BILATERAL NONPROLIFERATION DIALOGUE: SMALL GROUP

S E C R E T BEIJING 005360


E.O. 12958: DECL: 08/15/2027
TAGS: PARM PREL ETTC MTCR CH

SUBJECT: BILATERAL NONPROLIFERATION DIALOGUE: SMALL GROUP
DISCUSSION OF A WAY FORWARD ON NONPROLIFERATION SANCTIONS

Classified By: Political Minister Counselor Aubrey Carlson.
Reasons 1.4 (B) and (D).


1. (S) Summary: In a small group meeting concluding
bilateral nonproliferation talks August 13, ISN PDAS McNerney
outlined a U.S. proposal to work cooperatively to end
proliferation by specific sanctioned Chinese companies with a
view toward eventually removing sanctions on companies that
demonstrate a sustained commitment to nonproliferation. To
this end, McNerney conveyed the U.S. desire to begin a
dialogue with China North Industries Corporation (NORINCO) to
establish whether it can serve as a model company for other
Chinese companies to follow. MFA Arms Control and
Disarmament Department Director General Zhang Yan responded
positively to the U.S. proposal and encouraged the United
States to also begin a dialogue with China Great Wall
Industries Corporation (CGWIC),which McNerney agreed would
be productive. Zhang pledged to press NORINCO and CGWIC to
work constructively with the USG. End Summary.


2. (S) Principal Deputy Assistant Secretary of State for
International Security and Nonproliferation Patricia McNerney
met August 13 with MFA Arms Control and Disarmament Director
General Zhang Yan in a small group at the conclusion of
bilateral U.S.-China Nonproliferation meetings (septels) to
discuss developing a cooperative mechanism for enhancing
U.S.-China nonproliferation engagement. Drawing from the
interagency-approved strategy on ending Chinese
proliferation, McNerney expressed U.S. desire to create an
incentive structure for Chinese companies currently under
U.S. sanctions to work with the USG with a view toward ending
their proliferation activities and ultimately removing
existing sanctions. She highlighted that sanctioned Chinese
companies can choose to take the "good path" of ending
proliferation and establishing an internal compliance program
(ICP) to prevent future proliferation. The benefits of
taking this path, she explained, could be public recognition
by the USG of the company's efforts, waiving of U.S.
sanctions as appropriate, and enhanced international
recognition leading to normalized business relations with the
United States and globally. On the other hand, the McNerney
continued, Chinese companies can also continue on a "bad
path" that would lead to continued U.S. sanctions and public
stigma.


3. (S) As part of this proposal, McNerney indicated that the
USG would like to use the China North Industries Corporation
(NORINCO) as a test case. She stated that the USG would like
to invite senior NORINCO officials to Washington to start a
dialogue that would address NORINCO's business model and
strategic plan, its ICP process, the nature of existing
business with Iran and other countries of concern, and
efforts taken in relation to UN Security Council resolutions.
The invitation would be extended exclusively to NORINCO's
senior corporate officials, who would be asked to be
unaccompanied by advisors from the University of Georgia or
the China Arms Control and Disarmament Agency. The ultimate
goal of this engagement, she explained, would be to ensure
strong nonproliferation credentials by large Chinese
companies currently under nonproliferation sanctions, and to
remove current sanctions on such companies. This effort, she
said, would meet common U.S. and PRC nonproliferation
objectives.


4. (S) In parallel, PDAS McNerney suggested that the U.S. and
Chinese governments develop a framework for enhanced
cooperation and transparency. She indicated that the USG
would prepare for China a nonpaper outlining such
cooperation, including enhanced transparency of enforcement
measures by China and strengthened EXBS and other
government-to-government cooperation aimed at enhancing
enforcement actions. That nonpaper could serve as the basis
for reaching agreement on a framework for enhanced
cooperation between the two governments.


5. (S) DG Zhang responded enthusiastically to the U.S.
proposal, characterizing it as encouraging, constructive and
innovative. He stated that the PRC has been working with
large Chinese companies under U.S. sanctions, such as NORINCO
and China Great Wall Industries Corporation (CGWIC),to
improve their performance and to put in place internal
mechanisms to prevent proliferation. According to Zhang,
these companies have made tremendous efforts in this area,
have learned important lessons from past proliferation
activities, and would not engage in problematic transactions
in the future. As such, he urged the USG to begin engaging
with both companies, which McNerney agreed would be a good
approach. Zhang further believed that USG engagement with
these companies, the possibility of the removal of sanctions,
and the prospect of U.S. business opportunities would create
incentives for the companies to terminate business with Iran
and/or North Korea. This would create positive results for
other companies to follow, Zhang said. He also proposed that
the United States could attach conditions in the event that
these companies re-engage in proliferation activities. He
pledged to press the companies to engage constructively with
the USG and to be transparent and forthcoming. Lastly, Zhang
expressed his belief that positive engagement between the USG
and NORINCO and CGWIC, and possibly additional entities,
would strengthen the hand of the MFA in nonproliferation
vis-a-vis other PRC agencies on the issue of stopping arms
trade with Iran and North Korea.


6. (U) PDAS McNerney cleared this cable.
RANDT


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