Wall Street Journal, February 8, 1996, p. A10. China, U.S. Firm Challenge U.S. On Encryption-Software Exports By Don Clark RSA Data Security Inc., the dominant supplier of data-privacy software, announced an unusual partnership with the Chinese government that exploits loopholes in U.S. export restrictions on codemaking technology. As part of the deal, RSA, which is based in Redwood City, Calif., plans to fund an effort by Chinese government scientists to develop new encryption software. The Chinese-developed software, based on RSA's general mathematical formula, may be more powerful than versions now permitted for export under U.S. Iaws, said James Bidzos, RSA's president. Two Chinese agencies also will use and distribute RSA data encryption products that may be legally exported from the U.S. The Chinese encryption-development arrangement, which isn't based on those products, appears to be legal as long as RSA doesn't supply the scientists with any other controlled technology, lawyers familiar with export laws said. RSA's move comes at a sensitive time in U.S.-China relations, and opens a new front in the company's long-running campaign against encryption export regulations. The closely held company, and other U.S. software concerns, have attacked the Clinton administration and the National Security Agency for trying to limit the strength of exported U.S. technology, while stronger products increasingly can be purchased from competing foreign companies. "The government has opened export doors a crack, and we sort of drove a Mack truck through them," Mr. Bidzos said of the Chinese deal. "The genie is truly out of the bottle." Stewart Baker, a Washington lawyer and former general counsel of the NSA, said the government "obviously would not be thrilled" by RSA's China venture. China hasn't in the past been party to international agreements governing encryption exports, he noted, and RSA's move could force other countries to consider China as an important player. "It's going to create an interesting strain in the international discussion," he said. Japan, an even more potent force in technology, appears to be leaning toward loosening export controls on encryption, Mr. Baker and other industry executives say. RSA plans to announce the formation of a new company in Japan today, but the venture will be subject to U.S. export controls, Mr. Bidzos said. Encryption uses special mathematical formulas, called algorithms, to scramble voice conversations or data to make them unintelligible to eavesdroppers. RSA's founders developed a popular variant of the technology that helps determine the authenticity of senders and recipients of messages. Both privacy and authentication are widely regarded as crucial to advances in electronic commerce. RSA struck its deal with departments of China's Ministry of Foreign Trade and Economic Cooperation, and the Academy of Sciences. They will use two RSA software products -- one for authentication and one for protecting the contents of PC hard drives -- internally and help distribute them. The Academy scientists who will develop new encryption software also will be paid to try to break RSA's products to test their strength, Mr. Bidzos said. A spokesman at the Commerce Department's bureau of export administration said he was unaware of RSA's China venture, but said the agency would be monitoring developments. Mr. Baker, the former NSA attorney, questioned whether customers in other countries would warm to the idea of Chinese-developed encryption software. Products approved by the U.S. government for export have the stigma that NSA can decode, and Chinese products might be subject to even more suspicion, Mr. Baker said. Still, the RSA deal is likely to be seen as further evidence of slipping U.S. control over encryption. "It is another example of what happens when you try to impose unilateral controls on what is in reality uncontrollable technology," said Bruce Heiman, an outside attorney for the Business Software Alliance. [End]