US-Soviet Joint Ventures: The Camel’s Nose Under The Tent

Prepared Remarks of

FRANK J. GAFFNEY, JR.,
Director of the Center for Security Policy

before The Technology Transfer Caucus
Of the House Republican Study Committee

28 February 1989

Introduction:

Madame Chairwoman, members of the Committee, I am pleased to have this opportunity to address a dramatic, new threat to Western security interestsa: far-reaching and, thus far, largely undisciplined joint ventures between U.S. corporations and the Soviet state.

As this Caucus is well aware, some estimate that the West is already losing between $15-40 billion per year in advanced technology acquired by the Soviet Union through legal and illegal trade. Such acquisitions directly and adversely affect the cost and effectiveness of Western defenses.

Western joint ventures with the USSR have the potential vastly to increase these costs. Under present circumstances, they offer the Soviets unprecedented opportunities for wholesale technology transfers with a minimum of governmental oversight and interference. If these ventures perform as hoped by their promoters, they will also serve to transfer jobs and export potential overseas.

Unless fundamental changes are made in the U.S. government’s interagency export license review process, we will shortly begin to witness the massive transfer of technologies and skills to the Soviet bloc with serious security and economic repercussions for both U.S. taxpayers and workers.

Understanding U.S.-Soviet Joint Ventures:

At the outset, it should be recognized that U.S.-Soviet joint ventures provide tremendous benefits to the Soviet Union in economic, financial, and military terms; they certainly involve far more than just a one-time sale of U.S. products or technology:

• The principal motivation behind many joint venture schemes is the Soviets’ desire to develop exportable products capable of earning hard currency on the world’s markets.

It is reasonable to expect that such exports, like previous Soviet efforts to market goods such as tractors produced with labor costs that bear little relation to real market prices, could cut into U.S. export market shares as well as our own domestic market — with all that portends for American jobs and trade balances in the future.

 

• They enable the Soviet Union effectively to augment — indeed, to multiply — their own R&D investments. By so doing, the Soviets can substantially improve their position on the technology "learning curve" at minimal cost.

 

• By their very nature, such ventures enlarge the terrain for uncontrolled and unmonitored Soviet contacts with and even recruitment of Western technical experts.

 

• Moreover, technology transfers of both Western products and know-how for ostensibly civilian purposes invariably have applications for the military sector.

 

It has been estimated by U.S. Defense Department officials that technology losses to the Soviet Union through legal and illegal trade are running at an annual cost of between $15-$40 billion.

To the extent such transfers serve to increase the military potential of our principal adversary — and to reduce the qualitative advantage upon which we historically have relied to offset the USSR’s quantitative advantages -technology transfer redounds on the American taxpayer in the form of higher annual spending.

Against these significant potential costs to the United States stand the profits to be realized by, at present, a small number of private firms on the U.S. side who wish to participate in joint ventures with the Soviet Union. While it is not yet possible to determine how large such profits will actually be — the terms of some of the transactions now under negotiation with the USSR make the accounting procedures applied to leveraged buyouts look simple — in terms of the overall national trade picture, they are likely to remain a drop in the bucket.

The Honeywell/Baileys Control Case:

Two recently approved joint ventures reveal some of the serious risks involved in such transactions and highlight the present shortcomings in the U.S. government’s approach to their review. In late December 1988, in a hasty and ill-considered action, the Reagan Administration approved two separate requests by the Honeywell Corporation and by Baileys Controls to export high technology to the Soviet Ministry of Mineral Fertilizers (MMF). Each of these companies is individually involved in a joint venture with the MMF; both ventures involve process control systems.

For its part, Honeywell has been approved to provide the Soviet ministry the technical data supporting its TDC 3000 system, a microprocessor-based digital electronic system for industrial process controls. Bailey Controls will sell similar hardware to the Soviet Union but will, in addition, provide the Soviets with manufacturing technology (e.g., for circuit boards). Moreover, both companies intend to set up engineering centers at Soviet chemical production facilities that will provide servicing support, training and assistance in adaptation of the controls to other industrial uses.

It is not entirely clear just what United States’ interest is to be served by the dramatic improvement in Soviet fertilizer production likely to result from this transaction. At a minimum, it must be expected that such improvements will result in diminished U.S. agricultural sales to the USSR in the future. Far more disconcerting, however, is the fact that — as the Center for Security Policy pointed out in a recent paper entitled "Is the United States Also Exporting Chemical Weapons Manufacturing Technology?" (which I would like to submit for the record) — the Honeywell and Bailey Controls could lend themselves to chemical weapons production. If that were not worrisome enough, the Department of Energy uses similar process controls at its nuclear weapons production facility at Savannah River, Georgia. The Defense Department’s serious reservations about this transaction were summarily swept aside in the closing days of the Reagan Administration.

Worse May Be Yet To Come:

Vastly more ambitious — and strategically significant — proposals for joint ventures between the Soviet Union and U.S. companies are now in the final stages of negotiation:

The Ford Venture: Ford Motor Company is well advanced in its negotiations with the Soviet Union to undertake a massive $10 billion joint venture involving a facility that will produce the Ford Scorpio automobile. This new complex will be located near the Gorkovsky Automobilnyi Zavod (GAZ) factory in the Soviet Union, which Ford helped the Soviets build in the 1930s.

This project reportedly involves Ford Europe as the designated operating entity; eventually, it will produce 150,000 cars annually, as well as 100,000 sets of engines and transmissions. The Soviet Union evidently intends to export these products, presumably in competition with American auto-makers.

Those of you who remember the debate over the Kama River truck plant in the 1970’s — the American-supplied factory that produced vehicles used by the Soviet military to invade Afghanistan in 1979 — will appreciate the strategic potential of this joint venture to enhance the productivity of a crucial Soviet industry.

Chevron Venture: Yesterday’s Washington Times carried the details of a massive, multi-billion dollar contract in the works between Chevron and the Soviet Union for oil exploration, development, and production. The deal, expected to be signed in April, would involve drilling rights and oil refining in Siberia and possibly near the Caspian Sea and on Sakhalin Island. As many of you know, oil and gas are the principal hard currency earners for the Soviet Union (comprising roughly 75% of total annual Soviet hard currency income). For this reason, among others, energy is the most strategic sector of the Soviet economy.

This audacious venture is the more notable for its seeming contravention of the spirit — if not the letter — of existing international agreements between the United States and its allies. In fact, three separate agreements (the centerpiece of which is the International Energy Agency Agreement of May 1983) are now in place, designed effectively to limit Soviet gas deliveries to Western Europe to 30 percent of total West European gas supplies. Chevron’s bid to increase enormously the Soviet Union’s marketable energy output (in terms of oil and, as an unavoidable part of the recovery process, of gas) clearly is at cross-purposes with this alliance policy.

Consequently, the decision to provide such assistance to the Soviet Union is not simply a commercial matter. The United States government must, in consultation with its allies, determine whether or not increasing the availability of — and, therefore in all likelihood, Western countries’ future dependence upon — Soviet energy supplies is now in the West’s interest when it was not in 1983.

Several steps seem in order:

• The executive branch should undertake a comprehensive review of the strategic implications of the proposed Chevron transaction. Such a review should include consideration of this topic at least at one meeting of the National Security Council, presided over by the President.

 

• In view of its impact on collective security interests and existing alliance agreements, a counterpart study should be initiated at once with the allies. The leaders of the major industrial countries should, moreover, have an opportunity to discuss this matter as part of a larger discussion of economic and financial security that should take place at the Paris Economic Summit in July 1989.

 

• Obviously, the United States should disallow the signing of any binding contracts on Chevron’s joint venture until such U.S. and alliance-wide reviews are completed and reported in detail to Congress.

 

• Only after the Congress has had an opportunity to consider the results of such analyses and understands the broader strategic implications of Chevron, in effect, becoming a long-term partner with Moscow in the extraction, processing, and transmission of Soviet energy resources for sale to the West — only then should the ultimate destiny of the Chevron joint venture be decided.

American Trade Consortium Ventures: The Chevron deal is, moreover, the linchpin for deals other members of the American Trade Consortium (Archer Daniels Midland, Ford Motor, RJR Nabisco, Eastman Kodak, Johnson & Johnson, and Mercator) hope to strike with the Soviets. These companies currently are planning to sign in early April an unprecedented umbrella agreement between themselves and the Soviet government. The 100-plus page agreement now being drafted reportedly covers such areas as profits repatriation and rules covering tax, labor, accounting, insurance, arbitration and other areas for Soviet-American ventures. Signing of the agreement will clear the way for some two dozen joint ventures between the Soviet Union and members of the American Trade Consortium.

In what can only be described as a smoke and mirrors arrangement, Chevron will become the "cash cow" for other joint ventures, providing through future Soviet energy sales the dollars needed to meet the USSR’s hard currency requirements. (Under Soviet rules, joint ventures must earn enough hard currency to cover any profits they repatriate.) Madame Chairwoman, I would like to ask that a White Paper recently released by the Center for Security Policy entitled "Economic and Financial Security Implications of Gorbachev’s Perestroika," which critically examines the strategic consequences of enhanced Soviet hard currency earnings capabilities, be included in the record at this point.

Interestingly, while staff from the Commerce Department have been involved extensively in the construction of the American Trade Consortium umbrella agreement, the U.S. national security community has been totally excluded from its review — despite the obvious potential implications for U.S. foreign and defense interests that might arise from such an undertaking.

The Vital Need for an Improved Interagency Process:

I had an opportunity last week to testify before a subcommittee of the House Energy and Commerce Committee with Mr. Prestowitz and others on the FS-X agreement. In my testimony, I was sharply critical of my former colleagues at the Defense Department for their apparently conscious decision to prevent other relevant agencies of the U.S. government from participating in the negotiation of that agreement. Some of the Members participating in the hearing saw the necessary corrective step to be to ensure that Commerce was included in future negotiations on defense sales.

The truth of the matter is that issues affecting vital U.S. economic and financial security interests are rapidly becoming so intertwined that it is simply no longer possible to delineate sharply between national security and other portfolios. The only way to ensure that the Nation is properly served is to create a strong office within the National Security Council, chartered to serve as a dispassionate and honest broker. Its job should be to see to it that all of the relevant agencies have a fair and appropriate opportunity to participate in matters relating to foreign trade, technology transfer, financial transactions, etc.

I believe the present arrangement within the U.S. government does not Provide such a mechanism. The existing office within the NSC nominally responsible for such matters appears to be inadequately staffed and unable — and/or unmandated — to perform the requisite tasks. Particularly in the absence of a strong NSC component, the vesting of certain interested agencies — be they the State Department, Treasury, Commerce or Defense — with preeminent responsibilities invites the kind of bureaucratic in-fighting and sand-bagging seen in recent decisions on the FS-X and Honeywell/Bailey Controls joint ventures (and, we must expect, on the upcoming Ford, Chevron and American Trade Consortium agreements).

The Technology Transfer Caucus:

I believe the creation of the Technology Transfer Caucus is an extremely important and positive development. Over the years, there has been a clear erosion in the congress, especially on the House side, in the balance stuck between necessary technology security and legitimate trade. As members of this committee know too well, the pro-trade-with-the-Soviet-bloc lobby is well-financed and, increasingly, well-organized; it has had considerable success in recent years in relaxing vital export controls.

The House Foreign Affairs Committee is likely to carry on the tradition of approaching technology security issues in a less than satisfactory manner. Until the Toshiba case broke in 1987, the Foreign Affairs Committee, had sole jurisdiction over technology security. That deplorable episode, however, engaged three additional House Committees in the issue: Armed Services, Government Operations, and Ways and Means. It remains to be seen whether these Committees will again choose to get involved in technology security issues in the 101st Congress.

In my view, however, broadening the interest and awareness of members in this field is a development that must be strongly encouraged. I very much hope that this caucus will play an important role in that connection. Few places would be better starting points than an examination of the costs to the West of proposed joint ventures with the Soviet Union — and the need for an improved approach to their consideration by the U.S. government.