Long Beach: Proposed Lease by China Ocean Shipping Co. (COSCO) at Former Naval Base

Long Beach: Proposed Lease by China Ocean Shipping Co. (COSCO) at Former Naval Base

Order Code 97-476 F
Updated August 11, 1999
CRS Report for Congress
Received through the CRS Web
Long Beach: Proposed Lease by China Ocean
Shipping Co. (COSCO) at Former Naval Base
-na-e redacted-
Specialist in National Security Policy
Foreign Affairs and National Defense Division
Summary
At issue was a proposal by the City of Long Beach, California, to lease a container
terminal, to be built at the site of a closed naval station, to China Ocean Shipping
Company (COSCO), a commercial shipping company owned by China. (The lease was
later canceled over an issue unrelated to COSCO.) The proposed expansion of
COSCO’s facilities at the Port of Long Beach raised some security issues concerning
smuggling of guns by Chinese defense-related companies, proliferation of weapons of
mass destruction, intelligence collection, and access to U.S. and Panamanian ports. In
response, senior Clinton Administration officials wrote that COSCO’s use of a terminal
to be built on former Naval property would not adversely affect national security. The
Navy will be transferring its closed facilities to Long Beach in 1999 and 2000.
Some in Congress raised national security concerns about this proposed lease.
Other Members said the proposed lease posed no security threats. The Defense
Authorization Act for FY1998-1999 (P.L. 105-85) contained a compromise in Section
2826 that prohibits the Navy to convey the closed naval station to COSCO but allows
the President to waive the ban. As required, the FBI’s Director and the Secretary of
Defense submitted classified reports on counter-intelligence implications, dated,
respectively, on May 29 and September 14, 1998. Conferees on the Defense
Authorization Act for FY 1999 (H.R. 3616 / P.L. 105-261) retained Rep. Hunter’s
amendment to remove the waiver authority (sec. 2822), and the President signed it on
October 17, 1998. This CRS report provides background and analysis concerning
potential national security issues, status of Long Beach’s plan, and congressional action.
This report will no longer be updated.
A proposed lease (now canceled) for use of a future terminal between the Port of
Long Beach and COSCO raised a number of issues. Some expressed concerns about
awarding an expansion of facilities to COSCO, which has been linked by critics to
smuggling of guns by defense-related companies, weapons proliferation, intelligence
collection, and increased access to U.S. ports and ports at the Panama Canal.
Former Naval Station
Congressional Research Service ˜ The Library of Congress

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The naval facilities at Long Beach are closed.1 Department of Defense (DOD)
spokesman Kenneth Bacon said on March 20, 1997, that “right now there is no Navy
operation taking place at the Naval Station in Long Beach.” The naval station at Long
Beach — a homeport for some Navy ships — was designated for closure during the 1991
round of the DOD base realignment and closure (BRAC) process. The naval station was
closed in September 1994. The naval shipyard at Long Beach closed in September 1997.
According to the Defense Base Closure and Realignment Act of 1990, the local
community where the base is located has the responsibility to determine its reuse.
Long Beach’s Plan
The City of Long Beach proposed to acquire the closed naval station from the Navy
and use the property to build a new container terminal. Under the plan, the new terminal
would generate about 1,600 engineering, environmental, and construction jobs and
thousands of other transportation, trade, and service jobs nearby. Long Beach is the
busiest port in North America, handling more than 3.5 million containers annually. About
one-fourth of China’s exports to the United States arrives through the Port of Long Beach.
Under the plan, the Port of Long Beach would spend $200 million to convert the 145-acre
facility into a modern cargo terminal, and the terminal operator would pay at least $14.5
million a year.
COSCO
COSCO has operated at the Port of Long Beach since 1981 but does not have its own
terminal. It has sub-leased space in the Pacific Container Terminal. COSCO was the
only company to express interest in the proposed terminal. COSCO, China’s merchant
shipping corporation, operates about 600 ships, the world’s largest ocean shipping fleet.
COSCO is owned by the Chinese government’s Ministry of Communications. That
government has stated that it does not interfere with COSCO’s business operations and
does not provide any subsidies to COSCO. Despite the gun-smuggling and chemical
proliferation cases described below, COSCO is not run by the military, the People’s
Liberation Army (PLA). The PLA or its commercial businesses, however, may use
COSCO ships in commercial shipping or in wartime.
COSCO’s ships have made direct calls, delivering and receiving cargo, at seven U.S.
ports. They are: Baltimore, Charleston, Long Beach, New York, Norfolk, Oakland, and
Seattle. COSCO also has had facilities for trucking and rail services around the country.
Potential Implications for National Security
There were concerns among some that an expansion of COSCO’s presence at the
Port of Long Beach would increase Chinese smuggling of guns and other contraband, and
collection of intelligence about U.S. naval operations. Although COSCO is owned by the
Chinese government, COSCO’s presence at U.S. ports represents commercial operations.
On March 20, 1997, DOD spokesman Kenneth Bacon said that “COSCO has been
operating in the United States commercially for some time.” COSCO’s facilities in the
1 Confirmed by a visit to the Long Beach naval facilities and port in January 1998.

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United States have been subject to U.S. laws. COSCO’s ships have been reported to be
under surveillance by U.S. law enforcement for criminal activities, including gun-
smuggling and evasion of textile quotas. Moreover, American workers and law
enforcement agents may be present at COSCO’s facilities.
Proponents of the lease to COSCO argued that COSCO has been a tenant at Long
Beach since 1981 without raising national security concerns — even while the naval
station was active. They also contended that a focus on Long Beach was unfair, because
COSCO’s ships have made calls to other cities around the country. Moreover, they
argued, since the naval station closed in September 1994 and the naval shipyard closed
in September 1997, there has not been a naval presence close to the Port of Long Beach.
Some pointed out that Taiwan, which faces a threat from the PLA, allows ships owned
by COSCO to call at the port of Kaohsiung. There has been discussion about COSCO
setting up subsidiaries in Taiwan through another country.
Critics of the lease argued that a larger COSCO presence at U.S. ports would
facilitate increased illegal smuggling of contraband and Chinese intelligence collection,
and reward a company involved in shipments related to weapons proliferation. In the
reported cases of Chinese proliferation of nuclear, chemical, and biological weapons, and
ballistic missiles, a number of Chinese defense-industrial companies or organizations
have been targets of U.S. sanctions, but not COSCO.2 Critics have cited at least two cases
where COSCO has ties to the PLA or defense-industrial companies and allegedly
undermined U.S. national interests. One involved the smuggling of assault weapons and
the other involved the alleged shipping of chemicals to Iran:
! Gun Smuggling Case. In 1996, 2,000 AK-47 assault weapons were
reportedly smuggled aboard a COSCO ship, Empress Phoenix, into the
port of Oakland. Two Chinese companies were under investigation for
the smuggling: Poly Technologies, which is owned by the General Staff
Department of the PLA, and Norinco, or China North Industries
Corporation, which is part of China’s defense industries and owned by
the Chinese government.3 COSCO is not being charged in this case and
is not the subject of ongoing investigations by Federal law enforcement
agents.
! The “Yinhe” Case. In July 1993, the United States sought to prevent a
Chinese cargo ship, Yinhe, from reaching Iran. The United States
believed that the ship was carrying chemicals that could be used for
mustard gas and nerve gas — specifically, thiodiglycol and thionyl
chloride. One unusual factor in this case was that the Chinese media
originally disclosed the issue, along with extensive details. China did not
agree to allow U.S. representatives to participate in a Saudi inspection of
the ship’s cargo until August 26, 1993. Before the completion of the
2 See CRS Issue Brief IB92056, Chinese Proliferation of Weapons of Mass Destruction: Current
Policy Issues, updated regularly, by (name redacted).
3 Mann, Jim and Ronald J. Ostrow. “U.S. Seizes Assault Arms As Smuggling By China Is
Probed,” Los Angeles Times, May 23, 1996; Sanger, David E. “Senators Ask for Inquiry on
Leasing of California Base to Chinese,” New York Times, March 13, 1997.

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inspection, China declared that no chemicals were found. After the
inspection, the State Department said that the suspected chemicals were
not found aboard the ship.4
Chinese access to the Panama Canal has been another question raised by critics. In
February 1997, the government of Panama awarded a lease to Hutchison Port Holdings
Ltd., a subsidiary of Hutchison Whampoa Ltd., one of Hong Kong’s oldest and largest
conglomerates. A news report alleged that this Hong Kong company has “ties to the
Chinese government” and “members of Hutchison’s board of directors consult to
COSCO.” Hutchison operates much of Hong Kong’s ports and several terminals in
southern China. The 25-year lease allows Hutchison Port Holdings Ltd. to operate ports
on both sides of the Panama Canal: Balboa on the Pacific Ocean and Cristobal on the
Atlantic, “two commercially strategic sites,” according to the news report. James
McCarville, President of the Port of Pittsburgh, viewed this development in economic
terms, saying “I don’t think we should be terribly surprised to see the Chinese proceeding
in the same types of capitalistic endeavors as we have been encouraging them to do.”
Panama’s ambassador responded to the article, stating “Hutchison International
Terminals, a world-class port operator based in Hong Kong, made, by far, the best offer
by relying on its competitive advantages and not on the strength of its government. We
made a business decision, not one of state.”5 A staff report to Senators Helms and Biden
of the Committee on Foreign Relations concluded on May 14, 1997, that development of
the two ports by Hutchison Port Holdings “does not translate into a direct national
security threat to the Panama Canal.”6
Another question involved access of Chinese ships to U.S. ports. The U.S.-China
Maritime Transport Agreement of 1988 regulates the use of American ports by Chinese
ships and of Chinese ports by U.S. ships. The agreement provided 40 Chinese ports that
are open to vessels flying the American flag, subject to 24-hour’s advance notice, and
allowed vessels flying the Chinese flag to enter any U.S. port with 24-hour’s advance
notice, except for 12 ports. Entry by ships with Chinese flags to those 12 ports required
four-day’s advance notice. Those 12 ports did not include Long Beach. They were
Portsmouth, NH, New London and Groton, CT, Hampton Roads, VA, Charleston, SC,
Kings Bay, GA, Port Canaveral, FL, Panama City, FL, Pensacola, FL, Port St. Joe, FL,
San Diego, CA, Port Hueneme, CA, and Honolulu, HI.
In June 1996, the United States and China agreed to extend the agreement. In
addition, China agreed to allow two U.S. companies (American President Lines and Sea-
Land) to set up a container transportation service company and six branch offices in
China. This was the first time that China allowed foreign investment in establishing such
companies. As part of the negotiations and for reasons of reciprocity, the United States
agreed to remove the requirement that Chinese vessels enter the 12 ports listed above only
4 CRS Report 96-767, Chinese Proliferation of Weapons of Mass Destruction: Background and
Analysis, by (name redacted).
5 Woellert, Lorraine. U.S. Upset at Deal Ceding Panama Ports to China. Washington Times,
March 19, 1997; Morgan-Gonzalez, Eduardo. Letter to the Editor. Washington Times, March
27, 1997.
6 See CRS Issue Brief IB92088, Panama-U.S. Relations: Continuing Policy Concerns, by (nam
e redacted).

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after giving four-day’s notice.7 Since the Coast Guard lifted those restrictions in August
1996, Chinese ships now provide 24-hour’s notice for entry into all U.S. ports.8
Status of Long Beach’s Plan
A lawsuit (unrelated to concerns about COSCO) brought by the neighboring cities
of Vernon and Compton, and Long Beach Heritage (a historic preservation group) against
the Board of Harbor Commissioners and the Port of Long Beach had delayed construction
of the terminal. The City of Long Beach and COSCO Terminals America Inc., a
California-based corporation, had signed a lease for the proposed terminal in November
1996. Long Beach Harbor Commissioners had approved the plan to reuse the property
as a terminal in September 1996 and reaffirmed it in March 1997, after Superior Court
Judge Robert O’Brien in Los Angeles ordered a review. Opponents of the planned
terminal, however, argued that the existence of the lease prejudiced the review.
As ordered by Judge O’Brien, the Harbor Commissioners canceled the lease with
COSCO on April 21, 1997. Judge O’Brien issued a tentative ruling on May 20, 1997.
That ruling questioned the process of approving the environmental impact report and held
that the Board of Harbor Commissioners was predisposed to approve the proposed
terminal, because the port’s executive director and COSCO had signed a letter of intent
on April 4, 1996. Long Beach authorities appealed and won. On April 29, 1998, the
California Court of Appeals ruled in favor of the Port of Long Beach, agreeing that it was
legal for the port to propose a reuse for the closed naval station before completing an
environmental assessment of the development and that the proposal was not a “pre-
commitment.”
The Navy announced on May 26, 1998, that it completed the environmental impact
report on the disposal of the closed naval station and shipyard at Long Beach, the final
step in the required environmental evaluation. The Navy approved Long Beach’s
proposal to redevelop the naval station by building a marine container facility, intermodal
railyard, and a sea launch facility. That decision did not involve COSCO. The Long
Beach Board of Harbor Commissioners voted on June 1, 1998, to endorse the
environmental impact report. In August 1998, the Navy leased its closed facilities to
Long Beach, with transfer of the title to take place in 1999 and 2000 (as part of the base
closure process). Long Beach is proceeding with plans to build a new container terminal
that it hopes to lease to a shipping company other than COSCO.
Congressional Action
Some Members in Congress disputed that there were national security issues. In a
Dear Colleague letter dated March 25, 1997, Representatives Horn and Dreier concluded
that, based on intelligence briefings from the Central Intelligence Agency, Office of Naval
Intelligence, Coast Guard, and Bureau of Customs, “there is no evidence that the
agreement between the City and Port of Long Beach and the China Ocean Shipping
Company (COSCO) is a national security issue.”
7 Memorandum of U.S.-Sino Maritime Discussions, signed June 14, 1996.
8 U.S. Pacts Ease Port Calls by Chinese. Washington Times (from AP), April 1, 1997.

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Some Members requested official assessment. On March 11, 1997, Senators Boxer
and Feinstein wrote letters to National Security Adviser Samuel Berger and Secretary of
Defense William Cohen requesting reviews of whether “there are any security reasons that
this planned reuse should not occur.” On May 5, 1997, Secretary Cohen responded that
“a review of Department of Defense records reveals no significant national security
concerns” resulting from COSCO’s commerce in the United States. In reply to
Congressman Solomon, Navy Secretary John Dalton wrote on June 3, 1997, that he does
not believe that COSCO “poses a tactical or strategic threat to the U.S. Navy.” On June
18, 1997, National Security Adviser Samuel Berger reported to Members of Congress that
a review by the inter-departmental Committee on Foreign Investment in the United States
(CFIUS) found “no credible evidence” that: (1) COSCO has reasons other than
commercial ones for operating at U.S. ports; (2) COSCO’s planned expansion in Long
Beach could threaten U.S. national security; nor (3) COSCO is engaged in espionage,
smuggling, or other crimes in the United States. CFIUS includes representatives of the
Departments of Treasury, State, Defense, Commerce, and Justice. The CIA, FBI, Office
of Naval Intelligence, Customs Service, and Coast Guard commented on the review.
Critics in Congress raised national security concerns about the proposed lease to
COSCO. Representative Hunter introduced legislation (H.R. 1138) on March 20, 1997,
to prohibit the conveyance of property at the Naval Station, Long Beach, to a commercial
shipping company owned or controlled by a foreign country. In June, Rep. Hunter and
Taylor amended the House-passed Defense Authorization bill (H.R. 1119) to prohibit
such conveyance of any closed military installation. In October 1997, Rep. Hunter and
Senator Inhofe introduced separate bills (H.R. 2715 and S. 1306) to more narrowly
prohibit the conveyance of the closed naval station at Long Beach to COSCO.
The Defense Authorization Act for FYs 1998 and 1999, signed into law on
November 18, 1997 (P.L. 105-85), contains a compromise in Section 2826 that narrowly
prohibits the Navy to convey the closed naval station at Long Beach to COSCO but
allows the President to waive the ban. Either direct conveyance or indirect conveyance
(e.g., by a subsequent lease) is prohibited. According to this law, a waiver may be used
if the President determines that any increased national security risk is being addressed and
the conveyance would not adversely affect national security or significantly increase the
U.S. counter-intelligence burden. As required, the FBI’s director and the Secretary of
Defense submitted classified reports on implications of COSCO’s expansion at Long
Beach for counter-intelligence and national security, dated, respectively, on May 29 and
September 14, 1998.
However, the Defense Authorization Act for FY 1999 (H.R. 3616) contains an
amendment by Representative Hunter to remove the authority for the President to waive
the ban. Conferees retained Hunter’s amendment (in sec. 2822) in the final version that
the President signed on October 17, 1998 (P.L. 105-261).

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