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

97-476 F
Updated June 3, 1998
CRS Report for Congress
Received through the CRS Web
Long Beach: Proposed Lease by China Ocean
Shipping Co. (COSCO) at Former Naval Base
Shirley A. Kan
Analyst in Foreign Affairs
Foreign Affairs and National Defense Division
Summary
At issue is a proposal by the City of Long Beach, California, to build a container
terminal at the site of a closed naval station and a lease (now canceled) for the terminal
to be operated by China Ocean Shipping Company (COSCO). COSCO is a commercial
shipping company owned by China. The proposed expansion of COSCO’s facilities at
the Port of Long Beach has raised 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 Administration
officials have written that COSCO's use of a terminal to be built on former Naval
property would not adversely affect national security. Meanwhile, a lawsuit to block
construction of the terminal (not the lease with COSCO) has resulted in cancellation of
the lease and delays in construction. The Navy completed its environmental impact
report on May 26, 1998, which approved Long Beach's reuse plan. Some in Congress
have raised national security concerns about this proposed lease. Other Members say
that, based on intelligence briefings, the proposed lease poses no national security
threats. The Defense Authorization Act for FY1998-1999 (P.L. 105-85) contains 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. Current Congressional proposals
by Rep. Hunter and Sen. Inhofe to the Defense Authorization Act for FY 1999 (H.R.
3616, S. 2057) would remove the waiver authority.
Introduction
A proposal by Long Beach to reuse property at a closed naval station and lease a new
terminal to COSCO has raised a number of issues. Some have 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. This CRS
report provides background and analysis concerning potential national security issues,
congressional action, and current status and outlook.
Congressional Research Service ˜ The Library of Congress

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Former Naval Station
Defense Department 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 Department of Defense (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 how to reuse the facility.
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. The original lease with COSCO (now canceled) expected the new terminal
to be completed by July 1998.
COSCO
COSCO has operated at the Port of Long Beach since 1981 but does not have its own
terminal. It currently subleases 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 currently make 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 facilities for trucking and rail services around the country.
Potential Implications for National Security
There are 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, Defense Department spokesman Kenneth Bacon said that “COSCO
has been operating in the United States commercially for some time.” COSCO’s

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facilities, unlike Chinese consulates in the United States, are 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 could be present at COSCO’s facilities.
Proponents of the lease to COSCO argue 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 contend that a focus on Long Beach is unfair, because
COSCO's ships make calls to other cities around the country. Moreover, they argue, since
the naval station closed in September 1994 and the naval shipyard closed in September
1997, there is no naval presence close to the Port of Long Beach. Some point 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 argue 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.1 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. COSCO is no
2
t 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 inspection, China
1 See CRS Issue Brief 92056, Chinese Proliferation of Weapons of Mass Destruction: Current
Policy Issues, updated regularly, by Shirley A. Kan.
2 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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declared that no chemicals were found. After the inspection, the State Department
said that the suspected chemicals were not found aboard the ship.3
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.” A staff report to Senators Helms and Biden
4
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."5
Another question involves 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

3 CRS Report 96-767, Chinese Proliferation of Weapons of Mass Destruction: Background and
Analysis, by Shirley A. Kan.
4 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.

5 See CRS Issue Brief 92088, Panama-U.S. Relations: Continuing Policy Concerns, by Mark P.
Sullivan.

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after giving four-day’s notice. Since the Coast Guard lifted those restrictions in August
6
1996, Chinese ships now provide 24-hour’s notice for entry into all U.S. ports.7
Congressional Action
Some Members in Congress have disputed that there are national security issues. For
example, 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.”
Some Members have 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 have 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. A waiver may be used if the President
determines that any increased national security risk is being addressed and the conveyance
6 Memorandum of U.S.-Sino Maritime Discussions, signed June 14, 1996.
7 U.S. Pacts Ease Port Calls by Chinese. Washington Times (from AP), April 1, 1997.

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would not adversely affect national security or significantly increase the U.S. counter-
intelligence burden. If necessary, the President may issue the waiver allowed under
current law, since senior Administration officials have not expressed national security
concerns about the proposed lease with COSCO. Also, the Secretary of Defense and the
FBI's Director are to report on national security implications. Those reports have not been
submitted.
The Defense Authorization Act for FY 1999 (H.R. 3616) contains an amendment by
Representative Hunter that would prohibit the direct or indirect conveyance of the
property at the closed naval station at Long Beach to COSCO — but without the authority
for the President to waive the ban. The House passed H.R. 3616 on May 21, 1998.
Senator Inhofe intends to propose an amendment to the Senate's version (S. 2057) with
a similar prohibition that also does not allow a Presidential waiver.
Status and Outlook
Meanwhile, 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 Navy and the city may now discuss conveyance of the naval property to the
city. The Long Beach Board of Harbor Commissioners voted on June 1, 1998, to endorse
the environmental impact report. Construction of the terminal may begin in August 1998.
In addition, a lawsuit 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 has 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."
Another lease with COSCO would have to be signed, if and when approvals are
given and COSCO is still willing to lease the planned terminal at Long Beach.
Meanwhile, Los Angeles, with a port next to Long Beach’s port, is seeking business with
COSCO.