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Treasury agents seized 2,000 AK-47 rifles and arrested seven people in San Francisco for smuggling the automatic weapons in from China, the government announced Thursday.

"We consider this to be a very serious case," Deputy Attorney General Jamie Gorelick told a news conference. "Smuggling 2,000 AK-47s into this country is a very serious matter." Importation of automatic weapons has been banned for several years.The case could further raise tensions between China and the United States, especially because the president of an involved company is the son-in-law of China's paramount leader, Deng Xiaoping.

After talking with law enforcement officials, Rep. Charles Schumer, D-N.Y., wrote President Clinton that he is rethinking his previous support for favorable trade status for China.

Two of those arrested are representatives of China's state-owned weapons manufacturers, said Schumer, ranking minority member of the House crime subcommittee, after talking with federal law enforcement officials. Those arrested also discussed the sale of explosives, antiaircraft artillery and other powerful weapons with U.S. undercover agents, Schumer said he was told.

Rejecting the notion that those arrested were operating entirely on their own, Schumer said, "You can't export as many as 2,000 weapons from China unless you have someone in the government going along with this."

The seven defendants arrested Wednesday were scheduled for a court appearance in San Francisco later Thursday at which criminalcomplaints will be unsealed, Gore-lick said.

The case was described in published reports as the largest seizure of smuggled automatic weapons in U.S. history. The weapons were said to be worth $4 million.

The 18-month investigation was conducted jointly by the Treasury's Bureau of Alcohol, Tobacco and Firearms and its Customs Service and the U.S. attorney in San Francisco, Gorelick said.

Undercover ATF agents were able to purchase the weapons during the investigation, according to a federal law enforcement official who spoke on condition of anonymity.

Published reports said some of those arrested worked for Chinese arms companies.

Gorelick was asked if the Chinese government sanctioned the smuggling. "That's a very good question, and one that I will decline to answer," she said.

She also declined to say whether U.S. trade negotiators in disputes with China were aware of the case.

The United States outlined $3 billion in trade sanctions against China last week, the largest in U.S. history, because of its failure to enforce a 1995 agreement to stop piracy of American computer pro-grams, films and music. The move touched off the prospect of a full-fledged trade war as China responded with a sanctions list of its own.

In another case, however, the administration backed down from penalties when it decided not to punish China for selling goods to Pakistan that could be used to make nuclear weapons. Steering a zigzag course, the administration also announced unconditional renewal of general trade benefits for Beijing.

The Chinese government refused immediate comment Thursday on the smuggling arrests. "We're looking into the case," Foreign Ministry spokesman Cui Tian-kai told reporters.

Representatives of the state-owned China Northern Industrial Corp., also known as Norinco, and Poly Technologies, a related company that makes weapons for the Chinese military, were charged with smuggling the AK-47s, the New York Times, the Los Angeles Times, the San Francisco Chronicle and the Washington Post reported Thursday. Both companies are based in Beijing.

More than 90 federal agents seized the weapons and made the arrests Wednesday night in the San Francisco Bay area. The suspects included American citizens and Chinese visiting or living in the United States, the New York Times reported.

A secretary in the general manager's office of China Northern Industries said the company did not know about the allegations but thought they were unfounded.

The agents were working on a deal with the representatives that focused on the AK-47 and dealt with more sophisticated systems ranging from hand-held anti-aircraft missiles, to explosives and other devices, the New York Times reported, quoting an unidentified official familiar with the investigation.

The arrests came before agents had time to negotiate over the more sophisticated weaponry.

In fact, agents had not planned to make the arrests and reportedly hurried the sweep after the media learned of the sting.

Officials said they focused on the companies because they have evidence that they had previously smuggled other weapons into the United States.

It was unclear if the representatives had sold the goods for personal profit or if the sale was sanctioned by the company itself. The rifles were believed to be brought in through the port at Oakland on March 18.