Shoot-Out At Tech Gap

By Stephen Koepp

Under ordinary circumstances the sale of IBM computers to Transnautic Shipping, a company based in West Germany, might serve as a stirring example of America's ability to compete overseas. Transnautic, a Hamburg firm that coordinates ship traffic in the West German port, has been a satisfied customer indeed, buying many high-tech IBM products over the past decade. But last week the Transnautic-IBM connection gained unwanted notoriety as a symbol of the internal dissension that marks the U.S. Government's campaign to protect America's high-tech secrets. Reason: 51% of Transnautic is owned by the Soviet Union.

The intensity of the disagreements was driven home last week by three disquieting revelations:

-- The Pentagon acknowledged that it has been engaged in a yearlong struggle with the Commerce Department over Transnautic's $3 million order for one of IBM's powerful mainframe computer systems, called the Model 4381. The Commerce Department finally approved the sale over the Pentagon's bitter objections.

-- While the two sides were feuding, the Soviet-controlled company grew impatient and bought a Hitachi-made IBM clone. The Commerce Department admitted last week that it could have questioned that sale because the Hitachi machine contains some U.S.-made parts, but agency staffers who approved that deal somehow failed to notice Transnautic's Soviet ownership.

-- In perhaps the most serious incident, the Pentagon claims it stopped the Commerce Department from accidentally approving the sale of an IBM Model 9370 minicomputer to a Singapore-based Soviet shipping company. The 9370 is an advanced machine that has many military and engineering applications.

The episodes represent a flare-up in a long-running feud over how strictly the U.S. must limit its exports to preserve its technological edge. The dispute pits America's top two export watchdogs against each other. On one side is Stephen Bryen, a Deputy Under Secretary of Defense, who contends that Commerce is proving inept and overly permissive in its approval of export permits, allowing millions of dollars in strategic U.S. products to reach such final destinations as the Soviet Union, China and Iran. On the other side is Paul Freedenberg, an acting Commerce Under Secretary, who maintains that the Pentagon is overzealous and insensitive to the practical problems of accommodating America's Western trading partners.

The Pentagon's tough position, which took hold during the Reagan Administration's early years and succeeded in boosting Western vigilance against the world's technobandits, now faces growing criticism in the face of America's staggering trade deficits (last year's gap: $170 billion). One group, the Electronics Industries Association, estimates that export controls are costing the U.S. some $9 billion in lost business and 225,000 jobs every year as foreign suppliers rush to fill the orders refused by American companies.

In the Transnautic case, IBM's West German subsidiary first asked the Commerce Department for permission to ship the Model 4381 in September 1986. When the Pentagon protested the sale, IBM appealed, only to have the Defense Department urge Commerce once again to halt the deal. Says the Pentagon's Bryen: "We always suspect the worst with respect to the Soviets." But eventually Commerce's Freedenberg approved the sale despite the Pentagon's qualms. Declares Bryen: "The whole way they handled the Transnautic issue is outside the law."

One rationale for Freedenberg's decision was that Transnautic supposedly showed no previous tendency to sneak IBM technology back to the Soviet Union. Another factor was mounting complaints from the West German government, which questioned the legitimacy of U.S. interference in a deal between two ostensibly West German entities. "I decided it was a good deal," said Freedenberg, who attached conditions to the sale that would have required periodic inspections of the computer to prevent it from being smuggled into the Soviet Union. "We believed another country would ship ((that kind of computer)) without any conditions." By the time Commerce approved the sale, Hitachi had indeed filled the bill.

The Pentagon contends that in some cases the Commerce Department has failed to notice the Soviet connections of companies based in friendly countries. That was the case in August, when IBM applied to sell the Model 9370 minicomputer to a Soviet-controlled shipping firm in Singapore. Through a clerical mistake, the front page of the application listed the final destination only as IBM Singapore. But a sharp-eyed Pentagon analyst noticed that the intended use of the machine was given as "cargo handling," which obviously is not IBM's line of work, and prompted a more thorough Pentagon check that revealed the actual buyer. That name, Singapore Soviet Shipping, finally turned up on an attached document. The Commerce Department contends it would have made the same discovery, but Pentagon officials are skeptical. (IBM, for its part, has not been accused of any wrongdoing.)

The Soviets have a lengthy shopping list of Western technology, according to recently declassified documents. The list contains items in fields ranging from robotics to ceramics and fiber optics to ion-beam etching. The Soviets also want to know about new developments in industrial processes like fiber- glass manufacturing, which would help them build high-pressure air tanks for submarines.

To fill the shopping list, Soviet-employed technobandits roam from Silicon Valley to Long Island trying to buy, copy or steal the latest developments. One favorite tactic for getting the merchandise out of the U.S. is to set up a front company in a Western country through which goods can be transshipped. Says a West Coast security officer: "They sell it through three, four or five different parties. Nobody has the manpower to follow every shipment to its eventual destination."

But the U.S. Customs Service has made technology smuggling a high priority. Through a special project called Operation Exodus, started in 1981, the agency is pursuing more than 800 cases of high-tech thievery and arms smuggling. In one recent case, Customs unraveled an alleged plot to smuggle a sophisticated side-scan sonar device, an invaluable tool for tracking submarines. Made in New Hampshire, the device was bought by a Louisiana firm and shipped to Norway, then to Japan. A Japanese company was installing the device on a Soviet fishing trawler when officials closed in.

Besides the Soviet Union, many other countries are barred from receiving hundreds of thousands of U.S. products. High-speed marine outboard motors might seem like a device designed more for water-skiing than war, but in Iran's case the Administration embargoes them because the country has launched motorboat attacks in the Persian Gulf conflict. In a now notorious episode, a U.S. company was about to ship 50 radios (price: $28,500 each) to a supposed Libyan fig farm. But the Pentagon blocked the sale after learning that the radios were equipped with 785,000 fast-switching channels for evading eavesdroppers and were "ruggedized" for possible use in jeeps or tanks.

Traditionally, one of America's biggest headaches in stopping technology leaks has been poor cooperation from its allies, whose ports and corporations have served as smuggler's havens for trading in U.S.-made goods. But during the past few years the U.S. has won greater help from other members of the Paris-based Coordinating Committee for Multilateral Export Controls (COCOM), a group composed of 15 NATO countries plus Japan. The COCOM group, formed just after World War II, jointly agrees on a list of banned technology, but until recently the U.S. has enforced the guidelines much more seriously than most of its fellows. Japan, for example, has only now heightened its export scrutiny, a response to U.S. anger over the Toshiba affair, in which the company's machine-tool subsidiary sold advanced propeller-milling devices to the Soviets.

Despite the Pentagon's concern, many business leaders and politicians think the time has come to be more discriminating about which exports to control. Billions of dollars in high-tech business is being lost to foreign rivals because overseas buyers are wary of America's far-reaching restrictions. Last year the U.S. posted a deficit in high-technology trade -- $2.6 billion -- for the first time ever. In 1980, by contrast, America had a high-tech surplus of $27 billion. "We ought to be placing higher fences around fewer items," says Jim LeMunyon, senior manager of government relations for the American Electronics Association.

Now the export-decontrol momentum is building. In a notable change of philosophy, the U.S. recently went along with a COCOM decision to remove controls on shipments of personal computers. Likewise, the two trade bills approved by the House and Senate both contain provisions that would prevent the Government from restricting U.S. sales of high-tech items that other industrial nations already sell on the open market. The movement will no doubt meet some resistance. North Carolina Republican Senator Jesse Helms is threatening to block the confirmation of C. William Verity, President Reagan's nominee to become Commerce Secretary, on the ground that the former steel- company executive lacks the commitment to bar exports to the East bloc. But the U.S. is likely to grant its industries at least somewhat more freedom to give them a better shot at winning the lucrative contracts that are now going to relatively unfettered foreign firms.

With reporting by Christopher Redman/Paris and Elaine Shannon/Washington