The extension of soft government-guaranteed credits to the Soviet Union and her allies was a practice the Regan administration found increasingly troubling, particularly in connection with the Siberian natural gas pipeline to Western Europe. In order to bridge the growing gap in allied perceptions concerning the benefits and costs of East-West trade, an implicit bargain was struck: The U.S. delegation at Versailles would not press the allies on the Siberian pipeline, if they would agree to proceed with caution and exercise "commercial prudence" in future extension to the Soviet bloc. Yet barely two weeks later President Reagan reversed the Versailles bargain with a decision calculated to delay or halt the construction of the controversial gas pipeline. On June 18, the president announced the extension of his ban on U.S. participation in the pipeline project; on December 29 of last year, export licenses for several U.S. firms (most notably General Electric, Caterpillar, and International Harvester) had been denied in retaliation for assumed Soviet complicity in the Polish martial law decision of December 13. The transfer of U.S.-licensed turbine component technology to the Soviet Union, developed by General Electric ( GE) but produced by its European manufacturing associates, is now prohibited under this latest round of sanctions. The new ban extends beyond General Electric, however; the transfer to the Soviet Union of U.S.-licensed oil and gas technology and foreign-made products is likewise now prohibited under new Commerce Department regulations. Apart from the very real legal questions raised, the Reagan administration must graple with the political fallout resulting from the growing European perception that economic warfare has been declared on the North Atlantic Treaty Organization (NATO) allies, and antidumping steel tariffs and high U.S. interest rates reinforce this impression. Why has the president risked a major alliance rupture over the pipeline issue? Will the new sanctions, referred to as extraterritorial foreign policy controls, prove an effective tool in delaying or stopping the project? Finally, what are the likely alliance implications of an implacable U.S. commitment to extraterritorial controls -- however ineffective? THE SIBERIAN EXPORT PIPELINE A brief description of the pipeline project provides the necessary backdrop to U.S. policy initiatives aimed at obstructing the pipeline's progress. The project was first proposed in 1978 following the collapse of the Iranian-Soviet-West-European (IGAT II) proposal, in which Iranian natural gas would supply the southern districts of the Soviet Union and additional Soviet natural gas would flow into Western Europe under a trilateral financing arrangement. The Siberian-West European pipeline was not actively opposed by the Carter administration despite muted skepticism scattered throughout the national security community. As orginally planned, a 5,000-kilometer natural gas pipeline would join the Yamburg natural gas deposit north of the Arctic Circle with the Urengoi gas complex 150 miles to the south and thence continue southwest to the Soviet-Czech border at Uzhgorod. From Uzhgorod, gas would be pumped through Czechoslovakia to transfer stations at the West German-Czech and Austrian-Czech frontiers. Approximately 40 billion cubic meters (bcm) of gas per year were scheduled for delivery to as many as 10 West European countries, including Finland; eventually as much as 70 bcm could be delivered to markets in Western Europe. The Yamburg deposit on the Taz Peninsula (located across from the Yamal Peninsula, whose name became associated with the proposed pipeline) contains several trillion cubic meters (tcm) of estimated gas reserves but lacks the basic infrastructure, ranging from schools and houses and roads to electricity, drilling equipment, and processing facilities. In mid-1981 the Soviet Gas Ministry and Gosplan (the State Planning Commission) determined that the Yamburg development would not be ready until the late 1980s. Their focus then shifted south to Urengoi, the world's largest operating gas complex, possessing between 6 and 7 tcm of Soviet proven reserves -- about 20 percent of Soviet gas reserves and 7% of world proven gas reserves. Prior to the first set of Poland-related U.S. sanctions, seven member states (five belonging to NATO) of the Organization for Economic Cooperation and Development (OECD) had tentatively agreed to accept an additional 38.5-40.5 bcm of annual Soviet gas imports, raising Western Europe's total reliance on Soviet gas from approximately 25 bcm/year today to about 65 bcm/year by 1990. For several major allies -- West Germany, France, and Italy -- dependence on Soviet gas as a percentage of total gas consumption would range between 25 and 35 percent, with certain German regional dependencies reaching as high as 90 percent. n1 The construction arrangement is a compensation package involving Western private and government-guaranteed extensions of credit to several Soviet trading firms, who in turn will use the loans to purchase the necessary pipeline equipment. Upon the pipeline's completion (schedule for late 1984), the Soviets will begin to amortize their dept (at 7.75 percent interest) through deliveries of natural gas to individual European gas utilities, which will pay a 1984 price of $4.75 per million British thermal units (BTU) (in West Germany) and $4.65 per million BTU (in France). n2 Cost estimates vary widely, ranging from a low of $5-$10 billion to as much as $25 billion; confusion about final costs (especially those estimates over $25 billion) has arisen for a variety of factors, not the least of which being the inclusion (by many Western analysts) of the costs incurred in building all six gas pipelines scheduled for completion during the Soviets' 11th five-year plan (1981-1985). Following debt amortization, capacity exports (i.e., 40 bcm/year) to Western Europe should net Moscow at least $8-$10 billion/year in hard currencies for the life of the contracts -- 25 years. As of July 1, 1982, only four governments have signed and ratified gas supply agreements. West Germany will receive 10.5 bcm/year; Frances, 8 bcm/year; Austria, 1.5 bcm/year with an option to purchase an additional 1 bcm/year; and Switzerland, 0.36 bcm/year. After the Italian government announced a "pause for reflection" following the Polish martial law decision, delivery of 8 bcm/year to Italy is now uncertain. Without Italian, Dutch, and Belgian participation, the scale of the project and therefore the foreign exchange earnings will be cut in half. The relationship between the U.S. sanctions and the progress of the pipeline's construction stems from the nature of allied technology transfer and the implicit technological division of labor (with certain sectors) in the OECD. Rather than develop competing turbine and related component technologies for gas pipeline compressor stations, corporate decisions were made years ago in the relevant European industries to instead rely upon General electric's rotors, nozzles, and stator blades licensed by the U.S. Department of Commerce. The affected European companies are not subsidiaries of General Electric; they are manufacturing associates and as such are one step further removed from U.S. extraterritorial jurisdiction. GE's manufacturing associates -- A.E.G. Kanis, a subsidiary of the West German electrical firm A.E.G.-Telefunken; John Brown & Company of Scotland; and Nuovo Pignone (a division of the Italian state energy company) -- thus signed contracts with the Soviet Union for delivery of 125 compressor turbines, to be utilized in the 41 compressor stations along the export line to Western Europe. U.S. SANCTIONS The sanctions imposed by President Reagan after martial law was declared in Poland included comprehensive foreign policy controls, and extension of general export controls, and national security controls, which previously existed in U.S. oil and gas equipment sales to the Soviet Union covering the refining, distribution, drilling, and exploration sectors. Proprietary technology transfers in the previously mentioned sectors (and the processing sector as well) wee disallowed under existing national security controls. n3 U.S. energy technology trade with the Soviet Union has always been minimal. While the "U.S. is the sole or preferred supplier in a number of areas, including integrated computer systems and software, submersible pumps, blow-out preventers and tertiary recovery techniques," Moscow has decided to buy elsewhere when feasible because of the U.S. penchant to politicize Soviet-American trade. n4 The first round of U.S. sanctions issued last December denied General Electric the export license necessary to deliver the turbine's rotor sets to its European manufacturing associates, depriving GE of $175 million worth of signed contracts. Although some components were exported prior to December 29, 1981, the Reagan ban forbade the delivery of the bulk of the GE rotor sets. Those sets previously delivered were then in dispute, with some administration officials contending that these too might be subject to U.S. sanctions. GE's manufacturing associates cannot assemble the turbine without the rotor sets; without the turbines the compressor stations cannot push the gas through the pipeline. Alternative European suppliers could be found, but doing so would necessiate design changes. In addition, use of alternative suppliers would be a violation of the January 11, 1982, North Atlantic Council declaration pledging especially not to undercut one another's sanctions against Poland and the Soviet Union. Only one European firm can quickly replace the GE components for use in the Soviet pipeline: state-owned Alsthom-Atlantique of France. Alsthom is currently participating in the project and has only one factory producing turbine components (again, with U.S.-licensed GE technology). The plant is now operating at full capacity and orders are backlogged for several years; with the French government's support, however, Alsthom could gear up an additional production line, which could produce the entire GE turbine, but it would then be in violation of their contract with GE. Alsthom's long-term relationship with GE is therefore in jeopardy. President Francois Mitterrand's decision to support Alsthom could create enormous trade friction between the United States and France while simultaneously fostering a direct challenge to GE's share of the turbine component market worldwide. President Reagan's June 18 decision extends the scope of the December 1981 sanctions through the application of extraterritorial controls to GE's manufacturing associates. The president will consider France in violation of U.S. law should Alsthom-Atlantique or other suppliers utilize GE's technology in the assembly of the turbines. The Reagan administration based both sanctions decisions on the state of affairs in Poland. The lack of visible progress towards an end to martial law offered the president a pretext to extend the initial sanctions, but it is clear that growing presidential frustration with the pipeline deal weighted heavily in the White House's post-Versailles review of East-West relations. The administration fears European dependence on Soviet gas imports, which will range from 15-35% of total of gas consumption for the major participants. Industrial centers in West Germany, France, and Italy will use more Soviet gas, as will the residential and commercial sectors; the flexibility required to switch quickly away from gas in an emergency is severely lacking in the residential and commercial sectors. Gas storage facilities for industrial and utility use are very expensive and difficult to maintain, and there is a fear that industries and utilities will only stockpile a marginal excess of natural gas beyond primary stockfill needs (i.e., the levels necessary to maintain pipeline flow, and so on). Furthermore, those governments (principally the West German and French) that have forced industries to increase the number of interruptible contracts as a security measure would leave many industries severely exposed in a gas curtailment should substitutable oil supplies of the requisite product mix be unavailable in an emergency, or available only at exorbitant prices, reflecting the value of oil in a gas crisis. Most importantly, the administration is concerned over the hard-currency stream flowing into Moscow's coffers, which would obviate the need for the U.S.S.R. to divert resources from the military sector to the hard-currency-earning energy sector (now accounting for roughly 70% of annual Soviet hard-currency revenue). There is also growing concern over the asymmetrical leverage Moscow would gain vis-a-vis Western Europe's political and defense policies. The impetus not to oppose Soviet political initiatives in times of tension or crisis is bolstered by an industrial-financial lobby holding an active stake in East-West trade and detente, however imbalanced or unreciprocal. The Reagan argument maintains that the prospects for a reciprocal detente and realistic arms control would be diminished. Antipipeline officials argue that hard-currency earnings allow Moscow to avoid serious economic reform and internal reallocation of resources, which in effect provide an indirect subsidy for the continuation of inefficient nondefense production methods. The political leadership can therefore maintain its preoccupation with military spending. In a period of tight financial constraints, as the 1980s promise to be, helping Moscow with her energy and economic development could well prove counterproductive if one proceeds from a framework of comprehensive security analysis. THE FEASIBILITY OF CONTROLS The president thus was convinced that the pipeline must be stopped or sufficiently delayed so that our allies would rethink their participation. However, allied reaction to the administration's new policy was uniformly hostile. West Germany, France, and the European Economic Community (EEC) are seriously considering taking the extraterritorial controls decision to the International court of Justice. Japan -- now prevented from acquiring U.S. oil- and gas-drilling technology for use in the Soviet-Japanese Sakhalin Island project -- threatened to file a formal protest, a move that never materialized but nonetheless indicated extreme Japanese displeasure. All affected parties pledged renewed support to the pipeline's completion. The affected parties have recourse to several options. The U.S.S.R. may decide to seek alternative rotor suppliers, such as Rolls Royce of Great Britain, Brown, Boveri of West Germany, or Sulzer of Switzerland. Rolls Royce would be the logical candidate because of its current production of turbines and related equipment. Utilization of the Rolls Royce RB-211 aircraft turbine would provide greater efficiency than would the GE turbine but would require more maintenance and attention -- a serious problem for Soviet technicians in northwest Siberia. n5 Additionally, use of the British turbine would eliminate AEG-Kanis of West Germany from participation. Given active U.S. support for Great Britain during the British-Argentine war in the Falklands Islands -- at great cost to U.S. diplomacy in Latin America -- Parliament's willingness to invoke the Protection of Trading Interests Act will undoubtedly anger many in the Reagan administration who counted on Prime Minister Margaret Thatcher for support in Europe. The Thatcher government was the first ally to undertake domestic measures aimed at forcing nationally chartered companies of U.S. subsidiaries not to comply with the new U.S. sanctions. Moscow's second option consists of encouraging West European companies to violate the controls and develop their own gas turbine technology independently of the U.S.-licensed design or perhaps through a joint Soviet-European venture. Initial capacity -- especially with the reduced gas import commitments currently in hand -- can be scaled down enough so that existing pipelines or offtake branches can be utilized in the mid-1980s while European companies manufacture independently designed gas turbines for use later in the decade. As mentioned earlier, Alsthom-Atlantique manufacturers the entire turbine and could meet the Soviet timetable (late 1984) without too much delay. The French government has declared its willingness to confront the Reagan administration by publicly insisting that all French contracts for 1982 must be honored.Whether the Mitterrand cabinet will move one step further by granting Alsthom additional subsidies to begin a new production line will largely depend on how the U.S. Department of Commerce enforces the French export control violations. Finally, the Soviet government has recently declared its intention to produce the entire compressor station (including the 25-MW gas turbines) on Soviet soil independent of Western Assistance. n6 Prototype 16-MW and 25-MW turbines have already been manufactured without Western aid, but the capacity to mass-produce such powerful turbines in the time frame envisaged is clearly in doubt. Soviet threats to cut the West European subcontractors out of the compressor construction must be viewed with considerable skepticism, when one considers that the European commitment to the project rests in large part on the employment generated by the pipeline equipment sales, which involve billions of dollars in exports of steel pipe and compressor station components. The Soviet announcement should therefore be treated as an effort to pressure the NATO allies into confronting or otherwise challenging the Reagan administration's specific oil and gas sanctions and Washington's general export control laws. It is likely then that a major challenge to the president's extraterritorial controls will be undertaken, either through legal channels or through allied refusal to comply with the new ban via explicit circumvention of the Commerce Department rules. The technological and manufacturing capability of European companies to defy the sanctions are not in question; 25-MW gas-driven turbines comparable to the GE turbine can readily be designed and produced. Given the Soviets' construction time frame, their right to penalize participating companies in violation of signed contracts, and their determination to highlight President Reagan's impotence in reversing the course of East-West trade, substantial pressure from Moscow -- coupled with indigenous allied determination to proceed apace -- can be expected to persuade West European governments and companies to act quickly in defiance of Washington. FOREIGN POLICY AND ALLIANCE IMPLICATIONS The extension of extraterritorial controls was deemed "necessary to further significantly the foreign policy of the United States." n7 Diplomatic efforts aimed at reconciliation in Poland and at reversing the allies' pipeline decision proved unsuccessful; extended sanctions offered the Reagan administration a final possibility of influencing U.S. allies' behavior, which in turn would damage Soviet economic interests and perhaps Moscow's position in Eastern Europe as well. Have U.S. foreign policy goals been significantly furthered by the president's June 18 decision? The conditions listed under Section 6 of the Export Administration Act of 1979 set out a framework for analysis in the assessment of "foreign policy controls" -- and export control category separate from "national security controls" in its lack of technical precision and indirect language concerning an adversary's acquisition of products or technology deemed militarily significant. n8 Among the conditions that must be addressed prior to the imposition of foreign policy controls are the following: * The probability that U.S. controls will achieve the intended foreign policy objective. * The reactions of other countries "to the imposition or expansion" of U.S. controls. * The effects of the controls on U.S. export competitiveness, on the U.S.'s international economic position, on the credibility of the United States as a reliable supplier of goods and technology, and on individual companies affected by such controls. * The ability to enforce controls effectively as well as the foreign policy consequences of not imposing controls. n9 Clearly, the only criterion fulfilled by the imposition is the clause relating to the consequences of not imposing controls. The elasticity of concerns associated with foreign policy controls grants the president broad latitude in this regard; that is, by not imposing such controls, U.S. Foreign policy would undermine the cause of Polish reconciliation, in large part because we would abdicate our role as leader of an alliance outraged by Soviet-Polish suppression of popular dissent. The remaining criteria cannot be satisfied. The proscribed goods and technology can be acquired abroad and in a relatively short period of time, independent of U.S. license. A number of experts have testified that while U.S. blocking actions could delay the project by approximately two years, all of the proscribed equipment and proprietary know-how can be obtained abroad. Given the 25-year span of the gas supply contracts, a two-year delay is relatively insignificant. n10 The reaction of our closest allies has been most unfavorable and will continue to deteriorate should other intra-OECD trade disputes grow in volatility. Controls further undermine U.S. credibility as a reliable supplier of goods and technology -- and, as a direct result, undermine U.S. export competitiveness -- which in turn impels foreign importers of U.S.-licensed designs to develop their own technologies. Individual companies are hurt not only in the immediate case related to the construction of the Soviet pipeline, but also in the long run because of the emergence of new competitors in what is often a small market; this is particularly GE's problem in the gas turbine market. Finally, the enforcement of the controls extends only to U.S.-licensed technology, such as GE's gas turbine, not to goods produced abroad through independent design, such as pipelayers or earth movers. The enforcement of the controls, however, cannot prevent similar technology from being devised and diffused elsewhere in the OECD or in the Soviet bloc, The aura of an ineffectual U.S foreign policy does not, unfortunately, outweigh the potentially disastrous alliance implications arising from an increasingly troubled partnership. Protectionist sentiment will proliferate, as will the currently widespread notion that the United States poses more of a comprehensive threat to West European security than the Soviet Union does. In this context, key allied government elites -- who more often than not defend U.S.-sponsored policies in European capitals, particularly on explosive issues, such as long-range theater nuclear force modernization, maintenance of the nuclear response option to conventional Soviet attack, or the commitment to achieve real increases in annual defense expenditures -- can be expected to distance themselves from overtly pro-American positions while domestic discontent with the United States grows. A variety of equally -- if not more -- important security interests is thus jeopardized on behalf of an issue that must be regarded as a lost cause. In addition, U.S. credibility as a sincere economic summit partner is cast into doubt because coordinated policies (even least-common-denominator policies) will be perceived as short-term affairs. Barely two weeks had passed when the president reversed the Versailles bargain through the imposition of the extended sanctions. The timing of Reagan's announcement proved politically embarrassing for those governments dedicated to the principles of the annual economic summit process, that is, that the Big Seven OECD powers should seek common solutions to international economic problems based on good will, fair play, and mutual trust. The merits of the Soviet pipeline are no longer of primary concern. Many sound economic and security arguments have been ably marshaled in opposing the project; none has had the salutary effect upon European governments that the Reagan administration clearly desired. The pipeline will pose difficulties for alliance emergency planning and for the realization of greater energy security within NATO. Yet the application of extraterritorial foreign policy controls to Europe and Japan threatens to widen rather than narrow the rifts between the trilateral allies. As the defacto alliance leader, it would be more realistic for the United States to mitigate the worst consequences of our allies' pipeline decision by encouraging North Sea natural gas surge capacity, bolstering allied gas stockpile programs and emergency planning measures, and improving U.S. steam coal export facilities to compete against future Soviet gas deliveries in European industrial and utility markets. These measures would offer the additional benefit of precluding further Soviet inroads in the ensuing war of perceptions. Notes 1. Miriam Karr and Roger W. Robinson, Jr., "Soviet Gas: Risk or Reward?" The Washington Quarterly, vol. 4, no. 4, Autumn 1981, pp. 3-11. 2. One million BTU approximates the heat content of 1,000 cubic feet of natural gas. 3. Statement of Lionel H. Olmer, undersecretary of commerce for international trade, before the House Committee on Science and Technology, February 9, 1982, p.6 (Chart 1). 4. Statement of Ernest B. Johnston, Jr., deputy assistant secretary of state for economic and business affairs, before the House Committee on Science and Technology, February 9, 1982, p.4. 5. Suggestions that Moscow utilize two smaller turbines in place of the single 25-MW GE turbine suffer from similar concerns -- greater maintenance and operations costs, and a lack of skilled manpower, which will be demanded in other (principally military and industrial) sectors. Alternatively, engines powered either by diesel or electric power (replacing the turbines as a generator for the compressor stations) are impractical because of the failure to install adequate electricity capacity along the proposed pipeline route. Gas-driven turbines were therefore chosen in anticipation of the above problem (compounded by interministry bureaucratic feuding) as well as to take advantage of the abundant natural gas as a source of power for the turbines. 6. Dusko Doder, "Soviets Said to Dash West's Hope for Massive Deal," Washington Post, June 30, 1982, p.1. 7. "Amendment of Oil and Gas Controls to the U.S.S.R." Federal Register, vol. 47, no. 122, June 24, 1982, p. 27250. The legal rationale given by the Commerce Department's Office of International Trade Administration is not complex: prior controls restricting the export of certain "foreign produced products of U.S. technical data" require a written assurance that the foreign importer will not transfer such products to "proscribed destinations." The June 18 decision amended the above rules "to include products of U.S. data in cases where the right to the use of the data abroad is subject to a licensing arrangement with persons subject to the jurisdiction of the U.S. or requires the payment of royalties or other compensation to any such persons or in cases where the recipient of the technical data has agreed to abide by U.S. export control regulations." The U.S. position holds simply that GE's manufacturing associates previously agreed to abide by U.S export control regulations when they entered into the licensing arrangement. The Europeans have mustered a number of legal arguments to counter the legality of altering previously accepted export control laws as a basis for citing contract violation (i.e., GE's manufacturing associates agreed to one set of rules when the export licenses were first issued, whereas now they are expected to abide by new rules that were not a part of the initial licensing arrangement). 8. John F. Murphy and Arthur T. Downey, "National Security, Foreign Policy and Individual Rights: The Quandary of United States Export Controls," International and Comparative Law Quarterly, vol. 30, October 1981, p. 810. 9. Section 6, Export Administration Act of 1979, P.L. 96-72, cited in Murphy and Downey, op. cit., p. 813. 10. Forecasts of slower growth in Western Europe's natural gas demand in the late 1980s and early 1990s make the inevitable project delays more bearable. See International Energy Agency, Natural Gas: Prospects to 2000, OECD/IEA, 1982. LEVEL 1 - 25 STORIES 1. Platt's Oilgram News, November 16, 1982, Tuesday, INTERNATIONAL; Vol. 60, No. 221; Pg. 2, 57 words, U.S. LIFTING OF ANTI-USSR SANCTIONS BITTERSWEET FOR EUROPE, Rome 11/15 2. Copyright 1982 PennWell Publishing Company, Oil & Gas Journal, October 11, 1982, GENERAL INTEREST; News; Pg. 61, 990 words, Two West German firms added to U.S. blacklist 3. THE CHRISTIAN SCIENCE MONITOR, October 1, 1982, Friday, Midwestern Edition, Pg. 8, 750 words, British may fill pipeline order despite ban, By David K. Willis, Staff correspondent of The Christian Science Monitor, Clydebank, Scotland 4. The Washington Quarterly, 1982, Autumn, THE ENERGY DEBATE; Vol. 5, No. 4; Pg. 52, 4847 words, U.S. Controls and the Soviet Pipeline, Jonathan B. Stein - Jonathan B. Stein is research associate for the CSIS Program on Energy and National Security. He would like to thank James Hayes for his research assistance. 5. United Press International, September 28, 1982, Tuesday, AM cycle, International, 428 words, FRANKFURT, West Germany 6. Copyright 1982 Penton/IPC, Industry Week, September 20, 1982, NEWS ANALYSIS; Pg. 23, 674 words, U.S. hurting just itself? Reagan s pipeline ban has backfired, By John S. McClenahen 7. THE CHRISTIAN SCIENCE MONITOR, September 15, 1982, Wednesday, Midwestern Edition, Pg. 1, 1322 words, Gas pipeline: Soviets hint it'll be hard, By Ned Temko, Staff correspondent of The Christian Science Monitor, Moscow 8. Engineering News-Record, September 2, 1982, NEWS; Pg. 12, 287 words, Reagan takes action against sanction foes 9. United Press International, August 31, 1982, Tuesday, AM cycle, International, 474 words, Britain second nation to defy Reagan sanctions, GLASGOW, Scotland 10. Copyright 1982 PennWell Publishing Company, Oil & Gas Journal, August 16, 1982, GENERAL INTEREST; News; Pg. 43, 2620 words, Controversy building over U.S. sanctions against Yamal pipeline 11. The Economist, August 14, 1982, Business, finance and science; WORLD BUSINESS; Pg. 59 (U.S. Edition Pg. 59), 1120 words, Siberian pipeline; Over to the Lawyers 12. The Economist, August 7, 1982, Business, finance and science; WORLD BUSINESS; Pg. 63 (U.S. Edition Pg. 55), 2790 words, Siberian pipeline; Between Reagan and a hard place 13. THE CHRISTIAN SCIENCE MONITOR, August 2, 1982, Monday, Midwestern Edition, Pg. 1, 1123 words, Will John Brown turbines pump gas from Siberia, or rust under US ban?, By David K. Willis, Staff correspondent of The Christian Science Monitor, London 14. Business Week, July 19, 1982, WORLD TRADE; Pg. 50, 1240 words, Europe gets ready to strike back 15. The Economist, July 17, 1982, Business, finance and science; WORLD BUSINESS; Pg. 62 (U.S. Edition Pg. 64), 500 words, AEG-Telefunken; Reprieve, FRANKFURT 16. The Washington Post, July 14, 1982, Wednesday, Final Edition, First Section; A1, 900 words, West Germans Grant Soviets Pipeline Loan, By Dusko Doder, Washington Post Foreign Service; Washington Post correspondent Bradley Graham in Bonn contributed to this article., MOSCOW, July 13, 1982 17. Business Week, July 12, 1982, INTERNATIONAL BUSINESS; WEST GERMANY; Pg. 36 690 words, The pipeline cutoff throttles Telefunken 18. United Press International, July 10, 1982, Saturday, PM cycle, International, 130 words, Moscow replaces U.S. pipeline equipment with own, MOSCOW 19. The New York Times, July 1, 1982, Thursday, Late City Final Edition, Section D; Page 2, Column 1; Financial Desk, 1023 words, TECHNOLOGY; SOVIET OPTIONS ON G.E. ROTOR, By Andrew J. Pollack 20. The MacNeil/Lehrer Report, June 29, 1982, Tuesday, Transcript #1762, 4781 words, Euro-U.S. Pipeline Stress 21. United Press International, June 24, 1982, Thursday, PM cycle, Washington News, 462 words, New restrictions on technology exports draw protests, WASHINGTON 22. United Press International, June 23, 1982, Wednesday, AM cycle, International, 383 words, Mitterrand angrered by Reagan policies, PARIS 23. The Washington Post, March 23, 1982, Tuesday, Final Edition, First Section; A1, 1589 words, Anti-Soviet Sanctions Trouble W. Germans; W. Germans Squeezed by U.S. Anti-Soviet Sanctions, By Dan Morgan and Bradley Graham, Washington Post Foreign Service, ESSEN, West Germany 24. The Washington Post, January 31, 1982, Sunday, Final Edition, First Section; A1, 969 words, U.S. Is Exploring New Ways to Halt Soviet Gas Line; U.S. May Punish Foreign Companies Supplying Soviet Pipeline, By Dan Morgan, Washington Post Staff Writer 25. The New York Times, January 11, 1982, Monday, Late City Final Edition, Section A; Page 1, Column 4; Foreign Desk, 1003 words, U.S. ASKS ITS ALLIES TO DENY TO SOVIET PARTS FOR PIPELINE, By PAUL LEWIS, Special to the New York Times, PARIS, Jan. 10 LEVEL 1 - 2 OF 25 STORIES Copyright 1982 PennWell Publishing Company Oil & Gas Journal October 11, 1982 SECTION: GENERAL INTEREST; News; Pg. 61 LENGTH: 990 words HEADLINE: Two West German firms added to U.S. blacklist BODY: The U.S. Department of Commerce last week issued temporary denial orders (TDOs) banning export of U.S. oil and gas equipment, service, and related technology to two West German firms. The TDOs follow the pattern laid down by the Reagan administration in applying sanctions against overseas firms which supply equipment to the Soviet Union's so-called Yamal gas export pipeline. Meanwhile, a TDO against Dresser France SA has cost the firm a $3 million order. Dresser France lost the order because a TDO issued by Commerce denied U.S. technical data needed to build three compressors for Santos Ltd.'s South Australia pipeline project (OGJ, Apr. t, p. 93). In related action, Commerce was seeking a further change of a TDO issued earlier against Creusot Loire SA of France, Dresser France was preparing to ship another compressor to the U.S.S.R., and the Petroleum Equipment Suppliers Association (PESA) took a position against the sanctions. German sanctions. The two German firms issued TDOs are Mannesmann Anlagenbau AG and AEG-Kanis Turbinenfabrik GmbH. The Mannesmann TDO also applies to two of the firm's subsidiaries -- Essener Hockdruck-Rohrleitungsbau GmbH and Kocks Pipeline Planung GmbH. Commerce said AEG-Kanis is under contract to produce gas turbines containing U.S. parts and technology for trans- Siberian pipeline. Mannesmann is one of the prime contractors for the northern segment of the pipeline and a party to the three party gas turbine supply contract that includes AEG-Kanis and the Soviet foreign trade organization, Machinoimport. AEG-Kanis and Mannesmann are under investigation by Commerce because two gas turbines manufactured by AEG-Kanis were exported to the Soviet Union contrary to the Export Administration Act of 1979 (OGJ, Oct. 4, p. 48). Investigation of Mannesmann's contractual relationship with AEG-Kanis and Machinoimport led to its inclusion under the TDO, Commerce said. The West German TDOs are identical in scope to the denial orders in effect against John Brown Engineering Ltd. of the U.K., Nuovo Pignone SpA of Italy, and Dresser France and Creusot Loire. Mannesmann, Creusot Loire, and Nuovo Pignone are prime contractors for the Yamal pipeline. AEG-Kanis, John Brown Engineering, and Dresser France are subcontractors. Lost business. Dresser France lost an order not related to the Yamal line. Edward R. Luter, senior vice-president of Dresser Industries Inc., explained that Santos placed an order with General Electric Co. to provide three turbine compressor packages for its Australian pipeline project. The order specified that GE should buy compressors from Dresser France, which would be coupled with GE turbines. In connection with this, GE had to furnish certain technical data to Dresser France so the compressors could be built to specification. However, after the TDO was issued, GE could no longer furnish data. Santos then told GE to cancel the order with Dresser France and to reorder from another Dresser unit, Dresser Clark, Olean, N.Y. Meanwhile, Dresser France was preparing to ship a fourth compressor to the Soviet Union. Its TDO was issued for earlier shipping three compressors. The firm believes it has all the material and technology needed to fulfill its Soviet contract to provide 21 compressors for the Yamal line. A third shipment of three more compressors is expected to be made later this month. Commerce action. Commerce earlier issued a TDO against Creusot Loire and 13 subsidiaries. However, Commerce now wants to change that order to include only four subsidiaries. The four units are Creusot Loire Compressors, Soc. de Production Internationale de Trefiles, SMF International, and Creusot Loire Enterprises. "Further investigation has clarified that the nature of business and trading activity of these four Creusot Loire subsidiaries is oil and gas related," said U.S. Commerce Sec. Malcolm Baldrige. "We are now satisfied that it is not necessary to cut off exports to the broader group of Creusot Loire subsidiaries to protect against shipments to the U.S.S.R. of goods prohibited by the oil and gas regulations. "We do not want our export controls to place unnecessary economic burdens on our allies." Meanwhile, Creusot Loire lost a bid in U.S. district court for a temporary restraining order blocking imposition of the TDO. Judge John Penn said the company failed to show it would incur irreparable damage from the trade embargo. The decision marked the third time that courts have refused requests for temporary restraining orders. Dresser France has tried twice to obtain one. Both companies have asked Commerce to lift the TDOs. And full hearings on merits of the case are expected to get under way this month in Washington, D.C., federal courts. PESA's position. William J. Sallans, PESA executive vice-president, said the equipment suppliers' group told the Reagan administration the embargo is a mistake. He said the basis for the trade sanctions is a myth that oil production around the world will dry up if U.S. products and services are withdrawn from the marketplace. "The truth is that U.S. manufacturers, service, and supply companies have distinguished themselves by their preeminence and technical superiority in the world marketplace," PESA said. "This is the result of hard work, ingenuity, and quality products. It is not exclusivity of products, but the proven quality of the products plus delivery and service which have gained market acceptance. "In spite of all this, preeminence is confused with exclusivity, and the myth of the sole source of supply continues as a tool of foreign policy." PESA believes Reagan's embargo will hurt U.S. manufacturers far beyond the Yamal project because foreign customers have seen they can't rely upon supply of U.S. goods despite contracts for those goods. ECONOMIC NEWS (90%); EXPORT TRADE (90%); CONTRACTS & CONTRACTING (90%); CONTRACTS & BIDS (90%); ENGINEERING (90%); PIPES & PIPELINES (90%); OIL & GAS INDUSTRY (90%); EMBARGOES & SANCTIONS (78%); TRADE AGREEMENTS (73%); CONTRACT LAW (65%); INVESTIGATIONS (63%); LEVEL 1 - 3 OF 25 STORIES COPYRIGHT 1982 THE CHRISTIAN SCIENCE PUBLISHING SOCIETY THE CHRISTIAN SCIENCE MONITOR October 1, 1982, Friday, Midwestern Edition SECTION: Pg. 8 LENGTH: 750 words HEADLINE: British may fill pipeline order despite ban BYLINE: By David K. Willis, Staff correspondent of The Christian Science Monitor DATELINE: Clydebank, Scotland BODY: The British company that has already defied United States sanctions by shipping six 25-megawatt turbines to Leningrad now has high hopes of completing its entire order of 21 turbines. John Brown Engineering Ltd. is apparently attempting to persuade Moscow to divert to company headquarters 15 of the 40 rotor blade sets - the heart of the turbines - originally ordered as spare parts by the Soviets last November from a nationalized French engineering company. If the Soviets agree, John Brown would be able to fit the ''spare'' rotors in the remaining turbines destined for Moscow, and thus complete its entire contract about one year late. The Soviets apparently ordered the 40 extra rotor sets - made by France's Alsthom-Atlantique under license from General Electric in the US - because they feared that the US might try to block the flow of pipeline technology from Europe. John Brown was able to ship the first six turbines because it had received six rotors from General Electric in the US before President Reagan's sanctions were clamped into place Dec. 29, 1981. The Reagan sanctions now forbid GE from sending rotors to any company providing technology for the Siberian pipeline. Hence John Brown's urgent need for 15 extra rotors. The Soviet project will use 125 turbines (and thus 125 rotors) in 41 separate stations along its 3,500-mile length from Siberia to Western Europe. The Soviet order of 40 spare rotors from France's Alsthom-Atlantique is said here to exceed by a wide margin the normal number of spare rotors needed for the entire pipeline. The French government became the first European nation to openly defy the Reagan sanctions when it ordered Alsthom-Atlantique to begin production of the rotors in July. France later ordered other French firms to fulfill their pipeline contracts with the Soviet Union and the first French compressors have been delivered. But whether Alsthom-Atlantique would technically break the US embargo by supplying Soviet-ordered rotors to John Brown is not known. John Brown officials here on the banks of the Clyde near Glasgow will not talk openly, since their lawyers are still combing the Reagan sanctions order. The company is also holding talks with other nations providing pipeline technology - West Germany, Italy, and France. But it can be reported that they expect that Soviet-ordered rotors from France will indeed find their way to Scotland, and that John Brown will indeed fulfill its entire contract for seven stations containing three pumping turbines each. The pipeline order, totaling $181 million, is the largest turbine order in the company's history. It is helping to keep 1,400 workers busy in western Scotland, an area hard-hit by recession and unemployment. The company also has another reason for relief. As it reads the sanctions, GE is forbidden to send only rotors to be used in turbines that drive pumps. Yet 80 percent of the John Brown turbine business is in turbines that generate electricity. The company believes rotors for generator turbines are unaffected. John Brown itself would continue to defy the US embargo, at least in spirit, by using French rotors in their remaining 15 turbines. If the John Brown move does succeed, the British government would also be pleased. In September, 352,400 workers were jobless in Scotland, almost 16 percent of the work force. That is why Prime Minister Margaret Thatcher, known as the ''iron lady'' for her anti-Soviet stands on other issues, recently said on a visit here that the sanctions meant ''we have been wounded by a friend.'' The British object to the US ordering its companies to break existing contracts. And theyask why the US can sell grain to Moscow while telling its allies how to trade. John Brown does face at least two drawbacks because of the sanctions. Since it must start work on ancillary equipment 21/2 years before delivery and because most orders specify delivery in six months to a year, workshops are always assembling parts for turbines as yet unsold. The delay in getting rotors from France will mean more John Brown workers being diverted to unsold equipment instead of working on the Soviet machines already sold. Company planning will suffer as a result. Moreover, John Brown's competitors, it is learned, are trying to take advantage of the publicity around the Reagan sanction order. ''Don't order spare parts from John Brown,'' some competitors urge potential customers. ''They're embargoed, you know.''