Space Systems/Loral‘s call for the U.S. government to block a European competitor from packaging Chinese launch services with its commercial satellite bids is a bad idea that

nonetheless points to a very real issue stemming from a misguided U.S. policy.

If Loral gets its way – it seems unlikely, but strange things can happen in election years, especially where China is involved – the likely result will be more distortion and unintended negative consequences in a market that already has seen enough of both.

Patrick DeWitt, chief executive officer of Space Systems/Loral has publicly called on the U.S. government to pressure ThalesAlenia Space to stop using Chinese-built Long March rockets by threatening to prevent the satellite manufacturer’s corporate owners from bidding on Pentagon or other lucrative U.S. government contracts. DeWitt understandably is taking aim at the

competitive advantage ThalesAlenia Space currently enjoys

as the only major commercial satellite maker with access to China’s low-cost Long March rockets – a factor that has been important when the customer is a Chinese-owned satellite operator.

The Franco-Italian company has gotten around

the U.S. ban on launching American satellite components aboard Chinese rockets by developing a spacecraft containing no such hardware. U.S. satellite makers are by definition subject to the ban, and Europe’s other major commercial satellite builder, Astrium Satellites, also is

affected because its products include U.S. components.

This situation has its roots in the Strom Thurmond National Defense Authorization Act of 1999, which reclassified communications satellites as weapons for export purposes. The satellite-export provisions

were included in that law following allegations that China was improving its missiles by using technical data obtained in the course of launching American-built commercial spacecraft as well as data it received during launch accident investigations.

Although the law does not explicitly bar U.S. satellite exports to China, it has had that effect in practice: The U.S. State Department, which licenses weapons exports according to a set of rules known as the International Traffic in Arms Regulations, or ITAR, has generally refused to permit the shipment of U.S. satellite technology to China. As a result, China, once an important global supplier of commercial launch services, was effectively shut out of the market.

This has begun to change, however. Not only has ThalesAlenia Space come out with its so-called ITAR-free satellite; the government-owned China Academy of Space Technology has in recent years won satellite contracts that include launches aboard Long March rockets.

The U.S. government obviously has no say in who launches Chinese-built satellites. That also would be true for ThalesAlenia Space’s ITAR-free satellite except for the fact that other divisions of the European electronics giant do big business with the U.S. Department of Defense. The U.S. government could, at least in theory, lock ThalesAlenia out of the Pentagon market – or threaten to do so – unless its satellite division agrees not to buy Chinese launch services.

This apparently is the angle Mr. DeWitt is pursuing. “We want our senators and congressmen to know: you’re buying billions of dollars [of products] from a company that is a violator of U.S. policy,” he said recently at the Satellite 2008 conference in Washington.

Arianespace, the European launch services provider that stands to lose business as China wades back into the global commercial launch market, has voiced similar sentiments.

There are indications that these arguments have gained a sympathetic ear or two in Congress. The 2008 defense spending bill, for example, requires the Pentagon to prepare a report identifying non-Chinese companies that are signing up for Long March launches.

Contrary to Mr. DeWitt’s claim, however, ThalesAlenia Space is not violating anything – there is no formal U.S. ban on Chinese commercial launches, even to the extent that Washington is in the position to impose one.

More to the point, Mr. DeWitt

effectively is asking the government to reinforce a policy that created the very situation he seeks to address. While the reaction to any U.S. move in that direction is difficult to predict, the likely result would be more market fragmentation and less opportunity for true competition.

If Loral really wants to be an agent of constructive change it should lobby Washington to begin laying the groundwork for China’s eventual full return to the international launch marketplace. The existing players – Arianespace, International Launch Services and Sea Launch – have argued that the market is crowded enough as it is, but the situation last year in which two of the three main commercial vehicles were grounded by failure, resulting in delays for satellite owners, suggests it wouldn’t hurt to have another provider.

Some form of price control might be needed to ensure that China does not undercut the competition, as the disappearance of an existing provider would not be helpful. Meanwhile, there are established mechanisms short of blanket export-license denials to prevent sensitive technology – meaning that which is not already commercially available – from changing hands as Western satellites are integrated with Chinese launch vehicles.

The emergence of an ITAR-free satellite and China’s nascent reappearance as a launch services provider are proof positive that the international space marketplace is not completely beholden to the whims of the United States. The sooner U.S. policymakers come to grips with that reality and recognize commercial communications satellites and components for what they really are – a commodity that does not belong on the State Department’s munitions list – the better off everyone will be.