[Senate Hearing 116-624]
[From the U.S. Government Publishing Office]
S. Hrg. 116-624
THE CHINA CHALLENGE:
REALIGNMENT OF U.S. ECONOMIC POLICIES
TO BUILD RESILIENCY AND COMPETITIVENESS
=======================================================================
HEARING
before the
SUBCOMMITTEE ON SECURITY
of the
COMMITTEE ON COMMERCE,
SCIENCE, AND TRANSPORTATION
UNITED STATES SENATE
ONE HUNDRED SIXTEENTH CONGRESS
SECOND SESSION
__________
JULY 30, 2020
__________
Printed for the use of the Committee on Commerce, Science, and
Transportation
[GRAPHIC NOT AVAILABLE IN TIFF FORMAT]
Available online: http://www.govinfo.gov
______
U.S. GOVERNMENT PUBLISHING OFFICE
52-823 PDF WASHINGTON : 2023
SENATE COMMITTEE ON COMMERCE, SCIENCE, AND TRANSPORTATION
ONE HUNDRED SIXTEENTH CONGRESS
SECOND SESSION
ROGER WICKER, Mississippi, Chairman
JOHN THUNE, South Dakota MARIA CANTWELL, Washington,
ROY BLUNT, Missouri Ranking
TED CRUZ, Texas AMY KLOBUCHAR, Minnesota
DEB FISCHER, Nebraska RICHARD BLUMENTHAL, Connecticut
JERRY MORAN, Kansas BRIAN SCHATZ, Hawaii
DAN SULLIVAN, Alaska EDWARD MARKEY, Massachusetts
CORY GARDNER, Colorado TOM UDALL, New Mexico
MARSHA BLACKBURN, Tennessee GARY PETERS, Michigan
SHELLEY MOORE CAPITO, West Virginia TAMMY BALDWIN, Wisconsin
MIKE LEE, Utah TAMMY DUCKWORTH, Illinois
RON JOHNSON, Wisconsin JON TESTER, Montana
TODD YOUNG, Indiana KYRSTEN SINEMA, Arizona
RICK SCOTT, Florida JACKY ROSEN, Nevada
John Keast, Staff Director
Crystal Tully, Deputy Staff Director
Steven Wall, General Counsel
Kim Lipsky, Democratic Staff Director
Chris Day, Democratic Deputy Staff Director
Renae Black, Senior Counsel
------
SUBCOMMITTEE ON SECURITY
DAN SULLIVAN, Alaska, Chairman EDWARD MARKEY, Massachusetts,
ROY BLUNT, Missouri Ranking
TED CRUZ, Texas, AMY KLOBUCHAR, Minnesota
DEB FISCHER, Nebraska RICHARD BLUMENTHAL, Connecticut
MARSHA BLACKBURN, Tennessee BRIAN SCHATZ, Hawaii
MIKE LEE, Utah TOM UDALL, New Mexico
RON JOHNSON, Wisconsin TAMMY DUCKWORTH, Illinois
TODD YOUNG, Indiana KYRSTEN SINEMA, Arizona
RICK SCOTT, Florida JACKY ROSEN, Nevada
C O N T E N T S
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Page
Hearing held on July 30, 2020.................................... 1
Statement of Senator Sullivan.................................... 1
Statement of Senator Markey...................................... 2
Statement of Senator Wicker...................................... 4
Statement of Senator Klobuchar................................... 33
Statement of Senator Blunt....................................... 34
Statement of Senator Rosen....................................... 36
Statement of Senator Capito...................................... 38
Statement of Senator Blackburn................................... 42
Statement of Senator Blumenthal.................................. 43
Statement of Senator Young....................................... 67
Statement of Senator Cruz........................................ 73
Witnesses
Hon. Michael Wessel, Commissioner, U.S.-China Economic and
Security Review Commission..................................... 5
Prepared statement........................................... 7
Dr. Rush Doshi, Director, Brookings Institution China Strategy
Initiative; Fellow, Yale Law School China Center............... 17
Prepared statement........................................... 20
Hon. Keith Krach, U.S. Under Secretary of State for Economic
Growth, Energy, and the Environment, U.S. Department of State.. 49
Prepared statement........................................... 51
Hon. Nazak Nikakhtar, Assistant Secretary, International Trade
Administration, Industry and Analysis, U.S. Department of
Commerce....................................................... 57
Prepared statement........................................... 60
Appendix
Letter dated July 1, 2020 from Keith J. Krach, Under Secretary of
State for Economic Growth, Energy, and the Environment, U.S.
Department of State............................................ 79
Letter dated August 18, 2020 from Keith J. Krach, Under Secretary
of State for Economic Growth, Energy, and the Environment, U.S.
Department of State............................................ 81
Response to written questions submitted by Hon. Edward Markey to:
Hon. Michael Wessel.......................................... 84
Dr. Rush Doshi............................................... 90
Response to written questions submitted to Hon. Keith Krach by:
Hon. Dan Sullivan............................................ 91
Hon. Rick Scott.............................................. 95
Hon. Edward Markey........................................... 97
Response to written questions submitted to Hon. Nazak Nikakhtar
by:
Hon. Dan Sullivan............................................ 98
Hon. Rick Scott.............................................. 101
Hon. Edward Markey........................................... 102
THE CHINA CHALLENGE:
REALIGNMENT OF U.S. ECONOMIC POLICIES
TO BUILD RESILIENCY AND COMPETITIVENESS
----------
THURSDAY, JULY 30, 2020
U.S. Senate,
Subcommittee on Security,
Committee on Commerce, Science, and Transportation,
Washington, DC.
The Subcommittee met, pursuant to notice, at 10 a.m. in
room SR-253, Russell Senate Office Building, Hon. Dan Sullivan,
Chairman of the Subcommittee, presiding.
Present: Senators Sullivan [presiding], Blunt, Cruz,
Blackburn, Young, Wicker, Capito, Markey, Klobuchar,
Blumenthal, and Rosen.
OPENING STATEMENT OF HON. DAN SULLIVAN,
U.S. SENATOR FROM ALASKA
Senator Sullivan. Good morning. This hearing will now come
to order.
I am pleased to welcome our distinguished panels of
witnesses today as the Economic and Security Subcommittee
focuses on a very important topic that I think there's a lot of
bipartisan interest in and that is the economic and
geostrategic challenge that the rise of China poses for the
United States not just today but in the future.
The Communist Party-led People's Republic of China through
unfair trade practices, intellectual property theft, market
manipulation, and very prominently, in my view, non-reciprocal
treatment not just in the economic realm but in many realms has
been a force in the global economy that undercuts the
resiliency and strength of the U.S. economy.
China has been one of the world's fastest-growing
economies, averaging close to 10 percent growth from 1979 to
2015. In 2014, China overtook the United States as the world's
largest economy in purchasing power parity basis, according to
the International Monetary Fund.
I believe that there is a strong and bipartisan interest,
hopefully we will see that today, in establishing a long-term
economic United States strategy with our allies that focuses on
reciprocity, intellectual property theft, and ultimately from
the United States' perspective outcompeting the Chinese.
In May, the White House issued its document called The
United States Strategic Approach to the People's Republic of
China. This document stated, ``The Chinese Community Party's
expanding use of economic, political, and military power to
compel acquiescence from nation states across the globe harms
vital American interests and undermines the sovereignty and
dignity of countries and individuals around the world.''
This document is part of the broader national security
strategy issued a couple years ago by the Trump Administration
and national defense strategy issued by the Department of
Defense.
These documents, although you don't see it in the press, in
my view, have very strong bipartisan support in the Congress
for laying out the challenge that our Nation faces with regard
to China.
What they lack right now is implementing documents,
implementing strategies, particularly as it relates to the
economic challenge that China poses. So what our hearing
intends to do today is to start the focus on the implementation
and execution of these strategies.
As I mentioned, I think these strategies have broad-based
bipartisan support, but we're going to need to be able to bring
our government, our society together for the long-term,
literally decades, like we did in the Cold War with the Soviet
Union, if we're going to execute these in a way that protect
American interests, our workers, our economic and national
security interests.
I'm hopeful that that's the path that we are beginning on.
The Trump Administration, in a series of speeches through
Cabinet members in the last few weeks, has started to lay out
this strategy. I know that Secretary Pompeo, as we speak, is
testifying in front of the Senate Foreign Relations Committee,
and I am hopeful with our two panel witnesses today, government
witnesses and experts from the private sector and think tank
community, we'll be able to start informing the Congress on
this issue, which I think is one of the most important issues
facing the United States.
So that's our goal, and I'm excited to have Ranking Member
Markey as my Ranking Member here. I know he feels the same on a
lot of the issues with regard to the challenges that China
poses, and with that, I will turn to the Ranking Member for his
opening statement.
Senator Markey.
STATEMENT OF HON. EDWARD MARKEY,
U.S. SENATOR FROM MASSACHUSETTS
Senator Markey. Thank you, Mr. Chairman. Thank you so much
for convening this hearing and for your continued partnership
on the Subcommittee, and I want to thank our witnesses for
their willingness to participate today.
As the Ranking Member of both this subcommittee and the
East Asia Subcommittee of the Foreign Relations Committee, I
believe that meeting the China challenge should be a bipartisan
priority.
We must compete against Beijing's efforts to unfairly tilt
the playing field against American workers and businesses.
Those actions include state support for companies, intellectual
property theft, as well as increasingly using multilateral
institutions to set standards that privilege Chinese companies
and technology.
China also uses its vast economic tools to threaten freedom
around the world. Beijing is already exploiting the size of its
market to coerce American citizens and business leaders as well
as foreign governments into self-censorship to protect official
Chinese Government messaging.
We know China is using exports and foreign assistance,
including through the Belton Road Initiative, to embed around
the world not only surveillance technologies but also the
values and practices that activate those technologies for
authoritarian repression.
As we engage in this competition of systems, we must
remember that the Chinese Government is testing their
authoritarian tools, first and foremost, on the people of
China, and I want to make clear that in today's hearing and
otherwise, we are focused on the threats posed by the Chinese
Government.
But while countries around the world look to the United
States to lead an international coalition to push back on
Chinese aggression, they note that the United States has
retreated from our historic support of democracy and human
rights as a key pillar of our foreign policy. They note that
the Trump Administration has abandoned international
institutions, such as the World Health Organization, while the
Chinese Government has only stepped up their influence
campaign, and they note this Administration's unprecedented
support for a variance over allies.
Rather than take a leadership role in pulling together a
global coalition to combat Chinese policy objectives, this
Administration has pursued an aggressive go-it-alone approach
that swings between pandering to China, including an apparent
green light from President Trump for detention camps to the
closing of the Chinese Consulate in Houston, without any clear
reason or explanation of what we seek in return.
We cannot consider our China policy in a vacuum. Every
policy decision from the past three and a half years impacts
how the rest of the world views the current conflict. When I
assess these policy decisions, it's clear to me that we have
failed to rise to this moment.
As China steps up its propaganda campaign in the midst of
the coronavirus, it's hard for the United States to point
fingers when our own virus response has been so inadequate.
The President's inexplicable failure to lead a national
response to the coronavirus crisis and his attacks against
science, free speech, and the media has left the United States
flailing as other countries lead in responding to the pandemic.
As China continues to dominate manufacturing and requires
companies to bring on Chinese partners and share intellectual
property, the United States has cut relevant areas of domestic
spending and hasn't leveraged the full resources of the
government to spur economic development.
We should be investing in our research and development and
technology sectors and putting money into education with a
particular focus on STEM. We should also be utilizing the
Defense Production Act to its full potential to mobilize the
economy during the pandemic.
As China engages in a comprehensive campaign to exploit
international institutions for their own purposes, we have
retreated even further from the world stage. When the United
States is absent on the world stage, China is only too happy to
fill the void.
Competition with China is fundamentally about a free
society versus authoritarianism. We must utilize all of the
tools at our disposal to make the United States economy
competitive and resilient in this as we work with Democratic
countries around the world which act in a connected way to
protect the values we hold so dear.
The challenges are too important, the stakes are too high.
The United States simply cannot afford to cede leadership.
So thank you, Mr. Chairman, for this very important
hearing. Thank you to all of the witnesses who are
participating today. This is clearly a very important subject.
Senator Sullivan. Thank you, Senator Markey, and I
appreciate your partnership on this subcommittee where we've
had a lot of really good hearings and I think a lot of overall
bipartisan agreement on a number of issues. I think that's
important, particularly as it relates to China.
I noticed that the Chairman of the Commerce Committee,
Senator Wicker, is here, and I would ask him to give an opening
statement, as well.
Mr. Chairman.
STATEMENT OF HON. ROGER WICKER,
U.S. SENATOR FROM MISSISSIPPI
The Chairman. Thank you very much, Mr. Chairman.
I appreciate your leadership on this issue and that of
Ranking Member Markey. This is an ambitious two-panel hearing
this morning and should be quite valuable.
The focus, of course, is the Chinese Communist Party and
their predatory economic practices and their impact on American
companies and workers, both at home and abroad.
Confronting these practices and protecting our economic
advantages into the future will require an aggressive U.S.
Government response supported by congressional action and
oversight.
In May, the White House published its Whole of Government
Response Plan in a document called The United States Strategic
Approach to the People's Republic of China.
Today's hearing will focus on the economic dimensions of
the overall U.S. strategy. As the White House Strategic
Approach points out, the CCP uses a variety of weapons to
undermine America's economic competitiveness, including cyber
attacks, intellectual property theft, force technology
transfers, and illegal subsidies to state-owned enterprises.
I hope our witnesses will describe the particular impacts
of China's campaign with respect to industries under the
Commerce Committee's jurisdiction, such as telecommunications,
maritime, aviation, and space.
America's future economic prosperity is not the only thing
at stake in this strategic competition. As the COVID-19
pandemic continues, China is apparently using tactics from its
predatory playbook against our public health sector.
Last week, the Department of Justice indicted two Chinese
hackers for a widespread cyber attack campaign supported by the
Chinese Intelligence Service. The targets allegedly included at
least four U.S. pharmaceutical and biotech firms working on a
COVID-19-related testing and treatment project.
The COVID-19 crisis has revealed unacceptable
vulnerabilities caused by years of letting the CCP engage in
disruptive and damaging economic practices without an effective
coordinated response. Hopefully that's about to change.
During the initial phase of the COVID-19 outbreak, for
example, Chinese exporters and shipping ground to a halt and
many U.S. businesses were forced to go without essential
supplies. In particular, the United States pharmaceutical
industry has been shown to be overly reliant on Chinese
suppliers. We cannot tolerate having these economic
vulnerabilities.
The CCP is unlikely to stop its predatory practices.
Therefore, the U.S. Government should help our economy become
more resilient against constant pressure from Beijing.
I would ask our witnesses from the State Department and the
Commerce Department, respectively, to detail the measures they
are taking to support a multi-Cabinet approach.
Congress can play a significant role in supporting the
efforts of the executive branch. The Commerce Committee is
doing its part to help by producing bipartisan legislation,
such as the recently enacted Secure and Trusted Communications
Network Act, known as the Rip and Replace, and there are funds
in the COVID-19 Phase 4 proposal by the Majority Leader in this
regard.
This law will help protect American communications networks
from threats posed by CCP bat suppliers, such as Huawei and
ZTE, by supporting the removal of that equipment. I would
welcome suggestions from all of our witnesses on how Congress
can continue to bolster the Administration's efforts.
But, Mr. Chairman and Ranking Member Markey, you have both
been champions in this regard, and I appreciate your bipartisan
support.
I thank the witnesses for their time today and look forward
to their recommendations.
Thank you very much.
Senator Sullivan. Great. Thank you, Mr. Chairman.
I want to welcome our witnesses. I have instructions here
that say if the witnesses have not taken their seats, please
ask them to do so. We have no witnesses actually here in the
room, but I think they've taken their seats virtually. So I can
see them on the screen.
I want to welcome Mr. Michael Wessel, Commissioner of the
U.S.-China Economic and Security Review Commission, and Mr.
Rush Doshi, Director of the China Strategy Initiative at The
Brookings Institution.
Gentlemen, you each will have 5 minutes to deliver an oral
statement. A longer written statement will be included for the
record.
Thanks again for being here. Mr. Wessel, why don't we begin
with you?
STATEMENT OF HON. MICHAEL WESSEL, COMMISSIONER, U.S.-CHINA
ECONMIC AND SECURITY REVIEW COMMISSION
Mr. Wessel. Thank you for the invitation to appear before
you today. The topic of today's hearing directly affects every
one of our citizens.
My name is Michael Wessel, and I'm appearing before you
today as a Commissioner on the U.S.-China Economic and Security
Review Commission, but as a normal Washington disclaimer, I'm
speaking for myself, although my comments are informed by my
service on the Commission and other work I've been involved in
for many years.
Today's hearing raises the critical issue of how to respond
to the China challenge. While China's policies and actions pose
the greatest current threat to our competitive posture, other
nations are watching America's response to determine whether
they should emulate China's actions or whether America will
stand tall and defend and promote its interests.
Last week, China's Foreign Minister Wang Yi said that,
``The current situation in Chinese-U.S. relations is not what
China desires to see. The United States is responsible for all
of this.''
I agree that we don't want the current state of relations
to continue, but I strongly disagree that the U.S. is solely
responsible.
Years of repeated attacks on our industrial base, the
continuous theft of our intellectual property, countless unfair
trade practices, massive subsidies of state-owned and state-
supported entities, and many other predatory and protectionist
policies, along with China's human rights abuses, current
actions in Hong Kong, and power projections in the South China
Sea and elsewhere required that we more seriously confront
China. China's actions led to the response.
China's leadership has made clear their intentions through
numerous policy pronouncements and activities. They don't pose
their approach as being win-win but, rather, winning and
dominate.
The Chinese Communist Party's policies have contributed to
the hollowing out of production, the dangerous reliance on
uncertain and sometimes risky supply chains, and a loss of
resiliency. Countless jobs have been lost.
In my prepared testimony, I outline many of the CCP's
policies and practices that form the basis for our concerns.
They're well-documented. The dangerous dependence on China for
our medicines, medical devices, and personal protective
equipment has painted a stark picture for the public but that
dependence exists in many other sectors and could increase if
the CCP achieves its stated goals.
But ministry is right as it relates to policy failures here
in the U.S. that must be addressed. Our inaction on certain
fronts and actions on others have contributed to the current
problems.
After the accession of China, the World Trade Organization,
many U.S. businesses began to set up operations in China with
the stated goal of serving the Chinese market. Despite chasing
requirements for joint ventures, technology transfer, and other
policies, the amount of investment by U.S. firms in China
increased as did their employment which rose by almost 600
percent to 1.7 million people by 2017.
R&D by U.S. firms in China has increased an average of 13.6
percent per year since 2003, almost double the rate of their
domestic R&D here. The promise of serving the Chinese market
has not yielded all the claimed benefits. Research shows that
60 percent of China's exports to the U.S. emanate from foreign
invested enterprises. Not all of those are U.S. but many are.
Now with China's rising debt load and need for capital is
beginning to open its financial sector to foreign firms, it's
not doing that to advantage these firms but to serve its own
needs. The risk to foreign investors, our investors, is
significant in economic terms and in terms of advancing China's
military and technological capabilities.
Hundreds of billions of dollars may flow into China over
the next 2 years. This bears careful and strict scrutiny. On
these and many other fronts, we should examine some policy
options to promote our interests.
In my testimony, I identify several recommendations made by
the Commission as well as several of my own, but we need a
comprehensive approach, and I believe that emulating the
congressional effort that foster the Omnibus Trading and
Competitiveness Act of 1988, which this committee played a
critical role in, is worth considering.
We not only need to confront the acts and policy fostered
by the CCP but need to invest in our own competitiveness and
adopt rules that will advance our interests.
We also need to focus not only now on today's challenges
but those over the horizon.
Thank you for the opportunity to appear before you this
morning, and I look forward to your questions.
[The prepared statement of Mr. Wessel follows:]
Prepared Statement of Hon. Michael Wessel, Commissioner, U.S.-China
Economic and Security Review Commission
Chairman Sullivan, Ranking Member Markey, Members of the
Subcommittee. I want to thank you for the invitation to appear before
you today on ``The China Challenge: Realignment of U.S. Economic
Policies to Build Resiliency and Competitiveness.'' This is a critical
issue for U.S. economic and national security interests and directly
affects every one of our citizens.
My name is Michael Wessel and I am appearing before you today as a
Commissioner on the U.S.-China Economic and Security Review Commission
(Commission), where I have served since its creation in 2001. But, as a
disclaimer, I am speaking for myself, although my comments are informed
by my service on the Commission and other work I have been involved in
for many years.
The Commission was created by Congress in 2001 in conjunction with
the debate about the grant of Permanent Normal Trade Relations (PNTR)
to China, paving the way for its accession to the World Trade
Organization. The Commission was tasked with monitoring, investigating
and submitting to Congress an annual report on the national security
implications of the bilateral trade and economic relationship between
the United States and the People's Republic of China, and to provide
recommendations, where appropriate, to Congress for legislative and
administrative action.
The grant of PNTR ended the annual debate about whether to extend
most favored nation status to China. But as it passed PNTR, Congress
created the Commission because it did not want to forego the annual
review of our relationship with China. Since the creation of the
Commission, our mandate has been extended and altered as the U.S.-China
relationship evolved.
The Commission is a somewhat unique body: We report to and support
Congress. Each of the four Congressional leaders appoint 3 members to
the Commission for 2-year terms. In 7 of the last 10 years, we have
issued unanimous reports. In the 3 years where it was not unanimous,
there was only one dissenting vote. In many ways, the evolving
challenges and opportunities posed by the relationship with China have
united us in our analysis. All of our hearings, testimony, annual
reports and research are available at our website www.uscc.gov.
Today's hearing raises the critical issue of how to respond to the
China challenge. While China's policies and actions pose the greatest
current threat to our competitive posture, other nations are watching
America's response to determine whether they should emulate China's
actions or whether America will stand tall and defend its interests.
The long-term question is whether we will shed an ideological, outdated
approach to trade and competition in favor of an approach based on
pragmatism and reality that focuses on our economic, health, food and
national security interests.
The China Challenge
There is substantial documentation on the unfair, exclusionary and
predatory trade and economic policies that China has used to promote
its own interests, at the expense of the U.S. and other countries.
China, indeed, has been very public in its plans--ranging from its Long
and Medium Plan for Scientific and Technological Development (which
included calls for indigenous innovation) to its five-year plans, to
the Made in China 2025 Initiative, the Standards 2035 program, and
numerous other industrial policy blueprints. Economists, academics and
the press have often discounted China's statements, all-too-often to
the detriment of our own national and economic security.
The U.S.-China Economic and Security Review Commission has
documented China's plans, and their impact since China's entry into the
World Trade Organization in 2001. China has identified the industries
and sectors it wants to excel in, and often, dominate. China indicated
that it would allocate more than $1.5 trillion to support the goals of
its 13th Five Year Plan (2016-2020).
The USTR's Section 301 ``Investigation into China's Acts, Policies,
and Practices Related to Technology Transfer, Intellectual Property,
and Innovation'' is the most comprehensive government study on those
topics done to date. Various estimates over the years have identified
hundreds of billions of dollars of lost intellectual property due to
China's legal and illegal policies. As Dennis Blair and Keith Alexander
stated in an op-ed for the New York Times upon the initiation of the
USTR's investigation, ``All together, intellectual-property theft costs
America up to $600 billion a year, the greatest transfer of wealth in
history. China accounts for most of that loss.'' \1\
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\1\ Dennis C. Blair and Keith Alexander, ``China's Intellectual
Property Theft Must Stop,'' New York Times, August 15, 2017.
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China's IP policies have enhanced their economic and military
competitiveness and undermined our own. Companies have found their
ability to profit from their investments in research and development
undermined by the transfer of technology, which is often a requirement
based on market access rules and other provisions adopted by the
Chinese government. And, coupled with exclusionary as well as
preferential policies, many companies have expanded their R&D and
production in China, at the cost to our country.
China has identified market-share allocations for key sectors. For
example, in robotics, China has indicated that it wants to be 70
percent self-sufficient by 2025 and has invested money in the sector
\2\, supported it with preferential policies, identified key foreign
companies for acquisition (e.g., Germany's Kuka) and engaged in other
legal and illegal activities to acquire key technologies.
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\2\ Mercator Institute for China Studies, Made In China 2025: The
making of a high-tech superpower and consequences for industrial
countries, August 12, 2016.
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In 5G, a critical communications area, China has a broad array of
policies in place to advantage its leading players--most notably,
Huawei. China has allocated a minimum of two-thirds of its
telecommunications market to domestic companies. Over time, it sought,
and won, leadership positions on more subcommittees at the standards-
setting International Telecommunication Union than any other nation
seeking to ensure that international standards promoted and preferred
the equipment and designs of Chinese manufacturers. It has engaged in
subsidization, dumping and other policies to spread its technologies
across the globe--including as part of its efforts via the Belt and
Road Initiative to create a Digital Silk Road.
But, let's understand, before 5G is even fully realized or deployed
at even a fraction of its eventual geographic reach, experts are
already talking about 6G. Both of China's leading companies--Huawei and
ZTE--have made public announcements about their work on 6G. We can not
afford to be left behind.
As any good soccer player knows, you need to focus not on where the
ball is right now, but where it will be as you move down the field and
seek to score. China has a long-term strategy and is committed to
winning--it's focusing on where the ball needs to be. We need to have a
similar mindset, be just as committed and define and implement an
industrial policy to win.
Impact on U.S. Jobs
The debate about the impact of China's policies and practices on
the U.S. continues to be divisive. There are some who believe that
China's willingness to subsidize and dump products into the U.S. with
lower consumer costs should be the primary measure and, by this
measure, our people are better off. While fewer and fewer people
subscribe to this view, some still cling to it.
I couldn't disagree more and believe that the wealth of opinion has
come to the conclusion that China's predatory and protectionist trade
and economic policies undermine U.S. interests. The cost of products
cannot be the only measure of economic benefit. The public understands
that, while the flat screen television in their living room may be
cheaper, that the production jobs to support that product are not here
in the U.S. They know, all too well, that globalization has increased
the downward pressure on wages and our standard of living. It has
contributed to rising income inequality.
And, predatory pricing can lead to loss of capacity with the
outsourcing of jobs and offshoring of production. Industry after
industry has faced this problem. Steel. Aluminum. Solar cells. Rare
earths. Many others.
The Economic Policy Institute estimated that ``the growing trade
deficit with China eliminated 3.7 million U.S. jobs between 2001 and
2018.'' \3\ In their research for ``The China Shock'' a number of noted
economists found that ``(a)t the national level, employment has fallen
in the U.S. industries more exposed to import competition, as expected,
but offsetting employment gains in other industries have yet to
materialize.'' \4\ While classic trade theory would suggest that
displaced workers would migrate to other sectors, many of which would
be expected to be higher value-added, that has not been the case. China
has also targeted those sectors for development as well--putting
pressure on a much broader cross-section of our economy than classical
theory accounts for.
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\3\ Rob Scott and Zane Makhiber, Growing China Trade deficit cost
3.7 million American jobs between 2001 and 2018, Economic Policy
Institute, January 30, 2020.
\4\ David H. Autor, David Dorn, and Gordon H. Hanson, the China
Shock: Learning from Labor-Market Adjustment to Large Changes in Trade,
MIT Economics, August 11, 2016.
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And, as we have seen, the jobs at stake are not only in the
manufacturing sector. China's non-market economic policies have
threatened and undermined our agricultural interests as well. Over
time, China has used exclusionary and arbitrary policies to limit
access to many of our agricultural products. In soybeans, for example,
they have managed their purchases for political gain and have also
largely refused to allow crushed-soy exports into their country as
those are value-added jobs.
In pork, a preferred protein source for the Chinese people, they
have limited access to their market. As their level of income rose,
hitting a tipping point where protein consumption increased
significantly and demand for pork exceeded domestic supply, rather than
open their market to U.S. exports broadly, a state-supported company
purchased one of our preeminent pork producers--Smithfield Foods. A
free-market approach would have produced more general benefits for all
U.S. producers, rather than a select producer. In the first year after
their purchase of Smithfield, 97 percent of all China's imports were
from that company. The percentage has dropped, but the preference is
still there. And, the Chinese company that purchased Smithfield also
acquired intellectual property in the form of genetic stock and farming
techniques--which will advance Chinese domestic production capabilities
rather than U.S. jobs and economic interests. Only the swine flu
epidemic has mediated those concerns for the moment.
In many other sectors, we see the corrosive impact of CCP policies
and practices on U.S. interests that are hollowing out U.S. production
and adversely affecting U.S. employment.
Resilience
More than ever, the American people are uniquely focused on our
dependence on China for critical supplies and materials. The COVID-19
crisis has put a spotlight on supply chains for medical supplies,
medical devices, and Personal Protective Equipment. The outsourcing and
offshoring of production and jobs and the decline of productive
capacity in that sector has garnered attention on China as a supplier
like never before.
The public learned not only about our loss of production capacity,
but China's ability to control supplies and use them as foreign policy
leverage. The failure to have adequate inspections and limited quality
control all became nightly news stories. Masks sold as meeting the N95
standard were often found to be almost ineffective--possibly less
effective than simply using a bandana as a face mask.
And, in the early days, as we all know, the offshoring of
manufacturing limited our capacity to surge production of ventilators
and other critical equipment.
While the COVID-19 crisis brought all of this to the front pages
and to the nightly news, the threats to our economic health and
security have been building for years. In 2014, the Commission held a
hearing entitled ``China's Healthcare Sector, Drug Safety, and the
U.S.-China Trade in Medical Products.'' Last July, former Senator Jim
Talent and I co-chaired a hearing at the Commission, ``Exploring the
Growing U.S. Reliance on China's Biotech and Pharmaceutical Products''.
Our work, and the witness testimony we heard, along with staff
research, identified broad and deep dependence on China for our medical
needs and deep vulnerabilities.
We no longer have the fermentation capacity in the U.S. to make
penicillin and are completely dependent on foreign sources. Eighty
percent of the active pharmaceutical ingredients (APIs) we use come
from abroad, with a substantial portion coming from China. Of the 10
active ingredients in Remdisivir, one of the therapeutics reportedly
showing promise for treating COVID-19, 8 come from China.\5\ For many
other products, we are partially, or entirely, dependent on China.
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\5\ Mary Denigan-Macauley, written testimony for U.S. House of
Representatives Subcommittee on Oversight and Investigations, Committee
on Energy and Commerce, Hearing on Securing the U.S. Drug Supply Chain:
Oversight of FDA's Foreign Inspections Program, December 10, 2019, 1.
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As Christopher Priest, the Acting Deputy Assistant Director of the
Defense Health Agency told our Commission, ``the national security
risks of increased Chinese dominance of the global API market cannot be
overstated.'' \6\
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\6\ Christopher Priest, testimony for U.S.-China Economic and
Security Review Commission, Hearing on Exploring the Growing U.S.
Reliance on China's Biotech and Pharmaceutical Products, July 31, 2019.
https://www.uscc.gov/sites/default/files/Priest%20US-China%20Commis
sion%20Statement.pdf.
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Today, the focus is on medical supplies, but our dependence on
China for many products--some of them critical products--is broad and
deep.
As you know, China has in many ways cornered the market on rare
earth minerals--the input needed for rare earth magnets used across the
defense sector and in critical technology products. Years ago, the U.S.
mined rare earths in California, but China's predatory pricing policies
contributed to that facility going bankrupt. That occurred after CFIUS
approved the sale of Magnequench, a rare earth magnet supplier, to a
Chinese entity in 1996. The production equipment acquired in that deal
was moved to China in the early 2000s.
China has shown its willingness to weaponize these supply chains,
as it threatened to do with Japan because of a dispute in the East
China Sea. While that was a decade ago, recent writings show the intent
is still there: Research by Horizon Advisory shows a Chinese government
funded research institute indicated that, ``Amid the heated trade
conflict between China and the United States, China will not rule out
using rare earth exports as leverage to deal with the situation.'' \7\
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\7\ Horizon Advisory, ``Absolute Competitive Advantage: China's
Rare Earth Leverage and Strategy Planning,'' June 2020.
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Mr. Chairman, your home state, along with several other states, has
rare earth deposits that could be mined, separated, melted and
transformed into magnets. We should not continue to rely on China for
these critical minerals.
After Hurricane Sandy, the East Coast found that rebuilding the
electric grid, replacing transformers and providing power to many
communities was hampered by inadequate supplies of grain oriented
electrical steel. A dumping and subsidy cases to address China and
other countries unfair trade proved unsuccessful. This Administration
initiated a Section 232 investigation related to these products because
our electric transmission system is critical to our economy and
national security. It's critical that we ensure that there is the
capacity to meet our needs in this sector.
Our nation's reliance on other products from China continues to
grow, reducing our potential resilience. Last year, despite rising
trade tensions and the imposition of Section 301 tariffs, the U.S. ran
a trade deficit in advanced technology products with China of more than
$100 billion and an overall goods deficit of $345 billion. As has been
seen with 5G, the predatory actions of China's Huawei have undermined
the ability of market-oriented firms to develop the technology to
ensure safe sources of supplies. Our dependence on China for telecom
products has created dangerous vulnerabilities that our Nation is only
now really grappling with.
Reliance on China extends to many other sectors. While work has
been done by this Administration and other entities on single sources
of supply from China, or dangerous sourcing dependence, Congress should
carefully evaluate supply chain risks to determine what the potential
impact is on our national and economic security.
U.S. Business Activity in China and Its Security Implications
At the beginning of July, the Commission issued a staff paper
entitled ``Trends in U.S. Multinational Enterprise Activity in China,
2000-2017.'' \8\ Since China's accession to the WTO in 2001, U.S.
business operations in China have expanded dramatically. The staff
report found that ``as U.S. MNE [multinational enterprise] activity in
China increasingly focuses on the production of high-end technologies,
the risk that U.S. firms are unwittingly enabling China to achieve its
industrial policy and military development objectives rises.'' \9\
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\8\ Kaj Malden and Ann Listerud, ``Trends in U.S. Multinational
Enterprise Activity in China, 2000-2017,'' U.S. China Economic and
Security Review Commission, July 1, 2020.
\9\ Ibid, at 3.
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Summarizing the finding of the report:
China's vast consumer market and the Chinese government's
coercive policies have incentivized many U.S. MNEs to move
their manufacturing operations to China. U.S. Department of
Commerce Bureau of Economic Activity (BEA) data explored in
this report indicates the major destination for goods and
services supplied by U.S. MNEs in China is the Chinese market
itself. In 2017, U.S. MNE foreign affiliates in China sold 82
percent of the goods and services produced in China directly to
Chinese customers. At the same time, trade barriers, including
localization requirements and export restrictions on key raw
materials, have further induced production within China. Sales
to Chinese consumers may also constitute sales of intermediate
goods and services which might be used in final goods for
export to the United States.
U.S. MNEs employ more people in China than in any other
country outside of the United States, primarily in the assembly
of computers and electronic products. As of 2017, U.S. MNEs
employed 1.7 million people in China, a 574.6 percent increase
from the 252,000 people employed in 2000. China ranks as the
top destination for all U.S. MNE employment across all
manufacturing categories with the exception of food and
transportation equipment. Outside of manufacturing, U.S. MNE
employment in China is second highest in accommodations and
food services, likely due to growing disposable income levels
of China's rising middle class, who purchase more services.
China is the fourth-largest destination for U.S. MNE
research and development (R&D) expenditure and increasingly
competes with advanced economies in serving as a key research
hub for U.S. MNEs. The growth of U.S. MNE R&D expenditure in
China is also comparatively accelerated, averaging 13.6 percent
year-on-year since 2003 compared with 7.1 percent for all U.S.
MNE foreign affiliates in the same period. This expenditure is
highest in manufacturing, particularly in the production of
computers and electronic products, but has diversified over
time. For example, R&D expenditure on the improved manufacture
of chemicals, including pharmaceuticals, surged nearly 30-fold
from a low base of $13 million in 2000 to $392 million in 2017.
U.S. MNE capital expenditure in China has focused on the
creation of production sites for technology products. This
development is aided by the Chinese government's extensive
policy support to develop China into a hub for electronics
production, address gaps in the domestic production of
technology goods, and maximize access to the technical
expertise of multinational firms. For example, U.S. MNE capital
expenditure in China for the production of semiconductors, a
strategically important electronic component, accounted for
nearly a third of all U.S. MNE global capital expenditure on
semiconductor manufacturing assets in 2017.
China has grown from the 20th-highest source of U.S. MNE
affiliate value added in 2000 ($5.5 billion) to the fifth
highest in 2017 ($71.5 billion), driven primarily by the
manufacture of computers and electronic products as well as
chemicals. The surge is especially notable in semiconductors
and other electronic components, which accounted for $5.6
billion of total manufacturing value added in 2017, up 250
percent from $1.6 billion in 2009. Separately, pharmaceutical
manufacturing serves as the largest chemical sector in terms of
value added, accounting for $2.6 billion in 2017.
It is important to recognize that the staff report was prepared
based on the Department of Commerce's annual Multinational Enterprise
survey. In my view, the findings understate the impact of U.S.
multinational outsourcing and offshoring to China as well as business
relationships with Chinese entities. There are many questions left
unanswered by the Commerce data. Has outsourcing displaced U.S. exports
to China and, if so, by how much? What are the overall sourcing
patterns of U.S. MNEs in China? Are the products they sell in China and
elsewhere products that could have been produced in the United States,
but were shifted to China as a result of policy incentives and
direction? That's just the tip of the iceberg.
For example, while the MNE survey indicates that firms sold 82
percent of their products to Chinese customers, that does not tell the
entire story. Many of those sales are of products that may simply be
inputs into goods sold to the U.S. As Mary Lovely testified before the
Commission, 46 percent of China's overall exports emanate from foreign-
invested enterprises with 60 percent of China's exports to the U.S.
coming from such enterprises.\10\ Foreign firms, all-too-often, use
China simply as an export platform. Is it really in our interest to see
more U.S. firms move to China?
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\10\ Mary E. Lovely, testimony for U.S.-China Economic and Security
Review Commission, Hearing on Risks, Rewards, and Results: U.S.
Companies in China and Chinese Companies in the United States, February
28, 2019. https://www.uscc.gov/sites/default/files/M%20Lovely_Tes
timony%20for%20the%20USCC%20revised.pdf.
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In aerospace one of the two critical limitations on Chinese state-
owned aerospace companies' ability to field competitive commercial
aircraft has been substandard avionics and limitations on engine
capabilities. A number of years ago, General Electric was allowed to
form a joint venture with China's AVIC to share avionics technology. In
my view, that was a blow to our long-term competitiveness as it has
assisted China in its development of commercial aircraft which, when
normal economic conditions return, may enable Chinese-owned firms to
win more aircraft sales. In addition, the avionics technology can
potentially assist China in the development of its military
capabilities.
In auto production, U.S. firms have, through joint ventures,
provided enormous technological and production boosts to Chinese firms.
This was a requirement for market access imposed by China but the
advantages provided to indigenous Chinese firms cannot be discounted.
The benefits of this relate not only to direct production and
development, but in assisting local parts suppliers to become world-
class competitors. Before the outbreak of the pandemic, we saw
increased plans to ship Chinese-produced vehicles into the U.S. market.
In terms of market access for U.S. financial services firms, a key
component of the recently signed Phase One China trade deal, U.S. firms
will be assisting China in accessing capital from world markets--a
critical issue as China's rising debt levels demand new sources of
funds. In combination with China's access to world capital markets--and
U.S. markets in particular--this advances China's interests while
potentially jeopardizing the financial security and interests of our
people.
For example, MSCI, a financial firm that develops investment
indexes, expanded its emerging market index to cover equities issued in
China and increased the weighting of those securities in that fund.
Included in the index are Chinese firms that have been placed on the
U.S. ``Entities List'' as well as firms that are engaged in Chinese
``military-civilian fusion'' activities. As the Senators know, there
has been concern about the use of the MSCI index in the Thrift Savings
Plan's ``I fund'' which is an investment vehicle for Federal employees
and military servicemembers. Thus, their retirement funds could be
contributing to the development and success of Chinese firms directly
challenging our own security interests. Between the MSCI equity and
bond indices, the opening to Chinese firms will result in hundreds of
billions of foreign funds supporting that country's development.
And, as we all know, larger investments by U.S. firms in China make
them susceptible to pressure from the Chinese Communist Party (CCP) to
engage on policy matters here in Washington. China has made clear that
it will use every tool in its toolbox to advance its interests and can
use exclusionary and preferential policies to get its way. China, just
last week, indicated that it may sanction Ericsson and Nokia as many
countries seek to protect their security interests by limiting Huawei
products in their communications networks. Wall Street firms are not
shy about seeking to influence policymakers as they seek trading and
deal making fees. And, China has begun to roll-out its Corporate Social
Credit Score system which may advantage or disadvantage firms based on
their actions in support of, our counter to, CCP interests.
In many of the sectors where U.S. companies have invested and
operate in China, they have helped promote China's rise. Of course, we
all support the betterment of the Chinese people and the fact that
hundreds of millions have risen out of poverty is a tremendous success.
But, increasingly, activities by U.S. firms in China pose risks to our
economic and national security interests, and we must carefully
evaluate what policy course must be charted for the future.
Undermining Private Industry in the U.S.
There is very little work that has been done regarding the
activities and operations of Chinese companies operating in our market.
While the investment by Chinese companies in our market has hit some
speedbumps in the last two and a half years, the presence of these
companies in our market is extensive. And, while Rhodium, a leading
investment tracking firm, has indicated that the amount of new Chinese
foreign direct investment (FDI) in the U.S. has dropped significantly
since its high of $45.6 billion in 2016, investments are still
occurring. Indeed, at $444 million, investments in biotech by Chinese
firms were significant last year. Furthermore, Chinese companies are
using U.S. markets to raise capital in significant amounts. The
Commission staff prepared an inventory of listings by Chinese firms on
our three major exchanges which totaled more than $1.2 trillion in
capital raised last year.\11\
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\11\ A list of the companies is available at https://www.uscc.gov/
chinese-companies-listed-major-us-stock-exchanges
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Investments by Chinese companies in the U.S. market, the capital
they raise, and the operations they maintain, need greater scrutiny.
The Commission has tried to assess this issue, with limited results.
There are few sources of comprehensive case studies examining the
activities of Chinese firms in our market. Do they operate based on
market principles? What are their key objectives? What are their
employment practices? Are they profitable? These and other issues are
of critical interest.
The last time I checked data from the Internal Revenue Services
Statistics of Income publication for foreign controlled corporations,
data indicated that Chinese-controlled entities operating here in the
U.S. filed 7,360 returns. With total receipts of more than $49 billion,
their total income tax after credits was only $227 million. That, to
me, deserves further examination not only to understand and identify
the more than 7,000 entities filing returns, but to determine how they
operate. In an earlier period, Congress passed legislation to address
transfer pricing schemes where foreign input costs were inflated to
reduce the tax payments here in our market. I believe scrutiny on
Chinese-controlled entities operating here is also appropriate.
During a hearing at the Commission we questioned the potential
negative consequences of Chinese state-owned, state-controlled or
state-directed entities operating here after potentially receiving
support from the government in the form of loan subsidies, no-cost
capital or subsidized inputs. We heard from witnesses that there is no
provision in U.S. competition law that would allow action by a U.S.
competitor against what I would view as unfair competition.
As an example, take a Chinese state-owned steel pipe firm that is
receiving low-cost, or no cost-financing and, potentially, getting
subsidized inputs in the form of what is known as ``green pipe'' (i.e.,
pipe that has to only undergo minor finishing operations here). The
parent company in China could sell that pipe, which is not directly
entering U.S. commerce, at a subsidized price. Coupled with not having
to go to the capital markets, their cost of capital would also be
dramatically lower. The result? They could underprice any of our
domestic firms, potentially putting them out of business.
U.S. competition laws require that, to be actionable, a company
would have to seek ``recoupment.'' As I understand that, it means that
they would have to have a plan to raise prices later to ``recoup'' lost
profits for it to violate our laws. If they never planned to recoup
lost profits because they were acting on behalf of the CCP, their
domestic competitor would have no recourse.
CRRC, the State-Owned Chinese rail company has been winning subway
contracts in major cities in the U.S. by dramatically underbidding
their competitors. This is supported by massive state subsidies and a
plan to dominate the world's rail systems. CRRC reportedly already has
83 percent of world's rail market. This is anticompetitive and it is
dangerous.\12\
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\12\ John Adams, ``Stop China's Infiltration of U.S. Railroads,'',
Defense One, November 26, 2019.
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The impact of the CCP's programs is broad and deep. They use an
``all of the above'' approach to advancing their interests. For
example, work by private sector forensic accounting experts \13\
uncovered acts of espionage to undermine the market value of firms
which were later acquisition targets for Chinese firms. In other words,
they undermined a company's value to put it into a ``distress''
situation, to reduce its attractiveness to other companies and to make
it cheaper for them to acquire.
---------------------------------------------------------------------------
\13\ Jeffrey Z. Johnson, testimony for the U.S.-China Economic and
Security Review Commission, Hearing on Chinese Investment in the United
States: Impacts and Issues for Policy Makers, January 26, 2017.
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Chinese state directed and controlled entities have engaged in
massive cyber incursions in the U.S. The first major indictment on this
was brought forward by David Hickton, U.S. Attorney for the Western
District of Pennsylvania, in 2014 alleging that five People's
Liberation Army hackers had accessed the computer networks of the
United Steelworkers union and five major U.S. firms to obtain trade
secrets and other information. The next year, President Obama reached
an agreement with General Secretary Xi where China agreed that they
would not engage in hacking for economic gain. The premise of the
agreement was faulty from the start as China treats economic and
national security as inextricably intertwined: In short, all hacking
was for national security reasons and therefore, not covered by the
agreement.
Massive hacking continued with incalculable harm. Indeed, press
reports indicate that China, as well as Russia, have been trying to
hack into our major medical firms to obtain vaccine information. As
former FBI Director James Comey said, ``There are two kinds of big
companies in the United States. There are those who've been hacked by
the Chinese, and those who don't know they've been hacked by the
Chinese.'' \14\ The current FBI Director, Christopher Wray, recently
said ``The greatest long-term threat to our Nation's information and
intellectual property and our economic vitality is the
counterintelligence and economic espionage threats from China . . .
It's a threat to our economic security and, by extension, to our
national security.'' \15\
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\14\ Maria Tadeo, ``FBI's James Comey accuses China of hacking into
every major American company,'' The Independent, October 6, 2014.
\15\ Christopher Wray, Director, Federal Bureau of Investigation,
``The Threat Posed by the Chinese Government and the Chinese Communist
Party to the Economic and National Security of the United States,''
remarks as delivered, Hudson Institute, July 7, 2020.
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In the area of medicine, multiple hacks attributed to actors in
China, have obtained the longitudinal health data of U.S. citizens.
While today's medicines are largely composed of APIs and chemical
compounds, tomorrow's medicines are likely to be biosynthetics. With
the massive amount of data that Chinese entities collect--legally and
illegally--they have the opportunity to develop new drugs and
biosynthetics as a faster pace because of ``big data.'' Industries that
fall under the umbrella of biotechnology are worth hundreds of billions
of dollars annually, and their development will have a profound impact
on U.S. economy and national security. There is also the potential to
enable personalized medicine, to produce vaccines faster and more
effectively and develop other products which have enormous national
security implications. Earlier this year, the Theodore Roosevelt
aircraft carrier was sidelined because of COVID-19. The implications
are endless.
Chinese-directed researchers are aggressively working to obtain
America's secrets. Through China's Thousand Talents Program--with
bounties of $150,000 or more--China's government seeks to obtain the
support of some of our best researchers. Chinese-affiliated venture
capital funds--more than 1,000 according to some estimates--seek to
invest in, and obtain, technology and trade secrets to support the
CCP's industrial policies.
In many other areas the Chinese government and the CCP are
aggressively pursuing opportunities to advance their interests, often
at the cost to our own national and economic security.
Recommendations
The policies of the Chinese Communist Party and the actions of
their government have already triggered a reaction by the U.S. While
the honeymoon period after China's entry into the World Trade
Organization lasted too long, and the period of engagement and dialogue
yielded too few results, policy makers have identified many actions
that will make a difference. Among these are provisions advanced by
Congress to tighten up the underlying authority for the Committee on
Foreign Investment in the U.S. (CFIUS) and actions to limit the impact
of China's major telecommunications firms--ZTE and Huawei--to supply
our critical telecommunications systems. Other provisions are under
consideration as a vast array of legislative proposals have been
introduced in both Houses and the National Defense Authorization Act
for FY 2021 includes additional provisions.
But the challenges posed by China's policies and practices are
broad and deep and countering their negative impact on our interests
will require concerted action. Action is needed not only in the
economic policy realm, but on the diplomatic, human rights, health
policy, military and other fronts. Let me, however, offer several
recommendations for the Subcommittee's consideration. First, I will
identify some of the recommendations of the Commission in our last two
annual reports. Second, I will offer several of my own recommendations
for your consideration. While I would be happy to discuss
recommendations and issues relating to the pharmaceutical and medical
supply chain issue, a topic the Commission has addressed, I have not
included those recommendations here.
Commission Recommendations
Congress enact legislation to preclude Chinese companies from
issuing securities on U.S. stock exchanges if:
The Public Company Accounting Oversight Board is denied
timely access to the audit work papers relating to the
company's operations in China;
The company disclosure procedures are not consistent with
best practices on U.S. and European exchanges;
The company utilizes a variable interest entity (VIE)
structure;
The company does not comply with Regulation Fair Disclosure,
which requires material information to be released to all
investors at the same time.
Congress enact legislation requiring the following information to
be disclosed in all issuer initial public offering prospectuses and
annual reports as material information to U.S. investors:
Financial support provided by the Chinese government
including: direct subsidies, grants, loans, below-market loans,
loan guarantees, tax concessions, government procurement
policies, and other forms of government support.
Conditions under which that support is provided, including
but not limited to: export performance, input purchases
manufactured locally from specific producers or using local
intellectual property, or the assignment of Chinese Communist
Party (CCP) or government personnel in corporate positions.
CCP committees established within any company, including:
the establishment of a company Party committee, the standing of
that Party committee within the company, which corporate
personnel form that committee, and what role those personnel
play.
Current company officers and directors of Chinese companies
and U.S. subsidiaries or joint ventures in China who currently
hold or have formerly held positions as CCP officials and/or
Chinese government officials (central and local), including the
position and location.
Congress direct the U.S. Department of Justice to reestablish a
higher education advisory board under the Federal Bureau of
Investigation. In concert with the U.S. Department of Commerce's Bureau
of Industry and Security, U.S. Department of Homeland Security, and
U.S. Department of State, the higher education advisory board would
convene semiannual meetings between university representatives and
relevant Federal agencies to review the adequacy of protections for
sensitive technologies and research, identify patterns and early
warning signs in academic espionage, assess training needs for
university faculty and staff to comply with export controls and prevent
unauthorized transfer of information, and share other areas of concern
in protecting national security interests related to academic research.
Congress direct the U.S. Government Accountability Office to
conduct an assessment on the risks posed by Beijing's efforts to co-opt
foreign researchers or students at U.S. universities to unlawfully
appropriate research and other knowledge for the benefit of the
government, companies, or interests of the People's Republic of China.
This report should:
Include the number of foreign students and researchers from
China studying in science, technology, engineering, and
mathematics fields; past and current affiliations; primary
areas of research; duration of stay in the United States; and
subsequent employment;
Identify whether federally funded university research
related to emerging technologies may have been unlawfully
appropriated by individuals acting on behalf of Chinese
entities; and
Evaluate the efficacy and ability of the U.S. Department of
State's visa screening mechanism to mitigate the risk of
inappropriate technology transfer to China, including but not
limited to: assessing the ability of that process to identify
students, researchers, and research entities, through a visa
disclosure requirement, that are receiving funding from the
government of China or an intermediary entity acting in support
of China's government.
Congress amend Internal Revenue Code Section 41 to extend the
research and development tax credit to initial stages of deployment for
new products, processes, computer software, techniques, formulae, or
inventions that increase the production of final and intermediary goods
manufactured primarily in the United States. The tax credit should also
extend to precompetitive commercial development of basic and applied
research performed in the United States, particularly in industrial
sectors where the People's Republic of China threatens the
technological leadership of the United States.
Congress direct the U.S. Geological Survey, in coordination with
the U.S. Department of Energy, U.S. Department of Commerce, U.S.
Department of the Interior, and U.S. International Trade Commission to
develop and maintain a risk assessment framework that identifies
materials used in manufacturing industries critical to both national
security and commercial vitality. Such a framework should provide an
early warning mechanism for any threats to the U.S. supply of these
critical materials, including an increasing concentration of extraction
and processing by another country or entity and acquisition of
significant mining and processing facilities; increasing export
restrictions by another country; large gaps between domestic prices for
these materials in another country versus prices on international
markets; sharp increases or volatility in price; and substantial
control in supply of minerals used within the same industry or related
minerals that serve as substitutes by another country.
Congress direct the National Science Foundation, in coordination
with other agencies, to conduct a study on the impact of the activities
of Chinese government, state-sponsored organizations, or entities
affiliated or supported by the state in international bodies engaged in
developing and setting standards for emerging technologies. The study
should examine whether standards are being designed to promote Chinese
government interests to the exclusion of other participants.
Congress direct the Government Accountability Office to conduct an
assessment of U.S.-China collaborative initiatives in technical
cooperation. This assessment should describe the nature of
collaboration, including funding, participation, and reporting on the
outcomes; detail the licensing and regulatory regime under which the
initiatives occur; consider whether the intellectual property rights of
U.S. researchers and companies are being adequately protected; examine
whether Chinese state-owned enterprises or the military are benefitting
from U.S. taxpayer-funded research; investigate if any Chinese
researchers participating in the collaboration have ties to the Chinese
government or military; investigate if any U.S. companies,
universities, or labs participating in U.S. government-led
collaboration with China have been subject to cyber penetration
originating in China; and evaluate the benefits of this collaboration
for the United States. Further, this assessment should examine
redundancies, if any, among various U.S.-China government-led
collaborative programs and make suggestions for improving
collaboration.
Additional Proposals
Automatic trade cases. While this and the past Administration have
initiated action on illegal trade policies, a significant enforcement
burden still falls on private parties. Existing trade law is expensive
to access and time consuming to pursue. Relief, when granted, is only
prospective in nature allowing illegal trade practices to inflict
considerable harm. A more automatic approach to trade complaints--
primarily antidumping and countervailing duty cases--can be data driven
and provide more timely and effective relief and create some
``automaticity'' in the process. There is substantial trade data which,
coupled with data from other government sources, could identify
increasing imports, looking at per-unit pricing and domestic demand.
Where imports are increasing, prices are dropping and domestic demand
is constant, trade officials could use that as an early warning of
unfair trade and engage in additional review. Business leaders, and the
employees, should not have to be significantly injured before market
forces are restored.
Review and Reform of Competition Laws: As noted earlier, the non-
market actions of certain Chinese state-owned, state-supported or
state-directed companies operating in the U.S. market could inflict
considerable harm without domestic firms having an effective tool to
respond. Coupled with the fact that the authority for CFIUS is limited
to acquisitions of existing U.S. firms, rather than establishment of
new firms, this problem is expected to grow in intensity, should
current trade tensions diminish. Domestic firms should not have to
compete here, or internationally, with countries masquerading as
commercial firms.
Net economic Benefit Test: Economic and national security interests
are inextricably intertwined. While the Foreign Investment Risk Review
Modernization Act of 2018 (FIRRMA) strengthened and expanded the
authority for CFIUS additional authority should be considered to
include a net economic benefit test such as Canada and Australia have
in their laws. The interpretation of the term ``national security'' can
be too narrowly defined so as to allow for certain transactions to
proceed although the underlying corrosive impact could be considerable.
Tax Attributes: As noted, there are more than 7,000 Chinese-
controlled entities filing tax returns in the U.S. Understanding the
nature of those businesses and their tax attributes is an appropriate
area for examination by the Internal Revenue Service. There is
substantial opportunity to mask the true economic returns and resulting
tax liabilities for companies where intra-company transfers occur.
Conclusion
America was faced with similar challenges in the 1980s in terms of
competition with Japan, although the threats from, and impact of, that
country's policies at that time pale in comparison to the China
challenge today. I was deeply involved in that debate as a staffer for
former Democratic Leader Richard Gephardt. Remember that Japan's
exports of automobiles,--supported by a sanctuary market and industrial
policies, were a major threat to our Big Three auto companies. In
semiconductors--an industry where the U.S. had been a leader--Japan was
threatening our lead. Other sectors were challenged as well.
Bipartisan calls for action helped invigorate our approach to
competition. I was one of the lead House staffers helping to put
together the 1988 Omnibus Foreign Trade and Competitiveness Act which
cobbled together discreet, but vitally important provisions from a
variety of committees, to address the problems our country faced. The
original bill, H.R. 3, was introduced by my former boss. This Committee
was one of the key Senate Committees involved in the legislation.
That legislation enhanced the authority for the Committee on
Foreign Investment in the U.S. (CFIUS). It included a number of other
provisions including: the creation of what was known as ``Super 301''
to help prioritize action on key foreign unfair trade barriers; it
dealt with export promotion; national security impacts from trade;
currency manipulation; expanded authority for the National Institute of
Standards and Technology and created an Advanced Technology Program;
reformed the Trade Adjustment Assistance program; expanded STEM
education and language literacy and included a variety of other policy
initiatives.
During this period, President Reagan initiated trade negotiations
with Japan to address their predatory and protectionist policies across
a range of industries. One of those negotiations was on the so-called
MOSS talks, or ``market-oriented sector-selective'' negotiations. As
part of negotiations on semiconductors, a market-share target was used
as a basic metric to gauge the openness of Japan's market and whether
``success'' was being achieved.
The U.S. government also led an effort through a public-private
partnership known as Sematech to revitalize the domestic semiconductor
industry and invest in its future. That effort was a key step in
sending signals to the market, and supporting the industry, that
America wanted to ensure that an industry it led did not vanish.
President Reagan, a conservative, joined with liberal Democrats in
fostering many of those policies. The lessons of that time can help
guide some of our thinking today, including the focus on bipartisanship
and Congress playing a leading role in updating our laws and ensuring
the resources needed to compete are available. In addition to the
recommendations I have outlined, and the work of this Subcommittee, a
broader engagement by Congress and a comprehensive set of provisions to
promote production, employment and innovation is needed.
I have tremendous faith in America's ability to restore its
economic footing, to meet the China challenge, and to prosper. But,
that requires, as your hearing today addresses, a recognition of what
the problems are and what are some of the solutions that should be
considered.
I look forward to your questions and working with you and your
staff in the coming days.
Senator Sullivan. Thank you, Mr. Wessel.
I'd like to now ask Mr. Doshi for his opening statement.
STATEMENT OF DR. RUSH DOSHI, DIRECTOR,
BROOKINGS INSTITUTION CHINA STRATEGY INITIATIVE;
FELLOW, YALE LAW SCHOOL CHINA CENTER
Dr. Doshi. Thank you very much, Chairman Sullivan, Ranking
Member Markey, Distinguished Members of the Committee.
Again, thank you for the privilege of being able to testify
today at this important hearing on the China Challenge and
efforts to build U.S. resiliency and competitiveness.
As requested, I'll be focusing my remarks on three
subjects. First, Beijing's ambitions for global technology
leadership; second, Beijing's current activities and the
challenges they pose to our supply chains and our global
technology leadership; and third, policy recommendations to
bolster our competitiveness and resilience, what some call
super power marathon with China.
So, first, I'll talk about China's technology ambitions.
Beijing is pursuing a robust state-back effort to displace the
United States from global technology leadership. China's
leaders believe we're in the middle of the fourth industrial
revolution made up of artificial intelligence, quantum
computing, 5G, applied technology, et cetera, and it wants to
lead that revolution. That desire is not driven purely by
commercial motivations. It's also driven by geopolitical ones.
According to party texts, Beijing argues that the last
three industrial revolutions caused a divergence that allowed
some countries to become geopolitical leaders and left others
as geopolitical laggards. Their overview of that history is
worth surveying.
It argues that the first industrial revolution brought
steam power and coal and helped build the British Empire. The
second industrial revolution, which brought electrification,
made the United States a leading state, and the third
industrial revolution which brought information technology and
kept the U.S. a leading state.
Beijing missed out on these revolutions but now it hopes to
ride the fourth industrial revolution to global leadership. Top
party-connected scholars in China almost all agree that
technology is the main battlefield between the U.S. and China.
That leads to a second subject. What is China doing to
seize global technology leadership? Here, there are a few broad
activities.
First, China's R&D spending already in some cases is equal
to ours, if not greater, even though China has a smaller
economy. For example, in the technology central to the fourth
industrial revolution, China may be outspending us. It spends
10 times what we do on computing in one clear case.
Second, Beijing believes its industrial policies give it an
advantage. Beijing has a $1.4 trillion plan to build 5G across
China. It launched a Made in China 2025 Initiative to gain
leadership in 10 sectors of power in the industrial revolution.
They have spent multibillions of dollars to acquire foreign
technology and, of course, it has a hundred scientific
technology plants with varying degrees of success.
They have engaged in predatory behavior in state-backed
takeovers and, of course, technology transfer, all to close the
gap with the United States.
Chinese sources agree--rather, they argue that although the
U.S. is better at innovation, we cannot bring our products to
market without first-class factories, which gives China an
opportunity to use reverse engineering and force technology
transfer to catch up and surpass the United States.
Beijing understands that post-COVID, the free world is
trying to diversify supply chains away from China. For that
very reason, General Secretary Xi Jinping has declared that
protecting China's supply chains is now one of the country's
top national priorities and so far, the European and American
Chambers of Commerce in China have indicated that the vast
majority of their members are not yet considering leaving the
country.
It's not all about cost. China is the world's factory and
center of supply chains and it keeps those companies stocked
and in many cases adversely affecting our security and our
technological leadership.
That leads to a third and final broad question. What can we
do about this? I have much more in my submitted testimony, but
I'll say here that I do not believe that China's advantages are
insurmountable.
As a bipartisan committee of people thinking about how to
compete and have resilience and the ideas I'll offer come from
some of those individuals.
First, we need information on our supply chains. We need to
know where we're vulnerable with Beijing and that requires some
kind of entity that can audit our supply chains, stress test
them, and build institutionalized knowledge about them to
perhaps assist in our reporting requirements.
Second, we need better coordination. Some of this is at the
strategy level and we have a strategy document. We don't have a
national strategy yet for competitiveness and resilience. Some
of us at the agency level, as well, and in fact, Taiwan is
inspiring this regard.
We're the only government that's been successful in
penalizing reshoring from China over 33 billion since 2019 and
one way they did it was to have one office serves as a one-stop
shop for all businesses thinking about moving back to Taiwan.
Maybe we should consider a corporate structure. Congress
could consider pushing our corporations to look beyond
quarterly earnings cycles, for example, with tax policies,
encourage shareholders to hold equity positions longer, and we
need pro-competition approaches, as well.
On the innovation frontier, companies are making big
speculative bets on the future. If we only have one company in
the high-tech industry and it makes the wrong bet on aviation
or semi-conductors, we're out of luck. If we have multiple
companies making multiple bets, then we've got multiple options
and that's an advantage that we can uniquely have relative to
china's more consolidated industrial policy approach.
Finally, we should reinvest in America's strengths, fixing
our immigration system and, of course, Federal spending.
In closing, our super power marathon with China is as much
about what we do at home as it is about what we do abroad. This
committee will, of course, be the center of those efforts.
Thank you very much for your time and your consideration. I
look forward to your questions.
[The prepared statement of Dr. Doshi follows:]
Prepared Statement of Dr. Rush Doshi, Director, Brookings Institution
China Strategy Initiative; Fellow, Yale Law School China Center
The United States, China, and the Contest for
the Fourth Industrial Revolution \1\
---------------------------------------------------------------------------
\1\ This testimony draws from the author's forthcoming book. See
Rush Doshi, The Long Game: China's Grand Strategy to Displace American
Order (Oxford: Oxford University Press, 2021).
---------------------------------------------------------------------------
Introduction
Chairman Sullivan, Ranking Member Markey, distinguished members of
the Committee, thank you very much for the opportunity to testify at
today's hearing on the China challenge and efforts to build U.S.
resiliency and competitiveness. As requested, I will be focusing my
remarks on three subjects. First, I will discuss Beijing's challenge to
U.S. global technology leadership and its ambitions to dominate what it
often refers to as the ``Fourth Industrial Revolution.'' Second, I will
discuss some of the challenges the United States faces in reshoring or
diversifying supply chains presently based in China as well as in
sustaining its technology leadership. Finally, I will offer
recommendations for U.S. policy focusing on a few broad categories of
effort: (1) information gathering; (2) government coordination; (3)
immigration and basic science; (4) reforms of corporate and financial
incentives; and (5) coordination with likeminded stakeholders. It is
hoped that these policies might build long-term U.S. resilience and
competitiveness as we enter what some call a ``superpower marathon''
with China.\2\
---------------------------------------------------------------------------
\2\ Michael Brown, Eric Chewning, and Pavneet Singh, ``Preparing
the United States for the Superpower Marathon with China,'' The
Brookings Institution, April 2020, https://www.brook
ings.edu/wp-content/uploads/2020/04/
FP_20200427_superpower_marathon_brown_chewning
_singh.pdf
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I. China's Challenge to U.S. Global Technology Leadership
It is increasingly clear to most observers that China is pursuing a
robust, state-backed effort to displace the United States from global
technology leadership. This effort is not driven entirely by commercial
considerations but geopolitical ones as well. Beijing believes that the
competition over technology is about more than whose companies will
dominate particular markets. It is also about which country will be
best positioned to lead the world.
China's leaders have often seen technology and economic exchange
through a political lens, particularly as a way to create or avoid
dependency, strengthen China's ``comprehensive power,'' and build
order. This perspective appears to be rooted in the Party's Leninist
and mercantilist traditions as well as in its nationalist history.
China's ``century of humiliation,'' which stretches from the Opium Wars
to the founding of the People's Republic of China in 1949, is seen as a
product of the country's failure to achieve ``wealth and power''
[Chinese] relative to the industrialized West and Japan.\3\
Accordingly, technological advancement has long been seen as a means to
achieving ``wealth and power,'' whether during China's pursuit of
strategic weapons during Mao Zedong's leadership or its push to achieve
what his successor Deng Xiaoping labeled as the ``fourth
modernization'' of science and technology progress--both of which were
self-consciously styled as efforts to boost China's power. Now, as
China perceives a new period of technological change, the Chinese
Communist Party's writings suggest geopolitics is again at the
forefront.
---------------------------------------------------------------------------
\3\ Orville Schell and John Delury, Wealth and Power: China's Long
March to the Twenty-First Century (New York: Random House, 2013).
---------------------------------------------------------------------------
China's Ambitions--Seizing the Fourth Industrial Revolution
The Chinese Communist Party believes that the world has entered a
period of ``great changes unseen in a century.'' At the core of these
changes is a shift in the balance of power between the United States
and China, and one key driver of that change is the onset of a new
round of technological innovation which Xi Jinping and others have
sometimes referred to as the ``Fourth Industrial Revolution''
[Chinese].
Although the idea of a ``Fourth Industrial Revolution'' initially
emerged from the World Economic Forum in 2015, the concept has been
embraced by the Chinese Communist Party. As Xi Jinping argued in a 2018
speech: ``From the mechanization of the first industrial revolution in
the 18th century, to the electrification of the second industrial
revolution in the 19th century, to the informationization of the third
industrial revolution in the 20th century,'' each round of ``disruptive
technological innovation'' has shaped history.\4\
---------------------------------------------------------------------------
\4\ ``What is the Fourth Industrial Revolution? Xi Jinping
described the blueprint like this! [Chinese].'' Qiushi [Chinese], July
27, 2018. http://www.qstheory.cn/zhuanqu/2018-07/27/c_1123
186013.htm.
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China's leaders believe the next decade will largely determine who
leads the next industrial revolution. ``The next ten years will be a
key decade,'' Xi argued, ``a new round of technological revolution and
industrial change--artificial intelligence, big data, quantum
information, and biotechnology--are gathering strength.'' They would
bring ``earth-shaking changes'' while offering an ``important
opportunity to promote leapfrog development,'' allowing China to bypass
legacy systems and overtake competitors.\5\
---------------------------------------------------------------------------
\5\ ``Xi Jinping: Follow the trend of the times and achieve common
development [Chinese].'' People's Daily [Chinese], July 26, 2018.
http://cpc.people.com.cn/n1/2018/0726/c64094-30170
246.html.
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China's leaders have long employed the phrase ``catch up and
surpass'' [Chinese] to describe their technological ambitions, with the
United States and West seen as the critical benchmark. But
revolutionary technological changes, in the eyes of some Chinese
commentators, now make this lofty goal actually achievable.\6\ The
Fourth Industrial revolution could create the kind of ``great
divergence'' that accompanied past industrial revolutions, where some
countries and early adopters leapt ahead of rival competitors with
historical implications for global politics. And while Party officials
are generally guarded in describing China's ambitions in this fashion,
many commentaries and think tank pieces seem to suggest that surpassing
the United States in high technology would end its era of global
leadership, and presumably, usher in one of Chinese leadership.
---------------------------------------------------------------------------
\6\ Julian Baird Gewirtz, ``China's Long March to Technological
Supremacy,'' Foreign Affairs, August 27, 2019, https://
www.foreignaffairs.com/articles/china/2019-08-27/chinas-long-march-
technological-supremacy.
---------------------------------------------------------------------------
A wide range of Chinese commentators all agree that technology is
increasingly at the center of U.S.-China competition. ``In the next
decade. . .the competition for the fourth industrial revolution will
begin between China and the United States,'' writes Jin Canrong, a
well-known international relations professor and a dean at Renmin
University.\7\ ``Scientific and technological capabilities have become
an important indicator of a country's comprehensive strength, and it
has also become the main battlefield for great power competition,''
argues Zhu Feng, another well-known scholar and professor at Nanjing
University.\8\ And countless other prominent scholars express similar
sentiments.
---------------------------------------------------------------------------
\7\ Jin Canrong [Chinese]. ``Jin Canrong: The Fourth Industrial
Revolution is mainly a competition between the U.S. and China, and
China has a greater chance of winning [Chinese].'' Guancha [Chinese],
July 29, 2019. https://www.guancha.cn/JinCanRong/2019_07_29_511
347_s.shtml.
\8\ Zhu Feng [Chinese]. ``A Summary of Recent Academic Research on
`Great Changes Unseen in a Century' [Chinese].'' People's Forum,
Academic Frontier [Chinese], no. 7 (2019).
---------------------------------------------------------------------------
A typical discourse on the geopolitical stakes of technology
competition comes from an authoritative and apparently pseudonymous
commentary posted on the website of the Central Party School journal
Study Times [Chinese] roughly two months after Xi's 2018 address on the
Fourth Industrial Revolution.\9\ ``Britain seized the opportunity of
the first industrial revolution'' which provided it an empire;
afterwards, when the second industrial revolution arrived, ``the United
States seized the dominant power of advanced productivity from Great
Britain and jumped into position as the world's number one industrial
power, laying a solid foundation for establishing global hegemony.''
Then, ``the third industrial revolution originated in the United
States,'' and the United States seized it and boosted its
``comprehensive strength,'' providing the foundation for American
hegemony. China now sees an opportunity to wield what it believes is a
superior system to follow in the footsteps of Britain and the United
States, seize a new industrial revolution, and become the world's
leading state.
---------------------------------------------------------------------------
\9\ Li Jie [Chinese]. ``Deeply understand and grasp the world's
``great changes unseen in a century [Chinese].'' Qiushi [Chinese],
September 3, 2018. http://www.qstheory.cn/llwx/2018-09/03/
c_1123369881.htm.
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China's Advantages--What China Thinks it Does Better than the United
States
China believes it is well-positioned to outcompete the United
States in the competition for the Fourth Industrial Revolution and that
it has four main advantages: (1) heavy investment in R&D; (2) superior
institutions and industrial policies supporting China's ambitions; (3)
manufacturing prowess and centrality to global supply chains; and (4) a
more robust operation to set the global technology standards that could
determine the future of key industries.
First, China has learned from U.S. history in crafting its own
approach to basic science research. Beijing recognizes, as the United
States once did, that such research cannot be supported entirely by the
market and the private sector and instead must be supported by the
public. China's investments have been enormous. The National Science
Foundation estimates that China's total R&D spending is roughly
equivalent to U.S. spending even though China's economy is smaller.\10\
By some estimates, China's government-funded R&D also already exceeds
U.S. Federal R&D spending. And in the technologies central to the
Fourth Industrial Revolution, the differences are significant. China
spends roughly $2.5 billion annually, a modest sum that is nonetheless
estimated to be more than ten times what the U.S. spends in a sector
with critical economic and strategic potential.\11\ In addition to that
annual spending, Beijing also plans to spend some $10 billion to build
the National Laboratory for Quantum Information Sciences.\12\
Similarly, in artificial intelligence, China spends at least as much as
the United States and likely more, according to estimates from
Georgetown's Center for Security and Emerging Technology.\13\
---------------------------------------------------------------------------
\10\ Beethika Khan, Carol Robbins, and Abigail Okrent, The State of
U.S. Science and Engineering 2020 (Washington, DC: National Science
Foundation, 2020), https://ncses.nsf.gov/pubs/nsb20201/global-r-d.
\11\ Arthur Herman, ``The Quantum Computing Threat to American
Security,'' Wall Street Journal, November 10, 2019, https://
www.wsj.com/articles/the-quantum-computing-threat-to-american-security-
11573411715.
\12\ Neel V. Patel, ``China is beating the U.S. when it comes to
quantum security,'' MIT Technology Review, December 12, 2019, https://
www.technologyreview.com/2019/12/12/131600/china-is-beating-the-us-
when-it-comes-to-quantum-security/#: :text=Prisco%20says%20the%20
China%20is,although%20this%20number%20is%20disputed).
\13\ Ashwin Acharya and Zachary Arnold, Chinese Public AI R&D
Spending: Provisional Findings (Washington, DC: Center for Security and
Emerging Technology, 2019), https://cset
.georgetown.edu/wp-content/uploads/Chinese-Public-AI-RD-Spending-
Provisional-Findings-1.pdf.
---------------------------------------------------------------------------
Second, China believes its institutions are better designed to
mobilize the state, society, and market to wield industrial policy to
achieve the country's technological ambitions. For example, the Study
Times commentary cited previously noted that institutions are key to
seizing technological leadership, which in turn buttresses hegemonic
ambitions--this is why, it argued, Britain replaced Spain, the United
States replaced Britain, and why China might supplant the United
States. The commentary followed countless similar commentaries in China
arguing that the polarized U.S. political system was underperforming
relative to China's system.\14\ As a result, it argued, ``the emergence
of a new round of scientific and technological revolution and
industrial transformation is conductive to China's institutional
advantages and to achieving `overtaking by curve,' '' a reference to
sprinting ahead as a competitor slows down or mishandles a turn around
a racetrack.
---------------------------------------------------------------------------
\14\ These sources are discussed in greater detail in Rush Doshi,
The Long Game: China's Grand Strategy to Displace American Order
(Oxford: Oxford University Press, 2021). For a typical example, see
Zhang Yunling [Chinese], Yang Guangbin [Chinese], Wei Ling [Chinese],
Zhu Feng [Chinese], Jin Canrong [Chinese], and Xie Tao [Chinese]. ``How
to recognize and understand the great changes in a century [Chinese].''
Charhar Institute [Chinese], March 28, 2019. http://www.charhar.org.cn/
newsinfo.aspx?newsid=14706.
---------------------------------------------------------------------------
How do these supposed institutional advantages manifest themselves
in practical terms? China's leaders have been explicit about the
superiority of their industrial policy programs which are intended to
help China seize the commanding heights of the Fourth Industrial
Revolution.\15\ For example, in the aftermath of COVID-19, China's
National People's Congress approved a plan to spend $1.4 trillion in
five to six years to build fifth generation wireless networks, install
cameras and sensors to create smart cities, and integrate this network
with industry to accelerate progress in smart manufacturing. Earlier
this year, China had about 200,000 5G towers in use; by the end of the
year, it will have more than half a million with an ultimate goal of 5
million.\16\
---------------------------------------------------------------------------
\15\ ``Li Keqiang: The Internet + Double Innovation + Made in China
2025 Will Give Birth to a `New Industrial Revolution' [Chinese].''
Xinhua [Chinese], October 15, 2015. http://www
.xinhuanet.com/politics/2015-10/15/c_1116825589.htm.
\16\ Anjani Trivedi, ``China Is Winning the Trillion-Dollar 5G
War,'' Washington Post, July 12, 2020, https://www.washingtonpost.com/
business/china-is-winning-the-trillion-dollar-5g-war/2020/07/12/
876cb2f6-c493-11ea-a825-8722004e4150_story.html.
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In addition, China has released more than 100 science and
technology plans, including detailed plans for leadership in AI by 2030
and in standard-setting by 2035.\17\ It has several special purpose
funds allocating tens of billions towards specific research areas. And
it has developed its flagship industrial policy initiative, Made in
China 2025, which targets ten high-tech industries: information
technology; smart manufacturing; aerospace; maritime engineering;
advanced rail; electric vehicles; electrical equipment; new materials;
biomedicine; and agricultural machinery and equipment. Made in China
2025 seeks to indigenize these key technologies, gain favorable
positions in global supply chains, win market share within China, and
ultimately capture global market share from foreign markets. To do so,
it wields the full power of the state and the market power of the
Chinese economy to elevate local champions over their high-tech foreign
competitors globally, with specific quotas set in each industry for
China's anticipated share.\18\ The initiative relies on technology
transfer, market access restrictions, state-backed foreign
acquisitions, and subsidies. While Beijing has formally deemphasized it
in its official discourses following backlash from the United States
and Europe, the core of the initiative remains very much alive.
---------------------------------------------------------------------------
\17\ Tai Ming Cheung et al., Planning for Innovation: Understanding
China's Plans for Technological, Energy, Industrial, and Defense
Development (Washington, DC: U.S.-China Economic and Security Review
Commission, 2016), https://www.uscc.gov/sites/default/files/Research/
Planning%20for%20Innovation%20-
%20Understanding%20China's%20Plans%20for%20Tech%20
Energy%20Industrial %20and%20Defense%20Development072816.pdf.
\18\ Made in China 2025: Global Ambitions Built on Local
Protections (Washington, DC: United States Chamber of Commerce, 2017),
https://www.uschamber.com/sites/default/files/final
_made_in_china_2025_report_full.pdf.
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Third, Chinese sources suggest an understanding even though the
United States may have superior innovation capabilities relative to
China, in many industries, that advantage matters little without
manufacturing capabilities and will almost certainly evaporate unless
they return. Chinese scholars see the country's centrality to global
manufacturing and supply chains as an enormous strategic advantage; in
contrast, they argue that the United States has allowed ``the hollowing
out of its industrial base'' which means it cannot convert its
innovations into products without China's factories. This dependence on
China's manufacturing capability--when combined with China's large
numbers of engineers, its penchant for reverse-engineering, and robust
state support--gives it long-term advantages in the competition with
the United States.\19\ As the researcher Dan Wang notes, ``China
remains unmatched as a manufacturing site given its numbers of skilled
workers, deep supplier networks and the government's credible public
support for manufacturers and provision of reliable infrastructure.''
\20\ Even amid the pandemic, companies like Tesla are deeply invested
in China while others like Honeywell have announced new investments in
Wuhan, China.
---------------------------------------------------------------------------
\19\ Jin. ``Jin Canrong: The Fourth Industrial Revolution is mainly
a competition between the U.S. and China, and China has a greater
chance of winning [Chinese].''
\20\ ``Can the U.S. End control of the Global Supply Chain,''
Bloomberg, June 9, 2020, https://www.bloombergquint.com/global-
economics/why-the-u-s-can-t-easily-break-china-s-grip-on-supply-chains
---------------------------------------------------------------------------
Fourth, China is increasingly focused on setting standards in
technical bodies relative to the United States. China's objectives
include promoting its industries, earning lucrative royalties when its
patents are used, and embedding its values and governance approaches in
the architecture of technology. This year, China released its China
Standard 2035 Plan as part of an effort to advance its standards
globally. Even before this plan was announced, however, China had
already grown influential in key bodies like the Third Generation
Partnership Project (3GPP) and the International Telecommunication
Union (ITU) and in some cases sought to shift standard-setting
discussions to bodies where its influence was greater. Chinese firms
are expected to gain enormous royalties from having succeeded in the
competition over 5G standards. Moreover, with respect to governance,
Chinese companies like ZTE have proposed standards for street light
architecture that would allow video monitoring capabilities to be built
in; for facial recognition that would require specific and extraneous
demographic and biometric data to be stored; and for a new Internet
architecture that would advantage monitoring, censorship, and
control.\21\ Beijing's success in these bodies is in part a product of
its successful investments in next-generation technologies like 5G but
also the more ``hands-on'' approach the Party appears to take relative
to the more industry-led and ``hands-off'' approach that the United
States takes. Although many standard-setting bodies are primarily
comprised of companies that are supposed to vote based on their own
interests, at least in China's cases, companies like Lenovo that
initially voted to endorse approaches backed by U.S. companies were
criticized by nationalists for doing so and pressured to instead
endorse approaches backed by major Chinese companies like Huawei. As
Lenovo's leadership team noted in an apologetic message posted online,
``We all unanimously believe that Chinese companies should unite and
should not allow outsiders to play them against each other.'' \22\ If
China's efforts continue to be successful, Beijing may be able to lock-
in its approaches and extend its lead in certain key global
technologies to the detriment of universal values and U.S. interests.
---------------------------------------------------------------------------
\21\ Lindsay Gorman, ``The U.S. Needs to Get in the Standards
Game--With Like-Minded Democracies,'' Lawfare, April 2, 2020, https://
www.lawfareblog.com/us-needs-get-standards-game
%E2%80%94-minded-democracies.
\22\ ``Take action and fight to the death to win Lenovo's honor
defense war! [Chinese!],'' WeChat Post, May 16, 2018, https://
mp.weixin.qq.com/s/JDlmQbGFkxu-_D2jsqNz3w.
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II. Challenges to U.S. Reshoring, Diversification, and Technology
Competition
Despite a growing consensus across the political spectrum that the
erosion of U.S. manufacturing and technology leadership has weakened
U.S. resilience, competitiveness, and security, efforts to reverse
these trends face a wide range of challenges.
Challenges to Reshoring Industry and Diversifying from China
Several advanced economies are launching efforts to ``reshore''
manufacturing currently in China or to diversify supply chains to
markets outside China. Taiwan was one of the first to do so, and in
pursuit of what it called a ``non-red supply chain,'' it began mounting
a robust effort to lure Taiwanese manufacturers currently in China back
to Taiwan.\23\ Others have followed suit. Japan has subsidized exit
from China for eighty-seven companies, expending $2 billion on efforts
to bring production back to Japan or to diversify it into Southeast
Asia.\24\ Similar discussions are underway in the EU as well, with top
officials discussing the possibility of reshoring or diversification of
some critical industries.\25\ And of course, the United States is also
considering a variety of instruments to promote reshoring and supply
chain diversification, including through low-interest loans, corporate
tax cuts, a dedicated fund, and proposals to pay 100 percent of a
company's reshoring expenses.\26\
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\23\ Matthew Fulco, ``Is Taiwan Winning the U.S.-China Trade
War?,'' Taiwan Business Topics--AmCham Taipei, August 16, 2019, https:/
/topics.amcham.com.tw/2019/08/taiwan-winning-trade-war/.
\24\ Simon Denyer, ``Japan helps 87 companies to break from China
after pandemic exposed overreliance,'' Washington Post, July 21, 2020,
https://www.washingtonpost.com/world/asia_pacific/japan-helps-87-
companies-to-exit-china-after-pandemic-exposed-overreliance/2020/07/21/
4889abd2-cb2f-11ea-99b0-8426e26d203b_story.html.
\25\ ``Introductory statement by Commissioner Phil Hogan at
Informal meeting of EU Trade Ministers,'' European Commission, April
16, 2020, https://ec.europa.eu/commission/commissioners/2019-2024/
hogan/announcements/introductory-statement-commissioner-phil-hogan-
informal-meeting-eu-trade-ministers_en.
\26\ Jodi Xu Klein, ``Is TSMC's Arizona project a U.S. tech supply
chain win? Or a cautionary tale?,'' South China Morning Post, June 10,
2020, https://www.scmp.com/tech/innovation/article/3088489/tsmcs-
arizona-project-us-tech-supply-chain-win-or-cautionary-tale.
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These efforts are meeting with mixed success. While some
manufacturing has left China for Vietnam, Bangladesh, India, Mexico,
and Taiwan, among others, many companies are unwilling or unable to
relocate. The European Chamber of Commerce in China found that only
about 11 percent of its members were considering relocation out of
China; similarly, the President of AmCham China noted that the majority
of the group's members are not planning on exiting China.\27\ For these
firms, the rationale goes beyond cost alone. As the Paulson Institute
scholar Damien Ma argues, it is hard for Americans to quit Amazon
because it is the ``everything store,'' and it is hard for
manufacturers to quit China because it is the ``make everything
country.'' \28\ Surveys of American and Chinese businesses demonstrate
that most are not presently thinking of shifting out of China because
their access to a diverse range of suppliers in China is an enormous
advantage that offsets the value of reduced labor costs, subsidies, or
tax credits. At the same time, China is working to counteract
offshoring. General Secretary Xi Jinping has declared that protecting
China's supply chains is one of the country's six national priorities
in the wake of COVID-19.
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\27\ Joe McDonald, ``Companies prodded to rely less on China, but
few respond,'' Associated Press News, June 29, 2020, https://
apnews.com/bc9f37e67745c046563234d1d2e3fe01 and ``Supply Chain
Challenges for U.S. Companies in China,'' AmCham China, April 17, 2020,
https://www.amchamchina.org/about/press-center/amcham-statement/supply-
chain-challenges-for-us-companies-in-china.
\28\ Damien Ma (@damienics), Twitter Post, June 30, 2020, 4:54
p.m., https://twitter.com/damienics/status/1278114690871300101?s=20.
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Challenges to Retaining the U.S. Technology Base
Even as some industries are reluctant to leave China, others have
already exited or are considering exiting the U.S. market. For example,
Intel announced that it would likely outsource most of its cutting-edge
chip manufacturing given ``process slips'' it has encountered in
manufacturing 7nm semiconductors--a decision that comes even as the
U.S. government has made it clear that the semiconductor industry is a
priority for U.S. reshoring and despite a new round of tax credits and
subsidies meant to support it.\29\ Some financial analysts have
suggested that this is the right decision for Intel, and that it would
be efficient for it to sell its plants and focus on design, and allow
other companies focused on production alone to manufacture for Intel.
But what is efficient would be seriously damaging for the U.S.
industrial base and for an industry critical to U.S. security and
competitiveness since the outsourcing of manufacturing by the country's
largest chipmaker would allow whatever chipmaking knowledge exists in
the United States to essentially atrophy, thereby making any future
manufacturing in that industry significantly less likely for decades to
come. Meanwhile, despite the difficulties and costs, China remains
determined to acquire these same manufacturing capabilities because it
recognizes efficiency is not the only relevant value and has benefited
directly from the ways in which manufacturing prowess has produced
tacit knowledge and technical expertise that can seed a larger
industrial ecosystem.
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\29\ Ian King, ``Intel Plunges as It Weighs Exit from Manufacturing
Chips,'' Bloomberg, July 23, 2020, https://www.bloomberg.com/news/
articles/2020-07-24/intel-considers-what-was-once-heresy-not-
manufacturing-chips.
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A critical reason that Intel is looking abroad is Taiwan and South
Korea have made enormous investments in an ecosystem of physical and
human capital within this industry and have some resilience--if one of
their firms misjudge the next wave of semiconductors as Intel did, they
may have more ``cushion'' because of that broader ecosystem that
supports the industry. In contrast, the United States lacks a
comparable ecosystem of specialized engineering capability, tacit
knowledge, and professional networks in chip production. Its industry
therefore has little resilience.\30\ Onshoring chip manufacturing, in
other words, is about more than the provision of capital--it requires a
larger supporting ecosystem that can create that resilience. That kind
of ecosystem will not be built overnight, it will in part have to be
created with patience, and in some cases with better immigration
policies, some careful experimentation with incentivizing localization,
subsidies and credits where appropriate, and several other instruments.
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\30\ David P. Goldman, ``Intel is making a mockery of reshoring,''
Asia Times, July 25, 2020, https://asiatimes.com/2020/07/intel-is-
making-a-mockery-of-reshoring/.
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Considerations for Competitiveness and Resilience
The geoeconomic challenge China poses is so significant that the
United States will need to explore instruments beyond simple tax
credits and subsidies if it hopes to reshore or diversify its supply
chains and sustain its position in the Fourth Industrial Revolution.
This kind of broad strategy is sometimes referred to as
``industrial policy,'' which is in turn often mistakenly seen as a
narrow effort to pick winners and losers in an industry. The reality,
however, is that many mundane government practices might qualify as
``industrial policies'' and are not designed to pick winners and
losers. Indeed, if industrial policy is generally understood to be
``government intervention in a specific sector which is designed to
boost the growth prospects of that sector and to promote the
development of the wider economy''--particularly in cases where the
market is believed to be inadequate--then many practices might fall
under the broad umbrella of so-called industrial policy.\31\ In this
sense, industrial policy is everywhere, and it includes policy
instruments such as tax incentives, subsidies, trade agreements,
regulation, investments in infrastructure, support for a skilled
workforce, among countless others. What many effectively mean when they
use the term ``industrial policy'' is a state strategy to boost
competitiveness and resilience in a particular sector, a phraseology
which is far less controversial but effectively similar in meaning.\32\
The question is not whether the United States should pursue such a
strategy--there has long been bipartisan consensus that it should--but
how it can do so in a way that avoids waste and capture and that
instead sustains resilience, competitiveness, security, and
technological leadership relative to China.
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\31\ Uri Dadush, ``Industrial Policy: A Guide for the Perplexed,''
OCP Policy Center, January 2016 https://carnegieendowment.org/files/
OCPPC-PB-1605industrialpolicy.pdf.
\32\ Reda Cherif and Fuad Hasanov, ``All the Way to the Top:
Industrial Policy, Innovation, and Sustained Growth,'' IMFBlog,
November 13, 2019, https://blogs.imf.org/2019/11/13/all-the-way-to-the-
top-industrial-policy-innovation-and-sustained-growth/.
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First, with respect to reshoring and supply chain diversification,
other states have adopted practices in this vein that might be
instructive for U.S. policymakers. Despite efforts by a wide range of
governments to reshore or diversify supply chains currently based in
China, only Taiwan has so far been particularly successful. Beginning
in 2019, Taiwan pursued a ``non-red supply chain'' in key advanced
industries including telecommunications, electronics, smart machinery,
biomedicine, and green energy.\33\ To lure manufacturers back from
China, Taiwan used a wide range of policy instruments that went far
beyond tax credits and subsidies, relying on measures like rent
assistance, cheap finance, land acquisition, and simplified provisions
on reinvestment, among others. The effort self-consciously addressed
what Taiwan calls its ``five shortages'': land, water, power, manpower,
and talent to entice companies to return. Most critically, the
initiative was housed in the ``InvestTaiwan'' office at the Ministry of
Economic Affairs (MOEA), which the head of the office described as a
``a one-stop shop to help manufacturers return home smoothly.'' \34\
Since its establishment in 2019, the office has succeeded in achieving
$33 billion worth of reshoring in terms of investment which has boosted
Taiwan's economic growth. The office's success was no doubt partly
boosted by U.S. tariffs, but it was also due to the ease with which one
office could serve as a single point of contact for all firms thinking
about leaving China and the willingness of that office to proactively
work with businesses to address a wide range of concerns beyond
questions of credits and subsidies.
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\33\ Fulco, ``Is Taiwan Winning the U.S.-China Trade War?.''
\34\ Fulco, ``Is Taiwan Winning the U.S.-China Trade War?.''
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Second, with respect to efforts to boost competitiveness and
resilience in high-tech industries, a range of states have adopted
``industrial policy'' plans. China, as discussed, has its Made in China
2025 strategy and now a $1.4 trillion digital infrastructure plan. For
its part, Germany has Industry 4.0, the United Kingdom released an
Industrial Strategy, and a wide range of other states are experimenting
with similar efforts.
Over the last twenty years, had the United States government been
more willing to experiment with these tools and techniques to promote
its high-technology industries, it is possible--though by no means
guaranteed--that the competitive landscape with China could have looked
very different today. The kind of approach that helped restore the U.S.
semiconductor industry in the 1980s with SEMATECH and helped catalyze
the genomics industry in the same period with the Human Genome Project
could potentially have been attempted in other industries. And at the
very least, more robust efforts to save floundering high-tech
industries could have also been consequential. Indeed, at various times
over the last two decades, the United States intervened to save
industries like finance, automotives, and insurance. Those efforts,
however, did not generally extend to companies that were at the cutting
edge of high technology. For example, the United States government did
not intervene to save Motorola or Lucent, companies that today could
have formed the foundation of an American 5G industry. Similarly, if
the United States had mounted a more robust technology innovation
policy to sustain semiconductor manufacturing, it is possible that the
deterioration of that capability--and its potential loss of Intel
outsources production--could have been avoided. Rather than lamenting
what might have been, the past can be a useful guide to a more
competitive future. Accordingly, it is worth noting that if Washington
makes the right moves now, it is likely that the competitive landscape
with China over the next two decades could be significantly and
positively impacted.
For the United States then, as the experience with Intel
demonstrates, the core question will be how Washington can reverse the
loss of expertise and experience in key industries and, in a few
specific cases, attract foreign companies to come to the United States
and build reservoirs of tacit knowledge that could form the foundation
for future manufacturing resilience. These efforts will likely require
a wide range of policy instruments to boost U.S. manufacturing or
incentivize others to manufacture in the United States. These might
include subsidies, tax breaks, investments in education and training,
use of government procurement policies to encourage local production,
state-mandated production (e.g., under the Defense Production Act),
carefully structured trade agreements that advantage domestic
manufacturing, and export controls.\35\ In the past, particularly given
the allure of the U.S. market, similar efforts have helped attract
Japanese auto manufacturers to the United States, with companies like
Toyota producing 70 percent of the cars they sell to Americans at their
U.S. factories. By going beyond simple subsidies and tax credits, the
United States could build a broader ecosystem that will sustain and
attract advanced industries.
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\35\ Geoffrey Gertz, ``How to Deglobalize,'' Foreign Policy, July
24, 2020, https://foreign
policy.com/2020/07/24/how-to-deglobalize/
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Some of the policies critical to this effort are explored below.
III. Recommendations for U.S. Policy
1. Information Gathering for Economic Strategy
The U.S. Congress should consider creating an entity that
can audit the U.S. supply chain and craft robust reporting
requirements on supply chains for industry. China has
demonstrated a willingness to use its nodal position in modern
supply chains as leverage against other countries. If the
United States has a less sophisticated understanding of global
supply chains than China, it will not be well-positioned to
resist or help allies resist these efforts. Moreover, as the
recent pandemic has shown, the Federal government often has
little idea until it is too late just how dependent certain
critical industries (like the pharmaceutical sector, or PPE
manufacturing) are on imports from China and other countries.
Accordingly, the United States needs reliable information on
supply chains within and across industries. Efforts already
undertaken to audit supply chains in critical minerals and in
medical supplies should be expanded into a wide range of
critical and high-tech industries, institutionalized in a
Federal government entity, and bolstered through mandatory
reporting requirements for industries.\36\ This entity could
conceivably be staffed or supported by other economic
statistics-producing agencies, including the U.S. Census
Bureau, the Department of Commerce's Bureau of Economic
Analysis, or the International Trade Commission, among others.
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\36\ Geoffrey Gertz, ``How to Deglobalize,'' Foreign Policy, July
24, 2020, https://foreignpolicy.com/2020/07/24/how-to-deglobalize/ and
Nedal T. Nassar et al., ``Evaluating the mineral commodity supply risk
of the U.S. manufacturing sector,'' Science Advances 6, no. 8 (2020),
https://www.ncbi.nlm.nih.gov/pmc/articles/PMC7035000/. Also see the
text for the Coronavirus Aid, Relief, and Economic Security (CARES) Act
on the National Academies of Sciences, Engineering, and Medicine
website: https://www.nationalacademies.org/ocga/public-laws/
coronavirus-aid-relief-and-economic-security-cares-act.
The U.S. Census Bureau should restart and expand its Current
Industrial Reports program: These reports which were produced
annually produced rich and detailed information on U.S.
industries and created teams of individuals with deep,
institutionalized knowledge on each industry. That information
will be essential for crafting and implementing strategies to
boost U.S. resilience and competitiveness, reshoring, supply
chain security, reversing deindustrialization, and competing
with China.\37\
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\37\ ``Comprehensive List of the Commission's Recommendations,''
from 2019 Report to Congress of the U.S.-China Economic and Security
Review Commission (Washington, DC: U.S.-China Economic and Security
Review Commission, 2019), https://www.uscc.gov/sites/default/files/
2019-11/2019%20Recommendations%20to%20Congress.pdf,538.
The U.S. government should undertake supply chain stress
tests of companies in critical industries. The proliferation of
just-in-time manufacturing and lean production has reduced
inventory in supply chains, leaving little ``slack'' in the
system when confronted with foreign economic coercion, natural
disasters, or other supply chain shocks. Just as the United
States and European Union mandated stress tests for banks after
the financial crisis, supply chain stress tests would involve
efforts to determine how long a particular node in the supply
chain could function after a supply shock and how long it might
take to recover normal functionality.\38\
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\38\ David Simchi-Levi and Edith Simchi-Levi, ``We Need a Stress
Test for Critical Supply Chains,'' Harvard Business Review, April 28,
2020, https://hbr-org.cdn.ampproject.org/c/s/hbr.org/amp/2020/04/we-
need-a-stress-test-for-critical-supply-chains. Also see Gertz, ``How to
Deglobalize.''
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2. Coordinating Economic Policy and Strategy
The U.S. Congress should consider mandating a quadrennial
national strategy on competitiveness and resilience. The United
States government has published a series of annual strategy
reports, including the Quadrennial Defense Review (now the
National Defense Strategy), the Quadrennial Diplomacy and
Development Review, the Quadrennial Energy Review, the
Quadrennial National Health Security Review, and roughly a
dozen strategic plans for various U.S. government departments,
among other efforts. Vanderbilt Law Professor Ganesh Sitaram
has proposed a similar effort for U.S. competitiveness. The
document and the process of drafting it could help create
sustained attention on U.S. economic and technological
leadership, align various agencies, and force long-term
thinking about domestic and international trends.\39\
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\39\ Ganesh Sitaraman, ``On Agency Structure,'' American Compass,
June 10, 2020, https://americancompass.org/essays/on-agency-structure/.
The U.S. Congress should consider various models that could
integrate the U.S. government's various economic agencies and
ensure coordinated approaches to competitiveness and
resilience: When Taiwan sought to reshore supply chains based
in China, the government created a ``one-stop shop'' within one
of its ministries for that very purpose, thereby streamlining
corporate engagement with Taiwan's government and ensuring
timely and comprehensive and bespoke attention to various
challenges each company faced. Other governments that pursue
technology policies or industrial policies similarly integrate
a wide range of economic agencies within mission-specific
offices or even entire ministries. Similar approaches could be
considered within the U.S. government. On the modest side,
these approaches might involve offices comprised of economic
officials from a variety of agencies with a specific and
discrete task, such supply chain reshoring or diversification.
As the Brookings Institution scholar Geoffrey Gertz has noted,
the United States Commercial Service assists firms with exports
while other entities work to attract foreign investment.\40\
Similar entities could presumably be created to focus on
reshoring or diversification. On the expansive side, as some
like Ganesh Sitaram suggest, this could involve a
reorganization and streamlining of U.S. economic agencies to
better implement ``industrial policy'' or national strategies
for competitiveness and resilience, with strong protections to
ensure accountability and prevent capture.\41\
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\40\ Geoffrey Gertz, ``How to Deglobalize,'' Foreign Policy, July
24, 2020, https://foreignpolicy.com/2020/07/24/how-to-deglobalize/
\41\ Ganesh Sitaraman, ``On Agency Structure,'' American Compass,
June 10, 2020, https://americancompass.org/essays/on-agency-structure/.
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3. Boosting American Strengths in Immigration and R&D
The U.S. Congress should facilitate high-skilled immigration
to the United States: American openness is an enormous strength
that has long allowed the United States to attract the best
foreign minds to bolster its science and technology
capabilities. U.S. labs at the forefront of the Fourth
Industrial Revolution largely depend on graduate students from
a wide range of countries. For example, roughly 80 percent of
graduate students in electrical engineering and computer
science are foreign nationals.\42\ Most prefer to stay in the
United States following the completion of their degrees--with
vast majorities staying a decade after graduation--though
increasingly many are unable to do so.\43\ Similarly, U.S.
companies also rely on foreign talent to fill shortfalls in
science and technology, though the total number of those visas
has been capped since 2005 at 85,000, with only 20,000 reserved
for those with graduate degrees.\44\ Reforms are needed to
ensure that the United States has access to the world's best
high-tech talent. Per a report by Georgetown's Center for
Security and Emerging Technology, the U.S. Congress should (1)
raise the cap on H1-B visas; (2) automatically grant green
cards (exempt from green card caps) to postgraduate degree
holders, particularly in STEM; (3) emulate Canada's dedicated
post-graduation employment visa for international students; (4)
create a visa program for entrepreneurial graduate students who
wish to start companies after graduating; (5) codify the
Optional Practical Training program in statute, among other
policies.\45\
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\42\ ``The Importance of International Students to American Science
and Engineering,'' National Foundation for American Policy, October
2017, http://nfap.com/wp-content/uploads/2017/10/The-Importance-of-
International-Students.NFAP-Policy-Brief.October-20171.pdf.
\43\ Boris Granovskiy and Jill H. Wilson, ``Foreign STEM Students
in the United States,'' Congressional Research Service, November 1,
2019, https://crsreports.congress.gov/product/pdf/IF/IF11347. The
report notes that, ``According to the National Science Foundation's
2017 survey of STEM doctorate recipients from U.S. IHEs, 72 percent of
foreign doctorate recipients were still in the United States 10 years
after receiving their degrees. This percentage varied by country of
origin; for example, STEM graduates from China (90 percent) and India
(83 percent) stayed at higher rates than European students (69
percent).''
\44\ Ely Ratner et al., Rising to the China Challenge: Renewing
American Competitiveness in the Indo-Pacific (Washington, DC: Center
for a New American Security, 2020), https://www.cnas.org/publications/
reports/rising-to-the-china-challenge.
\45\ Remco Zwetsloot et al., Keeping Top AI Talent in the United
States: Findings and Policy Options for International Graduate Student
Retention (Washington, DC: Center for Security and Emerging Technology,
2019), https://cset.georgetown.edu/wp-content/uploads/Keeping-Top-AI-
Talent-in-the-United-States.pdf, 29-35.
The United States Congress should increase Federal R&D
spending by four-fold to keep pace with China, and it should
ensure increases go beyond the life sciences. Federal R&D
spending has declined for decades. As a percentage of GDP, the
U.S. Federal government spends only .61 percent of GDP on R&D--
the percentage is one of the lowest in seventy years, lower
than ten other science powers, and lower even than pre-Sputnik
funding. Moreover, half of Federal R&D spending goes to life
sciences alone.\46\ While it is true that business has
contributed significantly to U.S. R&D spending, particularly in
applied research, basic research generally comes from the
Federal government and has historically formed the foundation
for major breakthroughs--including radar, computing, and
nuclear power.\47\ One more recent example, as economist
Jonathan Gruber notes, is the $3 billion Congress spent
beginning in the 1980s to map the human genome. That investment
catalyzed the genomics industry, which employs 280,000 people
in the United States and generates taxes of $6 billion
annually.\48\ Meanwhile, as U.S. government research spending
falls, China's is growing rapidly and may well exceed 2.5
percent of GDP in coming years. For that reason, a doubling or
tripling of Federal research spending is in order, would allow
us to keep pace with China, and would restore us to levels last
seen in the 1960s.
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\46\ James Pethokoukis, ``US Federal research spending is at a 60-
year low. Should we be concerned?,'' American Enterprise Institute, May
11, 2020, https://www.aei.org/economics/us-federal-research-spending-
is-at-a-60-year-low-should-we-be-concerned/.
\47\ M. Anthony Mills and Mark P. Mills, ``The Science Before the
War,'' The New Atlantis (Winter 2020), https://www.thenewatlantis.com/
publications/the-science-before-the-war.
\48\ James Pethokoukis, ``Jonathan Gruber on jump-starting
breakthrough science and reviving economic growth: A long-read Q&A,''
American Enterprise Institute, June 3, 2019, https://www.aei.org/
economics/johnathan-gruber-on-jump-starting-breakthrough-science-and-
reviving-economic-growth-a-long-read-qa/.
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4. Reforms to Stimulate Long-Term Planning and Competition
The U.S. Congress should consider anti-monopoly measures to
build U.S. resilience in critical industries: True resilience
requires ensuring that the United States has several viable
competitors in any given industry, particularly those essential
to American health and security. At the innovation frontier,
companies frequently make bets about the progress of future
technology, some of which prove prescient and others of which
prove mistaken. When only one state champion is left in a given
industry, the price of making the wrong bet can be devastating
for the wider economy and for the country's technological
leadership. In contrast, when there are multiple companies
operating in a critical industry, the odds that one will make
the right bet and sustain the country's leadership in that
industry are far greater. When market structure sometimes
complicates efforts at ensuring competition, Congress can
assist weaker competitors, a policy approach it has used in the
past to ensure a competitive defense industrial base.\49\ Then,
as now, competition between leading firms in these essential
industries is more likely to produce lower prices, higher
quality products, industrial resilience, and greater
innovation--advantaging the United States relative to outright
mercantilist competitors with one leading state champion.
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\49\ Matt Stoller, Goliath: The 100-Year War Between Monopoly Power
and Democracy (New York: Simon & Schuster, 2019).
The U.S. Congress should consider financial sector and tax
policy reforms that reduce the short-termism of corporate
America and encourage a focus on longer-term decision-making:
The shareholder revolution of the 1980s helped usher in a focus
on returns on capital at the expense of longer-term planning.
Most shares of stock are held for less than a year now compared
to eight years in the 1950s; CEO tenure is now near a historic
low of roughly five years; and the pressure to generate
financial returns often disincentivizes manufacturing relative
to other more lucrative business activities. Efforts to adjust
the institutionalized ``short-termism'' of U.S. capital markets
will be difficult and controversial, but some prominent
executives like JPMorgan Chase CEO Jaimie Dimon and Berkshire
Hathaway CEO Warren Buffet are publicly supportive. As Michael
Brown, Eric Chewning, and Pavneet Singh note in an April report
from the Brookings Institution, Congress could incentivize the
creation of new benchmark metrics that include longer
timeframes as well as tax policy that encourages holding equity
positions for longer periods.\50\
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\50\ Michael Brown, Eric Chewning, and Pavneet Singh, ``Preparing
the United States for the Superpower Marathon with China,'' The
Brookings Institution, April 2020, https://www.brookings.edu/wp-
content/uploads/2020/04/FP_20200427_superpower_marathon_brown
_chewning_singh.pdf
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5. International Efforts with Like-Minded Stakeholders and in Key
Institutions
The U.S. Congress should encourage greater basic science
research collaboration between the United States and its key
allies and partners, who together comprise two times more
spending than China. Basic science research is already an
increasingly international endeavor, and U.S.-China scientific
cooperation is increasingly common. But while the United States
and China spend roughly equivalent amounts on R&D presently,
the combined total spent by Japan, Germany, South Korea, India,
France, and the UK exceeds the U.S. and China respectively. The
U.S. Congress should relax some of the people-to-people
impediments to greater allied and partner collaboration (e.g.,
visa policies) while also encouraging basic science research
organizations to engage more with allies and partners. Greater
diffusion across allied and partner channels could help sharpen
the American technological edge, allowing the country to
benefit from others. Moreover, formal partnerships could
involve efforts to ``set standards and values around sharing
data, transparency, reproducibility and research integrity,''
as Georgetown's Center for Strategic and Emerging Technology
argues.\51\
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\51\ Alison Snyder, ``Allies could shift U.S.-China scientific
balance of power,'' Axios, June 18, 2020, https://www.axios.com/
scientific-research-expenditures-america-china-743755fe-3e94-4cd3-92cf-
ea9eb1268ec2.html.
Congress should support efforts to advance coordinated
domestic and multilateral approaches to standard setting: While
many standard-setting bodies are comprised of companies rather
than countries, China's top-down effort to shape standards
requires a response from the U.S. government. This is
particularly urgent during times when standard-setting
processes might be inaugurating new paradigms in critical
industries, including telecommunications (e.g., O-RAN) and the
Internet of things, that could long shape the future. First,
Congress could support establishment of interagency working
groups on standards that could coordinate internally. For
example, OSTP could establish an interagency working group on
technology standards that brings together the departments of
State, Commerce, Justice, and Defense as well as the U.S.
intelligence community and NIST--and that also consults with
U.S. industry.\52\ Second, to build coalitions among different
companies and countries, Congress could support the
establishment of offices within the departments of Commerce and
State to coordinate U.S. approaches with like-minded
stakeholders.\53\
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\52\ Ely Ratner et al., Rising to the China Challenge: Renewing
American Competitiveness in the Indo-Pacific (Washington, DC: Center
for a New American Security, 2020), https://www.cnas
.org/publications/reports/rising-to-the-china-challenge.
\53\ Lindsay Gorman, ``The U.S. Needs to Get in the Standards
Game--With Like-Minded Democracies,'' Lawfare, April 2, 2020, https://
www.lawfareblog.com/us-needs-get-standards-game
%E2%80%94-minded-democracies.
Senator Sullivan. Well, thank you, gentlemen. Outstanding
opening statements by both of you, giving us a lot to think
about but again I think a lot to agree on.
So let me begin by asking both of you some kind of very
general open-ended questions. I've spent a lot of time actually
in China and working on this relationship from a lot of
different perspectives, but one core principle that I think we
need to focus on, I think it's again something that's
considered and viewed as very bipartisan, is the issue of
reciprocity.
Right now in the U.S.-China relationship across so many
spheres, the relationship is not reciprocal and at the end of
the day, reciprocity really is an issue of fairness. What we
enable Chinese, say, journalists or businesses or academic
institutions to do in America, we can't do over there. It's a
very long list across many spheres of the relationship and in
my meetings with the Chinese, they sometimes even acknowledge
this.
Remarkably, what they do when they say the relationship is
non-reciprocal, they say, well, and I've heard this as a U.S.
Senator, I've heard it in other positions, Senator, it's
because we're still a developing country and you're a developed
country. I heard that from the Ambassador about a year and a
half ago. Pretty ridiculous statement.
But I'd like the two of you to comment on this issue of the
lack of reciprocity and reciprocity as a core principle that we
need in the relationship between the United States and China,
and, second, if you can talk about an issue that I refer to as
promise fatigue, promise fatigue.
This is the issue of over the last three decades, almost
every major agreement that the Chinese have undertaken with
regard to the United States, they don't follow through on.
Two examples. During the Obama Administration, President
Obama led the effort to have a comprehensive agreement on
intellectual property theft. The Bush Administration prior to
the Obama Administration did this. They continued to steal
intellectual property probably at higher levels.
In 2015, Xi Jinping, next to President Obama in the Rose
Garden, said we will not militarize the South China Sea.
President of China said that in the Rose Garden next to the
President of the United States. Within weeks, they were
breaking that promise.
So promise fatigue is another issue that I'd like the two
of you to address. So if you can look at reciprocity, promise
fatigue, as kind of opening questions in this hearing. Thank
you.
Mr. Wessel. Thank you for that excellent question which
really goes to the heart of the relationship at this point and
the challenges we face.
Let me first go to promise fatigue and then I'll address
the question of reciprocity. I'm a Democrat, but one of the
great statesmen, Ronald Reagan said, ``Trust but verify,'' and
I think we've failed to have the kind of provisions in place
that would do just that, meaning that when a promise is made,
we need to implement automatic provisions to ensure that
promises are kept.
Too often, we rely on those promises and hope for the best
and find out many years later or even quicker sometimes that
the promises are broken and then we look at what tools might be
available to fix that. We need more automatic trade measures
and provisions to put in place, Number 1.
Number 2, and I'll rely on my colleague, who is skilled in
the Chinese language, we need to have a much better
understanding of what China actually says. That means and
requires reading their core documents.
When one looks at the bilateral agreement on cyber hacking,
for example, it was a fundamental misunderstanding here because
the Chinese said that they would not hack for economic benefit
alone. The fact is they view economics and military security as
inextricably intertwined and the result is when they hack for
economic gain, it is for military and national security gain.
So we were using different definitions.
Finally and quickly on reciprocity, I think reciprocity is
an appropriate tool to use in certain sectors, potentially not
across the board. We don't want to be like the Chinese, but we
want them to understand that when they take certain actions
that are adverse to our interests, they have to expect the same
here. So I believe reciprocity has a role in a number of
sectors.
Senator Sullivan. Let me just--before I have Mr. Doshi
answer that, just on reciprocity, I posed this issue to the
Chinese when I was in Beijing a couple years ago, that the lack
of reciprocity in areas like journalists, they have hundreds,
if not thousands, of journalists in our country pretty much
free roaming. We don't have that in their country. They have
Confucius Institutes at our universities.
When I was in Beijing, the Ambassador told me they couldn't
even get on the campus of Beijing University without an escort.
I posed these all to the Chinese. I said if you want Confucius
Institutes at hundreds of universities, then we should be able
to have James Madison Institutes of Freedom and Liberty on your
universities. I just made the term up, but the point was that
there's not a reciprocal relationship. Their answer was that
Confucius Institutes only teach culture and language. A James
Madison Institute of Freedom and Liberty would teach
propaganda. I think that's a fundamental misunderstanding of
James Madison, but these are examples of the lack of
reciprocity.
Mr. Doshi, would you care to comment on these questions
quickly before I turn to some of the other Senators who have
questions for the two of you?
Dr. Doshi. Thank you very much, Senator. I'll simply say
that I agree with my colleague, Commissioner Wessel.
Reciprocity should be the cornerstone of our relationship.
Of course, the question is where we want to insist on
reciprocity, where we may not want to. I'll note that back in
the Cold War, U.S. and Soviet Union actually had a very
reciprocal relationship on when it came to journalists. We had
equivalent numbers in each other's countries. We don't have
that approach now. Some could say that it benefits the United
States to have a bit more access than it does presently, but
it's unlikely that China would provide it because they see
reciprocity sometimes as a direct threat to the Chinese
Communist Party's hold on power.
And so for them, reciprocity becomes, you know, a direct
challenge to everything that is what they are and it becomes
very difficult for us to insist on it successfully.
Senator Sullivan. Sorry to interrupt you. So they booted a
bunch of our journalists from China recently. If they allow
five American journalists in all of China, is it in our
interest to say, OK, then you get five Chinese journalists? We
know a lot of them are, you know, mouth-pieces for the Chinese
Communist Party anyways. Some of them aren't even journalists,
I suspect, but would that make sense? Should we just say, all
right, you get five journalists in America? If we can't have
James Madison Institutes of Freedom and Liberty on your
universities, we'll boot all your Confucius Institutes off our
universities. Does that make sense?
Dr. Doshi. Thank you, Senator. It's an important question.
I think that the answer will vary from issue area to issue
area, and I think that with any luck, we'll be able to find
some kind of an arrangement where we'll have better access to
China in the long-term, but for now, it's the case that the
five journalists they have in the United States, if they were
to have reciprocity with us, would not do nearly as much for
China as our five would do for the United States in Beijing.
They're able to tell us more about what was happening on the
ground.
So that's an area where we get more from that perfect
reciprocity than they might since their mouthpieces aren't
particularly effective, you know, and our journalists can be
particularly effective in shaping global media coverage, for
example.
But you raise a very important question, Senator, and I'm
not sure I have a perfect answer for it.
Senator Sullivan. Great. And do you have a view on promise
fatigue real quick before we turn to Senator Klobuchar?
Dr. Doshi. Absolutely. I completely agree that promise
fatigue is a significant issue. There are so many promises that
have been broken across issue areas and that the key goes back
to what Commissioner Wessel said, trust and verify.
Senator Sullivan. Great. Senator Klobuchar.
STATEMENT OF HON. AMY KLOBUCHAR,
U.S. SENATOR FROM MINNESOTA
Senator Klobuchar. Thank you very much, Chairman Sullivan
and Ranking Member Markey, for holding this important hearing
today.
I've long been critical of China's unfair methods of
competition. It hit right at home with steel dumping in
Northern Minnesota, and I think we know it's not just
manufacturing and trade in which we need to be vigilant. China
is using both old and new tools, including expansion of state-
owned businesses, required disclosures from private companies
doing business in China, and outright theft of intellectual
property, and as we have seen during this pandemic, our
dependence on China has highlighted weaknesses in ensuring
access to critical medical supplies.
I'll start with you, Mr. Wessel. I mentioned this steel
dumping and both under the Obama Administration at the very end
we took this on in a big way and actually made a difference and
that continued into the advocacy that I have made with the
Trump Administration on this issue.
Do you agree with the importance of standing up to illegal
and unfair trade practices that harm our workers, such as
illegal steel dumping, Mr. Wessel?
Mr. Wessel. I couldn't agree more. The fact is that when
our workers work hard, play by the rules, they deserve to know
that those rules are going to be enforced and that they'll have
a fair chance to compete.
China has not only in steel but in so many other industries
a broad cross-section of protectionist and predatory practices
designed not to promote win-win but to win and dominate and
steel is a perfect example where, as you know, they will have
close to a billion metric tons of capacity, far more than they
need, far more than the government and the global community can
consume, and that over-capacity is simply skewing market forces
and under-mining the ability of our companies and our workers
to survive. That covers steel, aluminum, rubber, fiber optics,
and probably 15 to 17 separate sectors.
So standing up to their non-market activities is vital for
the preservation of our own industry but also for our own
economic success.
Senator Klobuchar. Very good. In your testimony, you also
note reports that intellectual property theft costs America up
to $600 billion a year. China, according to your testimony,
accounts for most of that loss.
Do you believe that the Administration's response to
Chinese intellectual property theft has been sufficient to
protect our economy from harmful influence?
Mr. Wessel. I believe they've taken some initial steps that
are helpful, but as they have pointed out and so many analysts,
myself included, believe is that stage 1 or phase 1 of their
agreement was insufficient. It does not get to many of the
structural issues, subsidies, state-owned enterprises, and the
basic core structure of Chinese non-market forces.
It is also somewhat problematic to believe that
intellectual property will change as a result of the Phase 1
agreement. We've already seen the indictments that continue to
be issued virtually every day, continued cyber hacking, theft,
et cetera, and the cost of doing business in China is still
dependent on joint ventures in so many sectors.
Those joint ventures often require U.S. companies to share
their intellectual property. It's a cost of doing business and
that hasn't changed.
Senator Klobuchar. Exactly. So this would mean trade
alliances and other things to try to push on these issues and
China sees, I think, you'd agree, the continuing weakening of
U.S. alliances and dis-engagement around the globe as an
opportunity to fill the vacuum left by U.S. leadership.
How should the U.S. respond to efforts by China, and I
guess I'll last ask this of Mr. Doshi, as well, to expand its
influence with our largest economic partners in regions around
the globe? Specifically, what role should strengthening
alliances and U.S. leadership in multilateral institutions play
in this effort? Can we just go it alone against China or do we
have to work with the rest of the world?
Mr. Wessel. Well, I think we've seen that going it alone is
not working as well as it should. We are engaging, as you've
seen recently, Great Britain has turned the corner, I believe,
on the question of Huawei, what Chairman Wicker talked about
earlier, and the leadership of this committee on Rip and
Replace and looking at that threat.
We have to reform organizations like the WTO to make sure
that they work for us and I think we're past the point where,
as it was in the past, that our allies would hold our coat
while we bloodied our nose. They realize now or increasingly
realize that the China Challenge is not just posed to U.S.
interests but their own, as well. They need to come to the
forefront and work with us. If they don't, we need to go it
alone because we need to protect our industry and our people,
but I think the world is waking up. We have to work on
reforming those organizations, doubling down and participating
where it can be helpful, but where we need to go it alone,
we've got to do it for our people.
Senator Klobuchar. Thank you.
Senator Sullivan. Thank you, Senator Klobuchar.
Senator Blunt.
STATEMENT OF HON. ROY BLUNT,
U.S. SENATOR FROM MISSOURI
Senator Blunt. Thank you, Chairman.
To both of the panelists, a couple of questions. One is,
what has China done in their effort to make it difficult for us
to have ownership and other things in China that makes it easy
for us to leave and two is, how are the dramatic demographic
changes in China going to impact their ability to continue to
compete, to keep wages low?
We have a country that's going to be dramatically changing
in terms of what it looks like, and how's that going to affect
their global position and their continuing economic model? To
both of you, let's start with Mr. Wessel and then Mr. Doshi.
Mr. Wessel. Thank you for that question. It really is the
key question in terms of how China is going to approach its own
future.
As we've seen, they have an aging population with over time
fewer replacement workers and that's going to put new stresses
and strains on their system.
One where it would seem, you know, one of the most evident
changes is in health care where, with their 1.4 billion people
aging quickly or aging at a faster pace than had expected,
that's why they're trying to dominate the biotechnology,
synthetic biology, and medical supply areas to meet their own
needs and also to dominate worldwide.
It also, of course, puts enormous stress on the need for
them to promote economic growth, productivity, and efficiency,
and as a result, they are trying to move up the value chain in
terms of products they've produced.
When China entered the WTO, the old view was it was about
toys and textiles. Now it's about quantum computing,
biotechnology, AI, and other critical industries. So all of
their demographic changes are helping influence their economic
choices.
Rush?
Dr. Doshi. Thank you, Senator, for that question, and I
think it's exactly the question that President Xi Jinping is
worried about or General Secretary Xi Jinping is worried about
in China.
First, they're trying to make it hard for companies to
leave. They know that wages are rising in China and that is
illuminating some of their advantage. So they're hoping to move
toward automation, toward smart manufacturing with a massive
$1.4 trillion bioG grid, hoping to make sure that they use
pressure sometimes to prevent companies from leaving, and
therefore to make themselves at the center of those global
supply chains. So that's, you know, the first thing they're
trying to do is make sure, as General Secretary Xi has
mentioned, that they have dominance in those supply chains.
The second area, on demographics, you're absolutely right.
Their demographic challenge is enormous. They have some of the
least favorable demographics of any great power in the world
today and they know it and they're worried about it. They're
worried they're going to get old before they get rich and
that's exactly why they're stepping up their industrial policy
approaches to target our high-tech industry because they're
hoping they can grasp that vine before they let go of the last
one, which was lower wage manufacturing.
So they have enormous challenges and this is a moment of
transition and that is in many ways why we are seeing so much
money being spent on Chinese industrial policy.
Senator Blunt. What about the impact of what we've been
doing so far? I heard the comment that we need to have more
help coming. Certainly Australia and some of our friends have
stepped up to resist the Chinese inability to be willing to
work with others.
What about moving forward and where are the likely friends
in this economic fight that we should be thinking come next?
Are they the transpacific countries or tell me what you think
happens there, and again both of you?
Mr. Wessel. Well, Senator, it's a great question. You know,
again as I had said, I think, you know, countries are now
beginning to appreciate better the China Challenge. For a long
time, they looked to the U.S. to lead, whether it was at the
WTO or elsewhere, and they would not always follow. So on
overcapacity, where there were multilateral talks, we got
little to no help from our allies.
I think the last two or three years and certainly what's
happened with the pandemic has awoken many of our trading
partners, many of our allies to the dangerous vulnerabilities,
the lack of resiliency, the, you know, unacceptable dependence
on Chinese supply chains, and I think we are entering an era
where there is opportunity to have greater allied support, but
we need to chart a course that they see themselves winning in,
as well, and we need to have institutions which are able to
enforce those measures. Those enforcement measures and
institutions right now are limited in their impact.
Senator Blunt. Mr. Doshi.
Dr. Doshi. Thank you, Senator.
China believes that our allies are our single biggest
advantage. They think our alliance structure is the most
important thing that we have going for us and they're worried
we're actually going to work with them, particularly in the
economic and technological spaces.
Now, as Michael Wessel just mentioned, post-COVID, approval
ratings for China are plummeting around the world, including in
many of the countries that we have very close ties with,
including in European countries and India, parts of the Asia
Pacific, and so we have the opportunity now to work with those
countries, to create coalitions at the forefront of technology.
People have talked about a D10, a coalition of democracies
to work together on 5G, but there's no reason we couldn't
expand that and work with other countries outside that
coalition on a variety of issues, everything from biotechnology
to medical supply chains to artificial intelligence.
So in many ways, the future of American power and
competition and technology is going to be coalition and I think
that that is the direction we're gradually beginning to move
in, in large part accelerated by China's own poor diplomacy
post-COVID-19.
Senator Blunt. Thanks to both of you, and thank you, Mr.
Chairman.
Senator Sullivan. Thank you, Senator Blunt.
Mr. Doshi, that's a very insightful comment on the allies.
The D10 is something I had not heard of before.
Senator Rosen.
STATEMENT OF HON. JACKY ROSEN,
U.S. SENATOR FROM NEVADA
Senator Rosen. Well, good morning, Mr. Chairman. Thank you
for holding this important hearing today.
I want to thank both our witnesses not just for being here
but your thoughtful testimony so far. A lot of your work is
what we need to learn from it and the lessons we take away.
But I want to talk a little bit about the STEM workforce
shortfall. You know, technology, of course, increasingly at the
center of U.S.-China economic competition. So I think we can
all agree that to boost our competitiveness with China, we must
invest in the STEM-capable workforce.
To continue being the most innovative country in the world,
we need to maintain a workforce that can innovate, and the
United States is expected to face a shortfall of nearly 3.4
million skilled and technical workers in just a few years, by
2022.
A recent study found that less than half of the K through
12 students are getting any cyber-related education. So to
promote our STEM work force, I have introduced multiple
bipartisan bills, ones that prepare Junior ROTC students for
careers in STEM education.
Excuse me. I had something caught in my throat right before
I started. I apologize. I'm going to go right to my question.
Mr. Wessel, in your testimony, you point out that the
growing trade deficit with China has eliminated millions of
American jobs in manufacturing and agricultural sectors, that
these jobs have not migrated to other industries.
What kind of programs do you think we should be investing
in to better prepare our students to enter the work force?
Mr. Wessel. Thank you for that excellent question and you
are spot on in terms of the question of the need to invest in
our children, our young adults, and our workers in terms of not
just STEM but, of course, lifelong learning. We need to make
sure that our workers have the skills to compete in the world
economy.
It also requires, though, that we fight more for some of
those high-tech jobs, the new jobs of the future, whether
they're in biotechnology or quantum computing or anything else,
so that the investments that workers make in their own success,
that families make in their students can achieve a good return,
that they know that they have a bright future ahead of them.
But without the skills, we don't have the critical input we
need to succeed and every industry now is an advanced industry,
whether it's agriculture, which, as you know, I was on farms in
Iowa for a portion of last summer, you know, every tractor is
high-tech, you know.
When you look at any factory, there's computer-assisted
support. You know, it's very different than the factories of a
hundred years ago. We need to constantly upgrade our skills and
STEM education is one of the key ingredients.
Senator Rosen. I'm going to ask both of you. You know,
China, of course, they prioritize STEM as a national security
issue. They mandate its inclusion in primary school. They've
launched an action plan, and the United States, in contrast, is
mostly offering an approach that doesn't meaningfully include
STEM. In a lot of ways, it doesn't include our nonprofits and
it doesn't include our industry partnerships.
So for both of you, how can we best help our states, our
school districts, and our schools? What can we again invest in,
public-private partnerships, government here with legislation,
grants, and help? What can we do to create an action plan of
our own and really support our school districts? That's where
the learning's going to happen.
Dr. Doshi, I guess we can start with you this time.
Dr. Doshi. Thank you, Senator. I think that's exactly the
right question and your diagnosis of China's advantages in STEM
is exactly right.
My belief in part is formed by the fact that our research
and development spending has historically supported STEM
research and education both. In fact, of course, at our
universities, the funds that come from our Federal grant-making
institutions when it comes to science and technology support
professors. They support graduate students, and they can
support them more effectively if we have more funds.
But right now, of course, as many of us know, our research
and development spending is .61 percent of GDP at the Federal
level. That is, our Federal Government only spends .61 percent
of GDP on science and technology research. That is far lower
than at during any point during the Cold War.
It's also interestingly to me lower than what we spent for
Sputnik and Sputnik was, of course, what catalyzed our science
and technology sector. So we're actually below what we were
before Sputnik.
There's a lot that we can do there, even a simple doubling
which is a significant amount of money, but we only raise that
amount to $200 billion compared to the several hundred that
China's putting in would make it possible for us to better
educate our population and do both good research at the same
time. The two goals, in my view, are complementary, Senator.
Senator Rosen. Well, I believe my time's expired, but I
like to think of this as an investment. It has a calculated
return and we can project the economic return by investing in
STEM early at all levels, K through 12, universities. If we
don't do it, we're going to be left behind.
So I thank you both for being here today.
Senator Sullivan. Thank you, Senator Rosen.
Senator Capito.
STATEMENT OF HON. SHELLEY MOORE CAPITO,
U.S. SENATOR FROM WEST VIRGINIA
Senator Capito. Thank you, Chairman Sullivan and Ranking
Member Markey, for having the hearing today.
As we know, this is a very complicated and ever-evolving
relationship. Can you hear me OK there? I got a little feedback
there.
Senator Sullivan. We're good now. Thanks.
Senator Capito. We're good. OK. Yes. It's complicated. In
January, I was pleased that the Administration and Chinese
officials raised the Phase 1 Trade Agreement.
Commissioner Wessel, as you know, trade discussions remain
ongoing between the United States and the U.K. Concerns have
been brought to my attention that a heavily subsidized U.K.
steel company was recently acquired by a Chinese steel
manufacturer.
China leads the globe in steel production and consumption
and hurts our American products and continues to acquire and
make direct investment in European countries, such as the one
that I mentioned in the U.K.
Has the Commission conducted any research into the impacts
that China direct investment in the U.K. would have on our own
domestic steel industry?
Mr. Wessel. Thank you for that question.
No, the Commission has not yet addressed that, but let me
just point out quickly I also am the staff chair for the Labor
Advisory Committee, which advises U.S. Department of Labor, and
that issue has come up.
The question of whether a Chinese state-owned entity, which
has acquired, as you point out, the largest steel company in
Great Britain, how that's going to be dealt with in the U.S.-
U.K. agreement, and our trade policies need to deal not only
with what's happening in our own market, your state has been
ground zero for much of this, but also what's happening with
our partners, like the potential U.S.-U.K. agreement.
Senator Capito. So let me just ask you this in terms of
let's say take ourselves out of U.K. If we're negotiating other
trade agreements, say, with India, and other countries, are we
digging down to the passive ownership issue that, although I
don't think there is passive ownership in the steel company in
the U.K., but, I mean, is that something of concern whether or
not--they're not the primary owner but we hear that they're
funneling materials and other things through other countries.
How do you address that issue?
Mr. Wessel. Well, it is a fundamental problem and you're
right, and it is a problem, I think, that's going to be of
increasing importance. So thank you for raising it.
How China invests around the globe, what they do to support
those entities? So the U.K. or India, they may be providing
either zero or no-cost financing. They may be providing inputs,
like green pipe, which goes through only minor transformation
in that country and then comes here and dramatically under-
prices our own firms.
That has to be dealt with in these trade agreements. We
cannot allow non-market activities that China seeks to export
and create a platform in another country be used as a platform
to undermine our interests.
Senator Capito. Yes. I have great concerns about that on a
lot of different products.
I'm going to go to a different product that's applicable to
West Virginia and that's our hardwood lumber and metallurgical
coal industries.
They've been very hard hit by the Chinese retaliatory
tariffs in response to the Section 301 Investigation, but when
the Phase 1 negotiations provided us positive news on both of
those, but they're still not living up to their purchase
agreements.
Do you think that's tied to this overall economy or is this
something that is consistent across all product lines, and what
can I tell my hardwood and metallurgical coal folks to expect
in the future whether they will live up to their purchase
requirements?
Mr. Wessel. Well, Senator, thank you for the question.
I have to say I have to do a bit more research on those
particular products and others where I've looked, for example,
soy. We saw that China was actually buying soy from Brazil
rather than from the U.S.
Each product is different, but again, as I said earlier,
and as the Chairman raised in terms of promise fatigue, we need
to make sure that the promises made to the industries and
workers in your state are kept. If not, that there is a swift
and sure response.
Senator Capito. Well, I think that's absolutely critical as
we move forward, and I think that that's something certainly
it's going to impact all different products all across the
state.
The last thing I would mention, and I don't know, this
isn't part of trade, but it is something that we see popping
up, recently in our state, two individuals who were tied to
China were prosecuted for income tax fraud and other things,
but they were heavily connected to Chinese universities and to
China in general.
I think that's cascading across the country as we look at
what's happening in our universities and colleges. Is this part
of what you look at or is that--am I out of your wheelhouse
here?
Mr. Wessel. We do look at that on both a classified and
unclassified reporting scenario every year.
Clearly, the FBI and other law enforcement as well as
intelligence services have been diving much deeper over the
last two or 3 years into the activities of individuals. We've
seen it at various universities, as you point out, researchers,
et cetera.
Senator Capito. Right.
Mr. Wessel. We need to have a much clearer understanding of
what's going on.
In my testimony, I talk about re-engaging between the FBI
and our university systems so that they have a better
understanding of what not only the rules are but what to look
out for and we need to have a much more coherent strategy. Some
of that's been done but much more remains to be done.
Senator Capito. Yes. I am very supportive of that and the
realization, too, that a lot of these things have been embedded
for not just a couple of years but maybe even as many as
decades.
So thank you very much for your service, and thank you, Mr.
Chairman, for the opportunity.
Senator Sullivan. Thank you, Senator Capito.
Gentlemen, I'm going to continue on. I think we have a few
more Senators who are going to be attending this questioning of
the first panel, but let me, in the meantime, ask a few follow
up questions from this very interesting discussion.
You know, of course, there are challenges, but in any
relationship, if it's going to be sustainable, there are
opportunities, as well, with regard to the economic
relationship between the United States and China.
We talked about the Trump Administration's Phase 1 approach
with regard to trade and that was something that I was quite
involved in trying to ensure that the President, the U.S. Trade
Rep, the entire team was focused on many different sectors of
the U.S. economy, including our fisheries sector, and that was
something that I was very focused on.
You know, Alaska is the super power of seafood, as I like
to call it. Over 60 percent of all seafood harvested in the
United States comes from Alaska's waters and we export a lot.
So you may have seen when the President announced Phase 1,
he did talk about the aspects of that agreement that include
China's commitment to dramatically increase its purchases of
American seafood, dramatically increase that. However, I worry
again that we might be into another promise fatigue moment with
regard to Phase 1.
Can either of you talk about how we press as we're really
in many ways re-evaluating the relationship but still look at
opportunities for American workers, American fishermen, farmers
to take advantage and benefit from the market? It's a balance,
isn't that correct? I'll open that up to both witnesses.
Mr. Wessel. Thank you for that question, and, Rush, I'll
turn to you quickly.
Look, seafood and----
Senator Sullivan. I'm talking beyond seafood. I'm just
talking about the market for American exports.
Mr. Wessel. I understand. No, no, no. I understand, but,
you know, I guess, you know, seafood has been under-appreciated
and does deserve particular attention.
As Chinese incomes have risen, the desire or the demand for
sources of protein rises with income and so there are new
markets for U.S. seafood. You're aware of not only all the
products from your state but Maine has lobster and many others.
You know, China has a critical problem in its fisheries
area, primarily around seafood safety because of their factory
farming techniques. As you're well aware, many of their
shipments of seafood to the U.S. have been denied entry because
of concerns about the safety and healthiness of their products.
But China needs to understand that if it doesn?t open its
market to our products, it's going to have an increasingly
difficult time selling here to the U.S. and we need to work
with our allies, as well, to make sure that they understand
from your initial question that reciprocal market access has to
be the approach that's taken with China when they so limit
access to prefer their own companies. We need to take a
responsive approach.
Senator Sullivan. Thank you, Mr. Wessel.
Mr. Doshi, you have a view on that? Just the opportunities
that also exist exporting, balancing that with, of course, the
many challenges?
Dr. Doshi. Thank you, Senator, for that question.
I agree very much with Commissioner Wessel that there are a
lot of opportunities, particularly in some quantities where
China has dependence on the United States--well, not
specifically the United States but partial dependence on the
United States, and, you know, if you look at China's food
security, it's a major concern for party leadership.
They'd like to be able to make sure they were more secure
in every aspect of agriculture, which is why you see the party
sometimes push to purchase overseas plots of land so they can
sort of reimport that food back in and have stability.
This is all a very long way of saying there are places
where there are opportunities for us to export to them and it's
in their interests to import, and I think that we'll be able to
make progress on those if we're able to kind of speak in a more
clear-eyed way about our trade disagreements.
I would also argue, Senator, that, in addition to exports
of commodities, there's also the question of, you know, more
high-technology exports, finished industrial goods, et cetera.
In those cases, we have a much more direct competition with
China that it would be a little bit harder to work out specific
areas of agreement, but again we see that China repeatedly asks
for some American high-technology which we, you know,
rightfully sometimes are unwilling to provide.
So there are areas that we can make progress, but we'll
have to be very careful about managing the risks and the
rewards.
Senator Sullivan. Great. Thank you very much for that.
Senator Blackburn.
STATEMENT OF HON. MARSHA BLACKBURN,
U.S. SENATOR FROM TENNESSEE
Senator Blackburn. Thank you, Mr. Chairman, and I am so
pleased that we are doing this hearing today, and I know that
it is difficult many times for you all to join us virtually,
but we do appreciate that you're doing that.
Let me--I want to ask you all and this is a question for
the panel. So I would appreciate that a response from each one.
Looking at the budgets for R&D, as we talk about China, as
we talk about great power competition, as we look at China and
the fact that you never know where their commercial complex and
their military complex begin and end, and China has
traditionally brought about new products in their country not
by innovation that is from them but what they do is to reverse
engineer and to steal information and looking at what they've
spent on R&D, 2000, they were not spending much on R&D at all.
They have gone through some explosive growth with their R&D
budgets, and in 2017, I was looking at what the commitment was
from the U.S. for R&D and it was $549 billion and China spent
$496 billion on R&D.
So can each of you comment on the potential consequences
that this will have as we look at the next century, as we look
at great power competition, as we talk about their Digital Silk
Road Initiative and their Belt and Road Initiative?
I would like--and also as we talk about Huawei and 5G,
which is another bucket of issues that is worthy of our time to
discuss, but let's look at those R&D numbers and then I would
like to hear from you all of your take on the consequences of
these expenditures.
Mr. Wessel. Rush, would you like to go first?
Dr. Doshi. Sure. Thank you.
I'll start, Senator, by saying that this is such an
important question and it's one that I'm thinking about, as
well.
When we have R&D, we have, you know, the Federal component
of R&D spending and there's also a business component. When we
add those together, the U.S. and China are actually almost even
according to some estimates, even though China has a much
smaller--well, not a much but a smaller economy, they're still
pulling even with us on total R&D spending which is concerning.
When you look at simply the government component and in our
system, the government component, of course, supports research
but also supports STEM education as well as labs that do a wide
variety of different things, some commercial, some basic
science.
Our Federal component has been, you know, essentially
falling as a percentage of GDP for a long time and right now
it's at the lowest level in almost 60 years, certainly one of
the lowest levels, whereas China sees that and thinks the
United States had a great R&D system during the Cold War, let's
emulate that.
So in many ways, China looks at our successes and says we
should do a little bit more of what the United States does. The
United States forgets some of its successes and stops doing
what it used to do so well.
So I'm very concerned about our R&D spending and I think
it's an area where we could--or even relatively small sums of
money increases could actually make an enormous difference.
Senator Blackburn. Let me ask you this just to add on to
that.
Dr. Doshi. Yes, Senator.
Senator Blackburn. If you would address where are they
primarily focusing their R&D or do you know? Is it intel
communications? Is it in super computing? Is it in artificial
intelligence? What is gaining their attention?
Dr. Doshi. Thank you, Senator.
There's a lot of opacity about specifically where all the
R&D funds go. We have some big numbers, though, and some party
documents suggest where the numbers can't give us the answer,
the documents sometimes indicate that a lot of that investment
or, rather, R&D spending is going to the technologies of the
so-called Fourth Industrial Revolution. So that includes many,
Senator, of the ones you mentioned.
Artificial intelligence is probably at the top of the list.
Smart manufacturing is very high up there. Telecommunications
is very high, $1.4 trillion just allocated to build out a
telecom 5G across all of China.
So it's many of these extraordinarily advanced sectors
where R&D is going and there are many of them are identified in
China's Made in China 2025 Plan which targets 10 specific
sectors for R&D spending and for state support, but I can work
with your staff and get you more specific answers after the
hearing.
Senator Blackburn. We would appreciate that. We're very
concerned about the national labs and the focus that is there
with our national labs. Of course, in Tennessee, we have Oak
Ridge. We have the world's fastest computer. We are looking at
those applications to hypersonic 21st Century warfare,
artificial intelligence, autonomous vehicles. So additional
information would be appreciated.
I yield back.
Senator Sullivan. Senator Blumenthal.
STATEMENT OF HON. RICHARD BLUMENTHAL,
U.S. SENATOR FROM CONNECTICUT
Senator Blumenthal. Thanks, Mr. Chairman, and thanks to
both of the witnesses who are here today.
This morning, Senator Hawley and I are sending a letter to
the Department of Justice requesting a national security
investigation into Zoom and TikTok. As tens of millions of
Americans turn to both Zoom and TikTok, few of them know that
they are vulnerable to surveillance, data harvesting, and
censorship by the Chinese Government.
There are now a number of reports that Zoom and TikTok
engaged in censorship on behalf of the Chinese Government.
Those reports are reliable and they are truly alarming. For
example, in early June several Chinese pro-democracy advocates,
including a prime dissident based in the United States, were
suspended by Zoom following a demand by the Chinese Communist
Party.
What were their crimes? Holding a peaceful commemoration of
the Tiananmen Square Demonstrations on Zoom.
Senator Hawley and I, along with other Members of Congress,
have repeatedly sought answers from both companies about who
has access to the personal data of American users and how
decisions about content moderation are made? TikTok and Zoom
have utterly failed to answer even the most basic questions
about their business operations. In the case of the Tiananmen
vigil, Zoom has still failed to answer the question of whether
it turned over information to the Chinese Government about
people who attended that meeting and that failure, among
others, simply supports the request we've made for an
investigation by the Department of Justice.
So my question to both of you is do you agree with me that
reports about Zoom and TikTok censoring, collecting
information, disclosing information to the Chinese Government,
based on requests from that government, are alarming and merit
investigation?
Mr. Wessel. Thank you for that question, Senator, and thank
you for your leadership along with Senator Hawley on this and
others.
The fact is this is a critical issue. We have seen it not
only with these two platforms but others, putting the very
lives of citizens at risk, as well as our own economic and
intelligence and security interests. So what you're doing is
critical.
For me, I, quite frankly, don't trust the answers of those
companies because Chinese basic law requires--their national
security law requires that any Chinese firm hand over when
requested the information that the government requests. We have
seen over many years, you know, criticisms of the security and
confidence we can have of Chinese-based platforms and
equipment, Huawei, TikTok, and others, as you note, and time
after time, we have seen both from law enforcement and the
intelligence community but also the private sector continuing
cyber intrusions, the lack of security, the espionage, the
shipment of data through multiple hacks of U.S. citizens, that
for the weegers, for those of the Falun Gong, for those in Hong
Kong and many others, their very lives are put at risk.
Senator Blumenthal. Thank you, Mr. Wessel.
Mr. Doshi.
Senator Markey. Thank you, Senator, for your leadership on
this.
I just wanted to add, if I may, that the Chinese Communist
Party, as a form of propaganda, has a form of discourse on how
it feels about social media platforms and instruments like
them, and it argues clearly that the party needs to control
those platforms because if it doesn't, it's simply going to be
an information content provider. It's not sufficient to simply
put out propaganda. You need to actually control platforms
themselves to shape public opinion and so part of my concern
with TikTok in particular isn't simply via information that
might be stolen but also the possibility for electoral
interference should TikTok even become more central to
elections than before as it becomes a more popular social media
platform.
Senator Blumenthal. Thank you both for your comments.
I think there is really strong bipartisan agreement that
the United States needs to protect our privacy and our
liberties from this kind of invasive and potentially illegal
action.
The Committee on Foreign Investment in the United States,
CFIUS, is currently considering new conditions and how
Bytedance operates TikTok, but so far this government has
failed to act to protect Americans and that's why I believe
that investigation by the Department of Justice and action is
necessary, and I'm so glad that you are supporting it and I
hope we can have action by this committee, as well.
Thanks, Mr. Chairman.
Senator Sullivan. Thank you, Senator Blumenthal, and thanks
for your work on these important issues, as well.
I agree with you. The vast majority of this is bipartisan
and I think we need to keep it that way because this issue is
too important for the future of our own nation to have it turn
into a partisan issue.
So I want to ask the witnesses, as we get ready for our
second panel, I was asked to give a speech at the Heritage
Foundation last year, last September, and I entitled the
speech, ``Winning the New Cold War with China and How the
United States Should Respond.''
I emphasized five areas of response that I thought could
gain bipartisan support, but we've talked about a number today,
but I'd like each of the witnesses to just comment on these and
what you see as important elements of a strategy, and I'm sure
we are missing things in a broad-based U.S. strategy. What
would those be?
I'm going to also submit this speech for the record.
Without objection.
[The information referred to was unavailable at time of
printing.]
Senator Sullivan. But the focus that I had in my remarks
last year were, as we talked about, demanding reciprocity,
we've already talked about this next one, reinvigorating
American competitiveness to outcompete China, rebuilding our
military strength and capability, have not talked about that,
deepening and expanding our global network of alliances, we
have talked about that, and, importantly, and I think it was a
critical element of winning the Cold War, employing our
democratic values as a comparative advantage in countering
China's global authoritarians influence.
I think all authoritarians at the end of the day fear their
own people and just look at what's going on in Hong Kong and I
think that this is an enormous comparative advantage we have.
It's certainly benefited us during the long twilight struggle
of the Cold War with the Soviet Union who also feared their own
people.
Would you gentlemen care to comment on any of those key
aspects of a strategy, and what do you think we're also
missing?
Mr. Wessel. Senator, thank you for the question. Thank you
for the leadership on looking at this across the various
platform sectors of policy that are critical.
I think you've hit all the major areas and appreciate that
and they all need to be dealt with at the same time with an
understanding or a public understanding of what a clear,
comprehensive, and consistent policy is. The fact is that we
failed on the last point to identify consistency to the Chinese
at times, also to our business community and our people, so
that they know what our plans are, what our red lines are, and
what our objectives are.
So in each of the areas you identified, we need to be even
clearer. We need to have more comprehensive identified plans of
what the limits are, what our plans are as has been noted from
your colleagues, everything from STEM education to dealing with
the surveillance platforms, et cetera, so that China
understands what we view as acceptable and unacceptable
behavior, and again sees a quick and fairly automatic response
when those lines are crossed.
Senator Sullivan. Thank you.
Mr. Doshi, you have any views on that?
Dr. Doshi. Thank you, Senator. I do, and I thank you for
your leadership and I remember your speech and I very much
agree with those five areas of focus. I think it's extremely
comprehensive.
I would only add to them a very small point, which is
simply that this will be a long-term competition. It will
continue for many years to come, as you mentioned, Senator, at
the beginning, and I wanted to ask that, you know, or, rather,
indicate that I think it's important for there to be public
support for this approach going forward, as well, and that will
take, of course, your leadership as well as there should be a
consistent approach across Administrations and that will often,
I think, be housed within Congress and I'm inspired by the fact
that there has been so much bipartisan cooperation from FERMA
to deal with Chinese predatory finance, from The BUILD Act to
deal with Belt and Road, and the recent Acts on Hong Kong and
review of human rights, and all of that to me indicates that
there is a greater consensus which is going to be the bedrock
for any sustainable grand strategy going forward.
So I'll just simply leave it there, that I think the most
important thing will be having a consistent grand strategy over
time that takes those five areas and make sure that we continue
to make progress in each of them in a systematic way.
Senator Sullivan. Kind of like the strategy of containment
which defined our relationship with the Soviet Union. It was
very bipartisan, consistent over decades, and it ended up
successfully winning the Cold War, correct?
Dr. Doshi. Yes, absolutely, Senator. That's exactly what
I'm thinking about, the kind of consistency of strategic
purpose that we've sometimes marshaled in the past will need to
be again marshaled in the present, and it will take multiple
parts of society and will have to have business onboard, the
public onboard, and, of course, consistent bipartisan
leadership, which we in many ways already have.
Thank you.
Senator Sullivan. Great. Let me ask one final question
before we turn to our next panel.
Both of you have testified about the importance of securing
our supply chains. In the National Defense Authorization Act, I
was proud to have a provision included--there was a very strong
bipartisan vote just last week on that bill that passed the
Senate--on critical minerals which we rely on way too much with
regard to China and yet we have in our own nation, certainly
have in my great state, the great state of Alaska, where we can
mine and process and produce these in a much more
environmentally responsible way than the Chinese do and yet we
continue to rely on China's rare earth elements and other
things.
Of course, the supply chains, there has been a big focus
with regard to medicines, with PPE, given the pandemic. The
Republican HEALS Act that we are debating now and hopefully
we're going to have some compromises with our Democratic
colleagues to get to some additional relief for the American
people during this pandemic, again broad bipartisan support, I
believe, in some of the issues that we're discussing today, but
on making sure that we're not relying on China for medicines,
for PPE, for semi-conductors, for critical minerals.
There's a lot of legislation. Like I said, my provision in
the NDDA passed a bill that Senator Murkowski and I have co-
sponsored is in the current version of the bill that we're
debating and trying to move forward in the Senate now on
critical minerals.
Can you two talk briefly about the importance and the long-
term importance and benefit to America of securing our supply
chains in a way where we're not so vulnerable to China, where
enhanced manufacturing can help our workers? To me, it's a
silver lining of this pandemic that we're already starting to
see bipartisan legislation on and I think we need to continue
it.
Mr. Wessel. Thank you, Senator, for your leadership with
NDDA and with other actions that you and the Committee have
taken, as well.
The fact is that I think the American public has woken up
because of the pandemic as to our dangerous dependence and
reliance on China. China, as you well know, going to the rare
earths, which your state and several others have deposits of,
has shown its willingness to weaponized supply chains to
achieve its goals. It did that with Japan with rare earths.
It's done it otherwise and as we also saw with this pandemic,
it used PPE as a diplomatic tool to try and gain access and
concessions from many of our allies.
The fact is we do have the ability to reclaim many of these
supply chains if we have a concerted plan in rare earths. We
have the ability to have a fully mines-to-magnets strategy. We
used to produce rare earths here not only at a facility in
California, but we also had in Indiana, a magnet quench which
did the smelting and the production of magnets.
In 1996, as you know, we sold that facility to the Chinese.
I believe that was short-sighted and Chinese predatory
practices put the California mine into bankruptcy.
We have to make clear what our long-term needs are, what
the key to our economic success and our technological and
military competitiveness, and we need to invest and ensure that
we have the ability to meet our needs with allies at times but
clearly meet our needs where the interests of the American
public are paramount.
Senator Sullivan. Thank you very much for that, Mr. Wessel.
Excellent answer, and your service on these issues is very
commendable.
Mr. Doshi, final question.
Dr. Doshi. Thank you, Chairman.
I wanted to add to Mr. Wessel's excellent point just a few
thoughts. It's clearly the case that China recognizes it has a
nodal position and General Secretary Xi Jinping wants to keep
that nodal position. So we're going to have to work against
those efforts. It will be a long-term competition to sort of
diversify the supply chains.
There are indications, of course, that Chinese media has
suggested that we face repercussions for some of our political
stances when it comes to PPE export, rare earth export time and
again. That's been hinted at in official and unofficial levels.
So we need a different approach and what concerns me the most
would be that we're not always sure exactly where we're
vulnerable to Beijing.
So we need some kind of entity that I think can more
effectively audit the entirety of our supply chain, at ties
perhaps even stress test certain companies the same way we
stress test financial institutions, and build institutionalized
knowledge about the nature of those interconnections, and I
think if we have that, we'll be in a better position to
compete, not just know where things are going off the track but
also think a little bit more effectively about how the whole
global economy fits together around China and where we can put
our efforts.
The last item I'll say here is, Senator, just that Taiwan
has been very inspiring in this regard. They've been very
successful with over $30 billion in reshoring and I think we
can learn a little from some of those approaches.
Senator Sullivan. Well, thank you for that very detailed
and wise answer.
I want to thank our witnesses again. I think this is
exactly what we need not only in the Senate but with regard to,
as you mentioned, the American public. There is growing
bipartisan support, you saw it in the strong participation of
numerous Senators on both sides of the aisle, in this first
panel, and expertise, and I want to thank both of the witnesses
who showed very strong expertise and insights on what I believe
is going to be an issue that is really at the forefront of
American domestic and foreign policy for the next 50 to a
hundred years, and we need to wake up to it, we have, and we
need to address it and execute it in a bipartisan way and I
think we are and that's an important beginning, but again to
our first panel of witnesses, thank you again.
I'm sure there are going to be additional questions for the
record and you are now excused.
[Panel Excused.]
Senator Sullivan. We are going to turn to the second part
of our hearing today, and I'm very pleased to actually have in
the Hearing Room two senior Administration officials who can
talk more specifically with regard to the policies that the
Trump Administration is not only formulating but beginning to
implement and that is Mr. Keith Krach, who is the Under
Secretary of State for Economic Growth, Energy, and the
Environment, and has been given a very important role in the
Executive Branch on the development and implementation of
America's U.S.-China strategy, particularly as it relates to
the Economic and Geostrategic Realm, and the Assistant
Secretary for Industry and Analysis from the U.S. Department of
Commerce, Ms. Nazak Nikakhtar, and she is also an expert in
this area.
So I want to welcome them physically here to the Committee
and, Secretary Krach, the floor is yours. You will have a 5-
minute opening statement and your longer written statement will
be submitted for the record, if you so desire.
Mr. Secretary, welcome.
STATEMENT OF HON. KEITH KRACH, U.S. UNDER SECRETARY OF STATE
FOR ECONOMIC GROWTH, ENERGY, AND THE
ENVIRONMENT, U.S. DEPARTMENT OF STATE
Mr. Krach. Great. Well, thank you, Chairman Sullivan and
Ranking Member----
Senator Sullivan. You need to turn your mic on.
Mr. Krach. Thank you, Chairman Sullivan and Ranking Member
Markey and Members of the Subcommittee on Security. I
appreciate the opportunity to discuss the China Challenge
because it's at the epicenter of the economic security threat
landscape.
Last week in his landmark speech, Secretary Pompeo said,
``Today, we are sitting wearing our masks and watching the
pandemic's body count rise, reading new headlines every day of
repression in Hong Kong and Xinjiang, seeing staggering
statistics of Chinese trade abuses, watching the Chinese
military grow stronger on the back of stolen American clean
innovation.''
I've experienced the CCP's economic warfare firsthand. I
grew up in small town Ohio where my father ran a five-person
machine shop and I saw China wield its weapons of mass
production gutting my father's shop. His pain was not lost on
me.
I went on to be a Vice President of General Motors where I
learned when you build a plant in China, you get access to
their market. You don't just give them the blueprints, you give
them the process engineering and train their labor force.
I spent the rest of my career in Silicon Valley where I had
my intellectual property ripped off and I saw firsthand China's
strategy of seducing with money while reinforcing with
intimidation and retaliation.
I started the world's first B2B commerce company called
Ariba. It's now the largest. Seven trillion of commerce was
conducted over the Ariba network last year, and I remember in
the late 1990s we welcomed Chinese visitors to our headquarters
only to have them clone one of our concepts. That company was
Ali Baba.
A couple of years ago, while running DocuSign, I spent two
weeks in China exploring what I thought might be market
opportunities. I've been going there since 1981, but this time
it was different. I met with Politburo members who spoke so
passionately about their grand strategy for global domination
and I saw how cleverly they depositioned the United States.
Then I got an in-depth look at their technology. That's
when it hit me. As soon as I got back, I went to Washington and
spoke to anyone who would listen and asked, ``do you understand
the country with the best technology usually wins?'' And that's
when I was asked to serve and that's why I'm here today because
of the China Challenge.
My first week on the job, Secretary Pompeo gave me the
charge to develop and operationalize a global strategic plan
that maximized national security, combats Chinese economic
aggression.
The strategy we've developed consists of three pillars. The
first is to turbo-charge economic impediments by driving
productivity and prioritizing 10 emerging technology key areas
that are critical to economic growth and security, such as 5G
and semi-conductors.
China is also gunning for the lead in each of these as we
speak. I can tell you the Communist Party's biggest fear is the
United States would have a Sputnik moment.
The second pillar of the strategy is safeguarding America's
assets, including our intellectual property, financial system,
and core freedoms. Securing these will require the U.S. and
partners to demand reciprocity, transparency, and enforcement
of laws.
We must also understand they've used our assets against us,
including our openness and our values. We must view every
Chinese action with skepticism. As Secretary Pompeo recently
said, ``Distrust and verify.''
The next part of the plan turns the table on the CCP by
reclaiming our core freedoms as our strength. We will answer
Secretary Pompeo's call to build a new alliance of democracies
to oppose China.
We would envision this to be comprised of like-minded
countries, companies, and civil society that operate under a
set of trust principles for all areas of economic collaboration
and those trust principles are American values, things like
integrity, accountability, transparency, reciprocity, respect
for Rule of Law, respect for property of all kinds, respect for
sovereignty of nations, respect for the planet, respect for
human rights.
When I talk to my counterparts from other countries about
this concept, their reaction is it's about time. We've been
waiting for an alternative, as one of the Southeast Asian
nations said, to China's One Belt One-Way Toll Road to Beijing.
The new alliance of democracies represents a unifying and
equitable clean alternative.
Speaking of the clean, let me update you on the State
Department's Clean Campaign which is unlocking a global
movement.
Secretary Pompeo also said last week, ``We've urged
countries to become clean countries so that their citizens'
private information doesn't end up in the hands of the Chinese
Communist Party,'' and it starts with the 5G Clean Network.
For years, the CCP has strong-armed nations to purchase
Huawei's 5G infrastructure. Huawei is the backbone of CCP's
surveillance state and extends the great one-way China firewall
where data comes in but not out and reciprocally propaganda
goes out but the truth does not come in.
The State Department is leading by example through our 5G
Clean Path Initiative which requires all data entering or
exiting U.S. diplomatic facilities to transit only across
trusted equipment.
We're making a difference and encouraging our partners to
join the 5G Clean Path and turning the tide against Huawei and
toward clean vendors.
As a result, Huawei's deals are evaporating. You saw it
earlier this month with the U.K. and last week with France.
There are now about 35G clean countries and many of the most
largest telco companies have become clean telcos, also
recently, Telco Italia, Telefonica, the top three telcos in
Singapore, and the top three telcos in Canada.
So the Clean Campaign's been so successful that we're
preparing to expand it beyond just clean networks and to clean
systems, including clean apps, clean store, clean cloud, clean
cable, and even clean currency.
It's also important to have clean supply chains with clean
labor. Recently, the State Department joined other agencies to
issue a business advisory regarding supply chain exposure to
entities engaged in forced labor and other human rights abuses
in Zhing Zhang.
As I said in a follow up letter to all U.S. CEOs and their
boards, I said, ``Your institutions have a moral
responsibility, perhaps a fiduciary duty, to establish clean
governance principles and divest from companies that contribute
to human rights abuses.'' They should at a minimum disclose the
Chinese companies they invest in.
Soon, President Trump's Working Group on Financial Markets
will make recommendations to the President on the transparency
of Chinese public companies to enhance investor protections and
ensure American exchanges remain the gold standard for the
world.
So, Senators, in conclusion, tackling the many facets of
the Chinese Challenge require all three branches of the
government, our powerful private sector, and as Secretary
Pompeo said, ``A new alliance of democracies.'' America's
moment is now to choose a path, a clean path to the future for
the sake of our children and our grandchildren.
Thank you very much, and I look forward to your questions.
[The prepared statement of Mr. Krach follows:]
Prepared Statement of Hon. Keith Krach, U.S. Under Secretary of State
for Economic Growth, Energy, and the Environment, U.S. Department of
State
Introduction
Good afternoon Chairman Sullivan, Ranking Member Markey, and other
esteemed Members of the Subcommittee on Security. It is a pleasure to
be here with you today and I very much appreciate the opportunity to
discuss the State Department's role in addressing economic security.
Now more than ever, as we live through this time of incredible
uncertainty, the economic security challenges facing our Nation are
acute and worthy of a robust, whole-of-government response. The China
challenge sits at the epicenter of the economic security threat
landscape.
On July 23, in a landmark speech at the Nixon Library, Secretary
Pompeo delivered a summary indictment of the Chinese Communist Party
(CCP). As he said, ``Today we sit wearing masks and watching the
pandemic's body count rise, reading new headlines every day of
repression in Hong Kong and Xinjiang, seeing staggering statistics of
Chinese trade abuses, watching the Chinese military grow stronger on
the back of stolen American innovation.''
I have experienced the long reach of Beijing firsthand, starting
when I was growing up in small-town Ohio, where my father ran a machine
shop. My dad's customers were suppliers to the big three car companies
in Detroit, and his fortunes were tied to theirs. As China offered
cheap and subsidized labor--its ``weapons of mass production''--
manufacturing was shipped overseas, and many of my dad's orders dried
up. I saw him go through the agonizing process of laying off trusted
employees. His pain was not lost on me.
I went on to be a vice president of General Motors, where I saw the
same story play out from a different angle. I saw the lust over China's
cheap manufacturing capabilities. And I saw the fallout: When you build
a plant in China, you don't just give them your blueprints, you give
them the process and engineering skills they need to steal your design
and create it for themselves.
I spent the rest of my career in Silicon Valley, where I went on to
start the world's first business-to-business e-commerce company called
Ariba in 1996. We took it public and $7 trillion of commerce was
conducted over the Ariba network last year. In 2009, I became CEO and
Chairman at a 50-person company called DocuSign that had a simple dream
of automating the signature process. After recently completing 10 years
there, it is now a $40 billion public company and recognized worldwide
for its transformative impact on the way business is done.
But in Silicon Valley, the CCP's economic weapons were aimed right
at us: including widespread theft of intellectual property and
predatory joint ventures. Two years ago, I traveled to China to explore
market opportunities. I heard five of the top seven Politburo members
speak about China's plans for the future, and I saw their technology.
As soon as I came back stateside, I went to Washington and spoke to
anyone who would listen. I said, ``Do you understand that the country
that has the best technology usually wins?'' And that's when I was
asked to serve. It has been the privilege of my life.
During my confirmation hearing, I stated that ``I fully appreciate
the enormity and gravity of this role, especially in a time where the
reality we face as a nation is one of ever-increasing cyber warfare and
seemingly ceaseless variations of intense, perhaps even weaponized,
economic competition.''
I also said, ``It is comforting to know that both sides of the
aisle understand that China is playing the long game, and they are
playing for keeps--a four-dimensional game of economic, military,
diplomatic, and cultural chess with little respect for human rights,
intellectual property, rule of law, transparency, the environment, or
the sovereignty of other nations.''
During the hearing, when asked how I would accomplish my
objectives, I said ``my focus would be on embracing this opportunity
and harnessing three powerful areas of competitive advantage:
strengthening our partnerships with friends and allies, leveraging the
innovation and resources of the private sector, and amplifying the
moral high ground of our American values and enduring optimism to
advance peace and prosperity for our country and for the world.''
My life's work has been focused on creating innovative companies
and transformative social causes by building high-performance teams
that challenge the status quo. I believe the team with the best people
wins and that diversity of thought on any team is the catalyst for
genius.
Framing Global Economic Security
My charge at the State Department, which Secretary Pompeo gave me
in my first week, is to develop and operationalize a framework for
global economic security combats the PRC's economic aggression, drives
economic growth, maximizes national security, and advances peace and
prosperity. It's been my honor to work with many in Congress to shape
this strategy.
As the President has often stated, economic security is national
security. We live in a world of determined competitors, asymmetric
threats, and networked technology. I have heard the same sentiment from
Congress and leaders in the private sector. Most importantly, I hear it
from my international counterparts.
Last year, Congress passed the bipartisan Championing American
Business Through Diplomacy Act, which bolsters U.S. business
competitiveness abroad. It does so by empowering the Department of
State to now work alongside the Department of Commerce to coordinate
interagency efforts to leverage our diplomatic missions to promote U.S.
economic and business around the world. The bill is aimed at countering
China's economic aggression by promoting U.S. business values that
reflect high quality standards, transparency, and agility in adapting
to the unique demands of individual foreign markets.
Adveraries and strategic competitors, such as China, are targeting
our national assets with a range of malign practices including theft,
deception, unfair trade practices, intimidation, financial seduction,
frivolous litigation, cyberattack, forced technology transfer,
propaganda, corruption, coercion, and retaliation. Securing America's
assets requires the U.S. private and public sectors to continue to work
with like-minded nations and demand reciprocity, transparency, and
solidarity.
We must continue to work with allies and friends to halt China's
aggression. It's about viewing every PRC action, whether an investment
in an American firm or the opening of a new Confucius Center at an
American university, with appropriate skepticism. As Secretary Pompeo
noted in July, President Reagan's Cold War mantra of ``trust but
verify'' doesn't apply here. When it comes to the CCP, we must
``distrust and verify.''
Our strategy for advancing global economic security and combating
China's economic aggression has yielded results. To give you a sampling
of the breadth and the depth of our efforts, I am highlighting our work
in the following six areas: 5G, semiconductors, supply chains,
institutions of higher learning, the One Belt One Road, and the
environment.
5G Networks
5G and 6G will be cornerstones of our economies and societies in
the future. Many aspects of our lives will flow over these networks,
which is why it is critical to secure them--and why the design,
development, and control of such technology, in the wrong hands, they
can be incredibly dangerous.
The CCP is posturing to leverage 5G-enabled technology to create
and export George Orwell's version of ``1984'' into the 21st century,
with an all-encompassing web technologies that can be exploited for
information gathering and surveillance. Huawei is the backbone of the
CCP's surveillance state and extends the great one-way China firewall,
where data comes in but not out and, reciprocally, propaganda goes out,
but the truth doesn't come in.
For years, the CCP has strong-armed nations to purchase Huawei's 5G
infrastructure and services. Untrusted, high-risk vendors like Huawei
and ZTE provide the CCP's authoritarian government the capability to
weaponize critical applications, information, and infrastructure, and
to provide technological advances to China's military forces. Huawei is
also on the Commerce Department's Entity List for engaging in
activities contrary to the national security and foreign policy
interests of the United States.
It should surprise no one that Huawei is under indictment in the
United States for bank fraud, wire fraud, conspiracy, violating
sanctions, racketeering, and misappropriating intellectual property
from six U.S. tech companies. And we know that it deploys these same
tactics in Europe and wherever else it can get a foothold.
To turn the tide, on April 29, 2020, Secretary Pompeo announced
that, in response to requirements in Section 889 of the 2019 National
Defense Authorization Act, the State Department will require a Clean
Path for all standalone 5G network traffic entering and exiting U.S.
diplomatic facilities at home and abroad. 5G Clean Path is an end-to-
end communications path for our diplomatic facilities that does not use
any transmission, control, computing, or storage equipment from
untrusted vendors. The Department of State has asked other countries to
join us in requiring a 5G clean path for their overseas diplomatic
facilities.
Further, we our working to infom international partners and allies
on the risk posed by untrusted information and communications
technology and services (ICTS), and convince them to join our effort to
address these risks through collaborative action. To that end, we
conducting international outreach, describing existing U.S. actions and
efforts, and encouraging foreign partners to take similar actions to
secure their ICTS ecosystem, while maintaining an open and fair market
for products and services from U.S. and trusworhty international
technology vendors.
Semiconductors
In the face of a newly aggressive and technologically empowered
China, the United States urgently needs similar success in
semiconductors. A recent onshoring win of TSMC was a good first step
for us, but there's more work to be done.
Semiconductors enable thousands of products and functions--from
cell phones to automobiles to 5G to artificial intelligence, along with
a litany of activities crucial to our national security. American
companies invented semiconductor technology and are leaders in its
design and development and are still global leaders in this area, yet
our output lags behind China, Taiwan, and South Korea, in semiconductor
manufacturing. We now produce only 12 percent of the world's chips,
half of our share of 24 percent in 2000. China now produces 19 percent
of global output, up from only 2 percent in 2000.
China shows no signs of stopping its pursuit of this economic and
national security imperative. China's intentions of technological
supremacy are documented in its Made in China 2025 plan: It's using all
of its tools of national power--including below-market lending and
equity, direct grants, tax concessions, and industrial and scientific
espionage--to dominate this critical global industry. It has already
invested $60 billion to develop an indigenous semiconductor industry,
with plans to invest another $100 billion over the next 10 years.
Chinese leaders understand that, as steam and steel were the
guarantors of economic and military strength in the 19th century and
the atom in the 20th, so will silicon be in the 21st. They understand
that a country that can't produce its own semiconductors can't defend
itself. And that is precisely the risk to the United States if our
technological dominance is eclipsed by Communist China. Further, as we
learned from recent shortages in the wake of COVID-19, there are risks
to relying on supply chains for critical products that are largely
manufactured in one country.
That's why we worked to secure a new commitment from the world's
leading semiconductor manufacturing companies to open the most advanced
chip factory in the United States. Taiwan Semiconductor Manufacturing
Company (TSMC) which, along with Samsung, is one of only two companies
capable of producing cutting-edge five-nanometer chips, has announced
plans for a cutting-edge facility in Arizona.
This facility will boost American competitiveness by ensuring that
the United States will have the capability to produce the chips
powering everything from 5G base stations to smart phones to F-35
fighter jets. It will also create tens of thousands of new U.S. jobs,
both in the semiconductor industry and throughout the high-tech supply
chain.
The TSMC plant is a tremendous step to jumpstart a new era of U.S.
high tech leadership, but we must keep moving with speed and purpose to
create a level playing field for American tech leadership to thrive.
New Federal incentives should be made available to any company,
domestic or foreign, that would undertake such a project anywhere in
the United States.
These initiatives will enable the United States to build
semiconductor manufacturing capacity, and in turn generate a domestic
supply chain for materials, equipment, parts, components, and services.
For example, when TSMC completes the construction of its planned
facility in Arizona, eight major suppliers plan to open new operations
here. If other companies replicate TSMC's decision, it will create the
ecosystem we need to maintain and grow our U.S. leadership in this
critical sector.
The U.S. commercial space industry has demonstrated that our Nation
can overcome even the most daunting challenges. Success in
semiconductors is measured in nanometers, not miles. By restoring
America's rightful place in leading a semiconductor manufacturing
capacity, we will create greater security and more jobs for our
citizens. We will secure an American legacy of innovation that has made
us the most prosperous nation in history.
Supply Chains
In a recent letter to U.S. business leaders, I asked corporate
boards to keep their supply chains clean from any of the human rights
abuses in Xinjiang, including forced labor. We are asking financial
institutions, pension funds, index funds, and university endowments to
keep their investments clean and free from Chinese companies that
violate human rights, profit from forced labor, build advanced
weaponry, or contribute to the erosion of Hong Kong's autonomy and
freedoms.
Up to this point, the CCP has concealed the forced labor and other
human rights abuses in Xinjiang and beyond that serve American
companies all over China. What makes matters worse is that the average
U.S. investor in companies that do business in China has been
unknowingly supporting the CCP's authoritarian machine. And American
technology has been transferred to, bought, or stolen by the CCP to
create a dystopian surveillance state that history's most repressive
dictators could have only dreamed of.
Addressing these critical challenges starts with the most
fundamental business principle: transparency is visibility, and
visibility is accountability.
To help shine the light of transparency, the State Department
joined the Departments of the Treasury, Commerce, and Homeland Security
on July 1 to issue a business advisory regarding potential supply chain
exposure to entities engaged in forced labor and other human rights
abuses in Xinjiang. This is a start, particularly when coupled with the
addition to the Commerce Department's Entity List of 48 PRC
institutions and financial sanctions on persons involved in human
rights abuses.
As I said in my follow up letter to CEOs all across our country,
the boards of their institutions have a moral responsibility and
perhaps even a fiduciary duty to ensure the institutions divest from
companies that contribute to human rights abuses, and to establish
governance principles that prevent these investments going forward.
Pension funds, university endowments, mutual funds, insurance
companies, venture capital firms, institutional investors, and
particularly emerging index funds should, at a minimum, disclose to
their constituents the Chinese companies they invest in.
However, the biggest ``difference makers'' in ending human rights
and labor abuses like the ones in Xinjiang are every day citizens. At
the end of the day, the American people are accountable, and they have
more power than they think. As my 94-year-old mother says, ``If it is
to be, it is up to me.''
How? If they have a pension plan, if their brokers invest in an
emerging index fund, if their universities have an endowment fund, if
they invest in a mutual fund, ETF, private equity or venture fund,
every day Americans can ask these entities to disclose their Chinese
investments. If not, they can ask to get a list of the Chinese
companies they invest in. If these entities can't or won't provide the
information, then investors should consider whether they are
comfortable with this lack of information.
One Belt One Road
As developing nations reel from the shock of the China-born
pandemic, they are also coming to terms with another Chinese pandemic
that can't be cured by a vaccine and will ravage developing nations for
years: a rising wave of unsustainable debt owed to the PRC.
For years, the PRC has couched its debt-financed One Belt One Road
(OBOR) initiative in the language of cooperation, development,
connectivity, and win-win. Nothing could be further from the truth.
Follow the money, and you see that OBOR lending is part of the CCP's
covert, corrupt, and coercive toolkit for pursuing its geostrategic
interests.
China has used this predatory OBOR lending in an attempt to
dominate the Eurasian landmass in one massive supply network with China
at its head, locking in global access to rare-earth minerals, critical
materials, oil, natural gas, cotton, lumber, and other natural
resources to feed their industrial-military machine.
Almost all Chinese overseas lending is extended by the Chinese
government and various state-owned entities, not by private banks. This
makes China by far the world's largest official bilateral creditor,
with outstanding claims in 2017 surpassing those of all 22 Paris Club
governments combined.
China frequently requires its sovereign loans be backed by
collateral. Ecuador's billions in debt to China--comprising oil-backed
and investment loans that the previous administration contracted in
secret with PRC state-owned companies--are a classic example giving
China the right to claim Ecuadorean state assets in the event of missed
payments.
For developing economies to rebuild in the wake of the pandemic,
the carnage of Chinese debt must end. Therefore, to help the poorest
countries respond to pandemic-related shocks, the G20 and Paris Club
are freezing 2020 government loan payments under the Debt Service
Suspension Initiative, which was developed by the G7 under the Treasury
Department's leadership. While the Chinese government signed onto the
initiative, it is excluding some claims of its largest government
creditors, such as China EXIM and the China Development Bank, from the
effort.
The United States is calling on all Chinese creditor agencies to
fully and transparently implement the G20-Paris Club Debt Service
Suspension Initiative, waive nondisclosure clauses, and refrain from
using them in the future. Just as important, we must join in calling on
all citizens, companies, and countries of the world to object to the
CCP's opaque predatory lending.
Protecting U.S. Higher Education
During this unprecedented period in modern history, American
universities and colleges are on the frontlines of addressing many of
the challenges presented by the pandemic. At the same time, these great
institutions are at the forefront of an equally serious challenge
brought on by the authoritarian influence of the CCP described in this
Letter that has broad implications for ensuring academic freedom,
honoring human dignity, protecting university endowments, and
safeguarding intellectual property.
At the U.S. Department of State, one of our primary missions is to
monitor and advocate for freedom, including academic freedom, around
the world. American institutions of higher learning are the envy of the
world and have always been an invaluable partner in that mission. That
is especially true now as we join hands to work through myriad
challenges brought on by the pandemic so that we can continue welcoming
students from around the world to America's shores. This includes an
orderly resumption of student visa issuances as the situation dictates
at our embassies and consulates around the world.
As a former Chairman of the Board of Purdue University, I recognize
that when addressing a long-term strategic issue of this magnitude, the
responsibility sits squarely on the shoulders of each and every board
member. Our concern is with the malign actions of the CCP and specific
individuals, not with the Chinese people or the overwhelming majority
of Chinese students in the United States. Our goal is to see an
improved, open, and transparent environment in which U.S. and Chinese
scholars can engage with greater trust. We seek your assistance in an
effort to safeguard U.S. technology and institutions, and to ensure our
national and economic security remain safe and free from foreign
interference.
After spending many years leading public companies, I have learned
that leadership in the face of challenges starts with that magical
principle of transparency. Good leaders know that visibility is
accountability. And this is where university and government leaders are
partners once again.
A number of American universities and colleges are home to
Confucius Institutes, partially funded and controlled by the PRC. As
the American Association of University Professors noted in a 2014
report, ``Confucius Institutes function as an arm of the Chinese state
and are allowed to ignore academic freedom.''
While ostensibly intended to teach Americans about Chinese language
and culture, they also exert malign influence on U.S. campuses and
disseminate CCP propaganda. There is increasing evidence that Confucius
Institutes spread PRC influence by providing institutions with
financial incentives to abstain from criticizing PRC policies; putting
pressure on faculty to self-censor; monitoring overseas students for
loyalty to the party; and undermining freedom of expression by
disrupting campus events deemed controversial to the CCP.
CCP propaganda has also spread into our K-12 schools through the
Confucius Classrooms program. Designed to provide Chinese language and
cultural education, Confucius Classrooms teach PRC-approved curriculum
to thousands of students across the United States.
Our goal is to shine a light on Confucius Institutes programming,
PRC citizen staffing, funding and operations. With this increased level
of transparency, U.S. stakeholders, including universities andlocal
school districts, can make more informed choices about the PRC
influence exerted on their communities.
Studies have shown that the majority of the U.S. university
endowment fund portfolios include PRC stocks listed on American
exchanges either directly or indirectly through emerging markets index
funds.
The U.S. academic community is in the crosshairs of not only
foreign competitors contending for the best and brightest talent, but
also our most valuable intellectual property. America built successful
research universities on certain values: reciprocity, integrity, merit-
based competition, and transparency. These values foster a free
exchange of ideas, encourage the most rigorous research results to
flourish, and ensure that researchers receive the benefit of their
intellectual property. In turn, America attracts the best and
brightest.
The PRC, however, seeks to exploit America's openness by
implementing a well-financed, whole-of-government campaign to recruit
foreign experts through its more than 200 talent recruitment plans. As
of 2017, China reportedly has recruited 7,000 researchers who focus on
or have access to cutting-edge research and technology. For the CCP,
international scientific collaboration is not about advancing science,
it is about advancing the PRC national security interests.
Just as our fine institutions vet employees for scientific rigor or
allegations of plagiarism, we also must vet for financial conflicts of
interests and foreign sources of funding. If our researchers can assess
potential collaborators' experience and past publications, they should
also assess any government affiliations and ulterior motivations. My
experience in the business, education, and government sectors tells me
that there is tremendous power in uniting those sectors as a force for
good if we are all armed with the truth. The world is watching, and the
integrity of our democracy and educational institutions is in our
hands.
China's Assault on the Environment
The CCP's actions wreak havoc on the Earth's air, water, and land--
Beijing can and must change course, but only if the international
community unifies in public pressure, rather than placating. The PRC
claims to be a ``torchbearer'' on global environmental issues--but like
so many of its claims, this is an outright lie. Beijing is the largest
emitter of numerous pollutants and greenhouse gases and irresponsibly
exploits natural resources for its own selfish and often pernicious
ends.
The PRC has been the largest emitter of carbon dioxide since 2006.
Armies of Chinese workers move in to perform the work and leave a trail
of environmental destruction in their wake.
The PRC is also responsible for nearly 30 percent of the plastic
pollution filling the world's oceans and harming marine life.
Unfortunately, persistent PRC market barriers, including those related
to protection of intellectual property, hamper trade in U.S.
environmental technologies that could help China address this and other
challenges.
The PRC is one of the world's biggest offenders when it comes to
illegal, unreported, and unregulated (IUU) fishing and overfishing
agreed-upon limits--endangering species and devastating local
economies. At the same time, the PRC is also the world's top subsidizer
of fishing activities. With its own fisheries already depleted from
overfishing, massive subsidies create incentives for the PRC's distant
water fleet to plumb the high seas and other nations' waters. Just ask
our friends in beautiful Ecuador, where waste from Chinese vessels is
washing up on the shores of the Galapagos Islands, a World Heritage
site, and important fish stocks are threatened. Beijing can and must
stop its irresponsible fishing practices.
The PRC manipulates Mekong River flows for its own profit at great
cost to downstream nations. Through the Mekong Water Data Initiative,
the United States is helping empower the people in the Mekong region to
advance transparent river management, even as they suffer from PRC
efforts to impede the water flow for the use of their people.
While the United States advocates for sustainable forestry
practices and supports the Trillion Trees initiative, China is the
world's largest consumer of illegal timber products. Perhaps most
sadly, China is the biggest consumer of illegal wildlife products.
Wildlife ``wet markets'' create extreme risks for diseases of animal
origin like COVID-19 to transmit to the human population. I echo
Secretary Pompeo's call for Beijing to shut down these markets
immediately and permanently.
When exposed, Beijing knows how to change its tune. In 2008, U.S.
diplomats installed air quality monitors on top of the U.S. Embassy in
Beijing. We shared the data publicly and revealed what residents
already knew: the air quality was dangerously worse than the CCP was
willing to admit. That small act of transparency catalysed a revolution
in air quality management, and Beijing made air quality a priority.
From that experience, we know the CCP can change--especially if we
shine a light on their hypocrisy and deceit. Countries, companies, and
every day citizens can make it clear that it is up to the PRC to end
these selfish, damaging practices, and protect the air, water, and land
on which life itself depends.
Conclusion
Tackling the many facets of the China Challenge will require the
whole government, our powerful private sector, I appreciate all the
dedication, energy and leadership of this subcommittee in promoting
security in our Nation's commerce and advancing America's economic
security abroad.
This requires acknowledging the true aspirations of despotic
regimes. It requires a bold vision for how we can win the international
economic competition, protect American assets, catalyze a new era of
prosperity and innovation, create enduring advantages for the American
people, and spread the success of free enterprise around the world.
The United States is taking the difficult but necessary steps to
begin to address the threat now. If we do not, we risk letting the
opportunity pass and forever regretting that we did. I thank you for
the opportunity to appear before you today and I look forward to
working with each of you as we join together to confront a dangerously
ascendant China and take the steps necessary to safeguard American
economic security.
Senator Sullivan. Thank you, Mr. Secretary.
Secretary Nikakhtar.
STATEMENT OF HON. NAZAK NIKAKHTAR, ASSISTANT
SECRETARY, INTERNATIONAL TRADE ADMINISTRATION,
INDUSTRY AND ANALYSIS, U.S. DEPARTMENT OF COMMERCE
Ms. Nikakhtar. Thank you, Chairman Sullivan, Ranking Member
Markey, and Members of the Subcommittee.
Good morning, and thank you for the opportunity to testify.
We are at a historic crossroads in the U.S.-China
relationship and the steps we take now will chart the course of
U.S. economic and technological leadership for decades to come.
In 2017, the U.S. began for the first time to confront
head-on the challenges posed by China's predatory practices.
Those practices had been ignored for decades and as a result
the United States lost capabilities in sector after sector in
manufacturing and technology that are so critical to this
Nation's security.
In order to understand the PRC's predatory economic
strategy, it's important to understand the specific tactics or
tools that it deploys. Indeed, China's most effective tools by
design are those that are governed by weak or non-existent
international rules and disciplines.
Case in point, the PRC takes advantage of the absence of
international rules over state-owned enterprises to funnel
massive amounts of resources to SOEs with the intent of
dominating strategic sectors worldwide.
The government also distorts prices and costs throughout
its economy to distort land and property, energy, wages, and
raw material prices in order to export under-valued goods and
services worldwide.
The goal is to under-price competitors to force them out of
the market. The goal is to hollow out our industries.
Next, the PRC Government takes advantage of the dearth of
rules governing global overcapacity to flood world markets with
goods at uncompetitive prices. This has been its strategy in
steel, aluminum, chemicals, and optical fiber cables--the
infrastructure for 5G.
I fear critical industries, like semi-conductors in many
parts of the China 2025 Plans, will be targets next.
The PRC is further exploiting opportunities abroad to
monopolize strategic assets. For example, the PRC's increasing
control of the raw materials necessary for high-tech products
by purchasing mines abroad, cobalt, graphite, lithium, nickel,
and platinum, to name a few.
The impacted countries are the United States and our allies
and because these critical materials are finite assets that
cannot be replaced, China is able to exert influence over the
rest of the world by withholding access to them.
Next, as we know the PRC regularly supports and directs the
theft and misappropriation of U.S. intellectual property. This
is well understood, but what's less discussed is this. Even
when Chinese firms are perceived to collaborate in
technological development, take, for example, Huawei's
announcement that it's planning to build in the U.K. a $1.2
billion optical fiber cable research facility, the gains are
only one-sided.
Chinese companies will benefit from collaboration with
international scientists abroad and then repatriate the
technology to China to generate overcapacity to eliminate
competition and obtain a monopoly position.
In sectors like 5G where optical cables provide the
infrastructure, the national security implications are obvious.
China's engagement in international standards as a way to
influence global technology market is also of great concern.
Finally, it's worth emphasizing that because China is a
sovereign state, foreign laws can never be sufficient to fully
address its conduct. It is not an actor that has shown a great
interest in adhering to international laws at all.
Of course, the past policies of the U.S. have failed to
prevent China's rise as a predatory economic actor. To build
our seemingly efficient supply chains, we flocked to China as a
low-cost producer and traded our most sensitive intellectual
property in exchange for short-term market access and profits.
As a result, we willingly transferred our debt and exported our
manufacturing capabilities and jobs to a non-market economy
where market principles and transparency do not exist.
By doing this, we created a global economy where distorted
prices and non-market conditions are allowed to proliferate
rather than market-based ones.
By understanding what has led to the erosion of our supply
chains, then it stands to reason that a comprehensive reshoring
strategy must remedy those causes.
At the outset, the United States must systematically
identify all items that are critical to our national security
to assess our dependency on imports. This Administration, my
office in particular, on behalf of the White House, has begun
to do this. We need to continue to do this on a permanent
basis.
A second essential component is incentivizing inward
investments in domestic R&D and manufacturing capabilities.
We've begun doing this through tax cuts to boost innovation and
economic growth. Let's do more.
Third, U.S. Government procurement authority. This is
critical to providing capital to new American investments and
to generate immediate demand for those new production
operations. This will compel companies to take a leap of faith
and reinvest in the United States.
And it is, of course, axiomatic that for U.S. investments
to grow, we must have a strategy to fight back against
predatory import competition, low-cost imports that aim to
undercut U.S. production and growth.
These foregoing elements are essential to a comprehensive
reshoring strategy. It will require a whole of government
approach, but I can tell you as a trade lawyer and an
economist, they will be effective in rebuilding supply chains
that are robust and are resilient.
I'd like to conclude by emphasizing that the global economy
of the 20th Century was developed by the United States and
although China is aggressively seeking to shape the global
economic order of the 21st Century, it is not too late to act.
Our supply chain vulnerabilities are too great to await yet
another national security crisis that may expose this country
to even more peril.
Thank you.
[The prepared statement of Ms. Nikakhtar follows:]
Prepared Statement of Hon. Nazak Nikakhtar, Assistant Secretary,
International Trade Administration, Industry & Analysis,
U.S. Department of Commerce
Good morning. Chairman Sullivan, Ranking Member Markey, and Members
of the Subcommittee, thank you for providing me the opportunity to
testify today regarding the United States' economic relationship with
the People's Republic of China (PRC). We are at historic cross-roads in
the U.S.-China relationship, as the steps we take now will chart the
course for U.S. economic and technological leadership, and will shape
the landscape for the democratic world for decades, and possibly
centuries to come.
The Department of Commerce's International Trade Administration is
responsible for strengthening the competitiveness of U.S. industry in
the United States and global marketplace, increasing investments in
America, monitoring compliance with U.S. trade agreements, and
enforcing U.S. trade laws. At Industry and Analysis (I&A), we are, in
particular, responsible for working with businesses to develop
international trade and investment strategies for a range of industries
from the manufacturing sector to the financial services sector,
including industries that are critical to the United States' national
security interests. I&A also leads the Commerce Department's
participation in the Committee on Foreign Investment in the United
States (CFIUS), a committee that reviews certain specific foreign
investments and real estate transactions in the United States for their
impact on U.S. national security.
Today, I would like to speak about challenges to the United States'
national security industries and set the stage for the successful
commercial growth of our most critical sectors. In 2017, the U.S.
Government began, for the first time, to confront head-on the
challenges posed by China's predatory practices. Those challenges had
been ignored for decades and, as a result, over the course of the past
40-plus years, the United States has continuously lost capabilities in
sector after sector in manufacturing, technology, and services that are
essential to our national security. In goods alone, the offshoring of
manufacturing has created supply chain vulnerabilities across hundreds
of critical products, ranging from semiconductor and electronics
manufacturing to the development of active pharmaceutical ingredients.
This has led to job losses of between 3.4 to 3.7 million between 2001
to 2018.\1\ In key sectors such as communications equipment,
electronics and computer technology, we ceded up to 40 percent of the
domestic market share to Chinese imports, and globally China has
captured 40 percent of market share in those sectors as well.
---------------------------------------------------------------------------
\1\ Scott, Robert; Mokhiber, Zane, Economic Policy Institute,
``Growing China Trade Deficit Cost 3.7 Million American Jobs Between
2001 and 2018,'' (Jan. 30, 2020) https://www.epi.org/publication/
growing-china-trade-deficits-costs-us-jobs/; also Census Data and
Department of Commerce calculations.
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To underscore with examples of where that leaves us, the United
States does not have the domestic supply chains required to manufacture
many key electronic components for our telecommunications systems, or
many active pharmaceutical ingredients for medicines to serve America's
health needs. Nor does the United States process the rare earth
elements that produce magnets that are essential for military and
weapons uses, as processing is now dominated by China. Even the more
mature steel and aluminum industries have been experiencing existential
challenges, as global overcapacity continues to weaken American firms.
Where the United States was once the undisputed leader in technological
innovation and industrial advancements across the board, it is now
struggling to remain competitive in many key industries.
There are two classes of state actors in the global economy. The
first class is comprised of nations that generally adhere to their
obligations under the rules and principles of the global economic and
trading system, as enshrined in international organizations such as the
United Nations, International Monetary Fund, Organization for Economic
Cooperation and Development, and the World Trade Organization (WTO).
The second class is comprised of nations that either do not adhere (or
selectively adhere) to these rules and norms, or actively circumvent
them. While both classes of nations can introduce distortions into the
global economic order--for example, through corporate subsidies and
discriminatory nontariff barriers--the distortions can be managed when
dealing with rules-based state actors and market-oriented economies.
Here, international agreements may provide viable legal mechanisms to
address non-competitive, market-distorting behavior, and states have
historically adhered to their binding commitments or improved their
practices when compliance fell short.
The Chinese Communist Party (CCP), on the other hand, does not just
fall within this second class of state actors. It is also, by far, the
most distortive economic actor that the global trading system has ever
encountered. Not only are the current rules of international trade and
monetary policy largely ineffective when dealing with China but, as a
non-market economy under the tight control of the CCP, the government
of the People's Republic of China flagrantly flouts those rules when it
believes it is in its interest to do so, and shows no intention of
reforming to a market-based system or adhering to its international
obligations when those rules frustrate its national industrial goals.
And because of China's size and scale, it has been able to weaken
international supply chains and disrupt the global economy
significantly. In this respect, the threat from China is formidable,
and it is the largest threat the United States has encountered to date.
But we need to remember that this threat is nothing new, it has its
roots in the Cold War. Khrushchev famously said ``We,'' meaning the
Sino-Soviet bloc, ``declare war upon you,'' the United States, ``in the
peaceful world of trade. We will declare a war; we will win over the
United States.'' Again, quoting from the Prime Minister of the Soviet
Union, ``We,'' again referring to the Communist states, ``value trade
less for economic reasons and most for political reasons.'' The hearing
transcript for the Trade Act of 1962 includes these powerful
statements. Perhaps in response to this threat, in the ``Statement and
Purpose'' subsection of the Trade Act of 1962, 19 U.S.C. 1801, Congress
explicitly enacted into law the goal of Chapter 19; it is inter alia,
``through trade agreements affording mutual trade benefits'' to
``prevent Communist economic penetration.'' This provision is still
valid today precisely because the threats continue today. And after
1979, when the United States formally normalized trade relations with
China, the PRC government accelerated its plan to augment global
economic and military strength in a quest that it concedes will
ultimately lead to a great power struggle against the United States.
The PRC government's weapon of choice is predatory economic
tactics, and it has successfully used such tactics to disrupt global
supply chains and weaken the technological advancements of the United
States and its Western allies. China has transformed itself into the
epicenter of global commerce, has centralized manufacturing and
research and development (R&D) hubs within its own borders and, with
this, it has accumulated the power to influence all economies that are
dependent on it.
CHINA'S USE OF PREDATORY ECONOMIC TACTICS TO CAPTURE
CRITICAL SUPPLY CHAINS AND TECHNOLOGY
In order to understand the PRC government's predatory economic
strategy, it is important to understand the specific trade tools that
it deploys. Indeed, China's most effective tools, by design, are those
that are governed by weak or non-existent international rules and
disciplines. To understand a ``strategic competitor'' or an
``adversary,'' one has to understand their tactics. To counter those
tactics, we need to consider how our laws need to be strengthened.
Case in point: China's economy has grown in large part because of
the massive subsidies it provides to industries, and the lack of
transparency on the subsidies it provides results from its failure to
notify them completely to the WTO, as well as the absence of effective
WTO rules governing the types of market-distorting industrial subsidies
used in China.\2\ It is difficult to legally challenge what we do not
know about or what the rules do not cover. Moreover, China leverages
its self-designated developing country status to avoid complying with
existing WTO rules and obligations, and WTO rules are generally silent
on how a member state can challenge another country's self-designated
status.
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\2\ Examples include Chinese government subsidies that constitute
unlimited guarantees to corporations, subsidies to insolvent or ailing
enterprises lacking credible restructuring plans (also known as
``zombie'' companies), subsidies that encourage global overcapacity,
subsidies to firms unable to obtain long-term financing from
independent commercial sources that are operating in sectors or
industries in overcapacity, and direct debt forgiveness.
---------------------------------------------------------------------------
Next, the PRC government takes advantage of the absence of
applicable international rules over state-owned enterprises (SOEs) to
funnel massive amounts of capital and other resources to SOEs with the
well-publicized intent of dominating strategic sectors worldwide. The
PRC government also distorts prices and costs throughout its economy
(e.g., land and property, energy, wages, and raw materials) through
direct price controls and to export undervalued goods and services
worldwide, thereby weakening the competitive positions of market-based
firms. Dangling possible access to China's large consumer market and
making available cheap labor, goods and services are also how China
lures foreign manufacturing capacity and technological know-how into
its own borders. And as the CCP controls the government of a sovereign
state, it knows full well that its non-market economic system is
unaffected by legal challenges or the prospect thereof by the rest of
the world; even possible losses of legal challenges at the WTO may not
be incentive enough to compel China to reform a system that has served
it so well and eroded the competitive positions of its adversaries so
quickly.
Just as alarming, the PRC government takes advantage of the dearth
of rules governing global overcapacity to flood world markets with
distortedly low-priced goods. In 2019, China's overcapacity
significantly depressed global prices in the fiber optical cable
market. Its strategy is to eliminate competitors and obtain absolute
control over this critical 5G infrastructure asset. The PRC government
has previously deployed the same strategy in the steel and aluminum
sectors, among many others, and the same strategy will create excess
capacity in new sectors in the future. And notwithstanding the fact
that the 2020 coronavirus pandemic has dramatically reduced demand for
steel and aluminum products worldwide, China has once again ramped up
steel and aluminum production and dramatically increased inventories,
contributing to drastic global price depression. This illustrates the
national security threat to our steel and aluminum industries and why
the President imposed Section 232 tariffs to address the impact of
overcapacity and the threat posed by steel and aluminum imports.
Outside the United States, however, the global surge continues and
China's actions are still destabilizing the global steel and aluminum
industries.
The PRC government is further exploiting opportunities abroad to
monopolize strategic ports and mines (among other assets). State-backed
Chinese investors own 10 percent or more of equity in ports in Europe,
and it has major deals in Greece, Italy, Spain, France, the
Netherlands, and Belgium. This is in addition to a growing number of
investments in more than 40 ports in North America, South America,
Eastern Europe, the Middle East, Africa, Central Asia, South and
Southeast Asia, Australia, and the Pacific. The PRC government is
similarly increasing control of the raw materials necessary for
manufacturing high-technology products (e.g., phones, vehicles,
advanced energy storage systems, and magnets) that are sourced from a
small number of countries, and for which substitutes are unavailable.
Operating in niche markets with limited transparency, often in
politically unstable countries, Chinese firms continue to capture
supplies of cobalt, graphite, lithium, nickel, niobium, and platinum,
to name just a few. Because these minerals and metals are finite assets
that cannot be replaced, China is able to exert influence over the rest
of the world by withholding access to these assets to compel nations to
bend to its will.
Additionally, in its never-ending quest for technological
superiority and control over key positions in the industrial value
chain, the PRC government regularly has supported or directed the theft
and misappropriation of U.S. technology and intellectual property (IP).
Monetary damages accrued to the United States are estimated to range
from $50 billion to as high as $600 billion annually. Moreover, by
making short-lived market access promises to cutting-edge technology
companies, the PRC government pressures the most technologically-
advanced firms to transfer IP and sensitive data to it. The PRC
government ultimately uses the IP it extracts from companies to
displace them from the market. China's increased dominance in key
segments of the industrial value chain further cements its technology
transfer approach. Even where Chinese firms are perceived to
``collaborate'' in technology development, take for example Huawei's
announcement that it plans to build a $1.2 billion optical fiber
research facility in the United Kingdom, the gains are only one
sided.\3\ Chinese companies will, as directed by the PRC government,
benefit from scientific research and collaboration with international
scientists abroad, resulting in some cases in the repatriation of
technology to generate overcapacity to eliminate competition and obtain
a monopoly position. In sectors like 5G, where optical fiber cables
provide the infrastructure for an impending technology revolution, the
national security implications are obvious.
---------------------------------------------------------------------------
\3\ Gold, Hadas, CNN, ``Huawei to Build $1.2 Billion Cambridge
Facility as It Faces Uncertain UK Future,''(June 25, 2020) https://
www.cnn.com/2020/06/25/tech/huawei-cambridge-uk/index.html.
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It is also reported that the Chinese government, this year, is
implementing a nationwide credit rating system for all corporations--
foreign-owned or Chinese-owned--operating within China. Companies
handling sensitive personal data and proprietary technical information
will be required to transfer that data to the Chinese government. The
European Chamber reports this credit rating system as amounting to
``life or death'' for companies.\4\
---------------------------------------------------------------------------
\4\ European Chamber of Commerce, ``European Chamber Report on
China's Corporate Social Credit System, A Wake Up Call for European
Businesses in China,'' (Aug. 28, 2019), https://
www.europeanchamber.com.cn/en/press-releases/3045/
european_chamber_report_on_china_s
_corporate_social_credit_system_a_wake_up_call_for_european_business_in_
china.
---------------------------------------------------------------------------
China's engagement in international standards as a way to influence
the global technology market also is of great concern, but it is often
not fully understood. To illustrate this attempted influence, take for
instance the fact that, from 2011 to 2019, the number of Chinese-led
technical committees in the International Organization for
Standardization, one of the largest international standards setting
organizations, increased by 75 percent.\5\ Further, China has
strategically increased its participation in the International
Telecommunication Union (ITU), an agency of the United Nations
responsible for coordinating telecommunications operations and
services, with the hopes of expanding its influence around the globe.
In fact, in key technology working groups of the ITU, China alone
comprises 40 percent of participants.\6\ Moreover, China's press into
international standardization ranges from introducing weak proposals
into the standards development process, flooding the organizations with
low-quality proposals that detract from and take resources away from
sound proposals, to making financial contributions as a way to wield
power over those organizations and to punish member companies and
countries that do not side with its agenda. Indeed, China's
participation in international organizations has become a vehicle to
advance its One Belt One Road Initiative, and the more influence China
has over standards development, the more likely this initiative will
succeed.
---------------------------------------------------------------------------
\5\ Kamensky, Jack, China Business Review, ``China's Participation
in International Standards Setting: Benefits and Concerns for U.S.
Industry,'' (Feb. 7, 2020) https://www.chinabusiness
review.com/chinas-participation-in-international-standards-setting-
benefits-and-concerns-for-us-industry/.
\6\ Department of Commerce calculations.
---------------------------------------------------------------------------
Additionally, China uses other international organizations to
advance its global ambition, including the Belt and Road Initiative. To
illustrate, it has been reported that the head of the UN Department of
Economic and Social Affairs used his position to discriminate against
people and organizations who were drawing attention to the CCP's
repression of the Uighur ethnic group. The World Health Organization's
capture by the Chinese government, by failing to alert countries to the
rapid transmission of the coronavirus, is yet another recent example.
Even more to the point, if the Chinese government is currently
threatening to retaliate against Nokia and Ericsson for the EU's
possible move to ban Huawei from their 5G systems,\7\ imagine the types
of influence that China could wield if it is able to dominate global
standards organizations and the standards themselves.
---------------------------------------------------------------------------
\7\ Lin, Liza; Woo, Stu; Wei, Lingling, ``China May Retaliate
Against Nokia and Ericsson If EU Countries Move to Ban Huawei,'' Wall
Street Journal (July 20, 2020), https://www.wsj.com/articles/china-may-
retaliate-against-nokia-and-ericsson-if-eu-countries-move-to-ban-
huawei-1159525
0557.
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Finally, it is worth emphasizing that because China is a sovereign
state, foreign laws can never be sufficient to fully address its
conduct. In fact, the PRC government takes advantage of the United
States' lack of an extradition treaty with it to advance cyberattacks
on sensitive U.S. assets. The attacks not only obtain proprietary trade
secrets from companies and sensitive personal information about
American citizens from servers, but these attacks also target crucial
weapons systems and sensitive military technology (well-documented
examples include attacks that extracted sensitive information about
U.S. submarines, cryptographic systems, the F-35 Joint Strike Fighter,
and anti-ship missiles that are crucial for deterrence and developing
countermeasures). China's medium of cybertheft also includes stealing
computer software source codes, design technology, and technical
product specifications. And the PRC government continues to violate its
2015 bilateral commitment to the United States in which it had vowed to
refrain from stealing and misappropriating U.S. IP.
The tactics used by the PRC government over the course of the past
40 plus years have enabled the country to move its economy from the
12th largest in the world ($191 billion gross domestic product, GDP
(current prices), in 1980) to the second largest ($14 trillion GDP
(current prices) in 2019); become the second largest foreign holder of
U.S. debt at $1.09 trillion in 2019 (the first largest being Japan
holding $1.27 trillion), and grow as the world's largest exporter of
goods. Indeed, the United States' largest bilateral trade deficit is
with China ($345.6 billion in deficit in goods in 2019). In addition,
China today holds uniquely powerful positions in the most critical
supply chains in the world including rare earths elements, medical
equipment and supplies, pharmaceuticals, and electronics.
The past policies of the United States did not effectively impede
or curtail China's rise as a predatory economic actor. To build our
seemingly efficient supply chains, we flocked to China as the low-cost
producer of virtually every link in the chain, allowed the PRC
government to build reserves of U.S. dollars which it used to devalue
its currency, traded our most sensitive intellectual property in
exchange for short-term market access and profits, and did not
adequately use legal enforcement tools to protect our industries. Our
motives were short-sighted, and we failed to sufficiently anticipate
the vulnerabilities that this trading relationship would create.
As a result, we willingly transferred our debt and exported our
manufacturing capabilities (and jobs) to a non-market economy where
market principles, transparency, and predictability do not exist. By
doing this, we created a global economy where distorted prices and non-
market conditions are allowed to proliferate. We also put China in
control of our revenue stream. This vulnerability is often not
discussed among policymakers, but it is important to emphasize: within
our highest-technology sectors, substantial revenue comes from U.S.
exports to China. This means that China, by controlling America's
revenue stream, also controls America's ability to earn income and fund
R&D. This is an extraordinary vulnerability that, if unaddressed, will
be used by the PRC government to further halt America's technological
progress.
RESHORING CRITICAL SUPPLY CHAINS
Traditionally, economists have viewed calls for countries to pursue
policies aimed at protecting national security production capacity
skeptically. They argued that a nation could, in a globalized world,
always turn to other countries if the domestic supply chains eroded at
home. However, what we have learned from the coronavirus crisis is that
borders do matter because any state has the sovereign right, and
ability to, restrict exports to the rest of the world. Indeed, the PRC
government strategically withholds exports: (1) as a bargaining chip to
extract concessions from trading partners; or (2) to punish trading
partners that do not bend to its will. Even our allies introduced
earlier this year--at the height of the pandemic--emergency export
restrictions over much needed medical equipment in order to provide for
their own citizens to the detriment of neighbors in need.
These facts should serve as an important reminder to the United
States that the security of domestic supply chains is essential, and it
must be regained because the basic political and economic unit should
always remain the nation-state. Indeed, the protection of American
citizens requires that the United States' vulnerable supply chains be
strengthened, and a major component of supply chain resiliency must be
reshoring. But how can the United States reverse the excessive
offshoring that has occurred over the course of the past 40 years?
The problem is complex, but it can be solved through a whole-of-
Government approach. That is, if we collectively are prepared to tackle
difficult policy questions, even those that may run counter to long-
held economic biases. To the extent that those biases once formed
policies that incentivized critical industries to offshore, then
logically they need to be revised or reversed.
Understanding what has led to the degradation of our supply chains,
then it stands to reason that a comprehensive reshoring strategy must
remedy those causes. At the outset, the United States must
systematically and routinely identify all products, goods, and
technologies that are critical to national security to address the
country's dependency on imports from strategic competitors, whether in
a time of war, cyber-attack, pandemic or other national emergency. This
Administration--my office in particular on behalf of the White House--
has begun doing this. We need to continue this on a permanent basis. An
additional component here is measuring the flow of technology if it is
now as equally as important, and in many instances more important, than
the traditional ``national security good.''
A second essential component of a reshoring strategy is
incentivizing inward investments in domestic manufacturing and R&D
activities. We have begun doing this to boost innovation and economic
growth through tax cuts. A whole-of-Government approach, in partnership
with Congress, will continue to make this effort successful.
Third, we have in our arsenal of tools powerful U.S. Government
procurement authority, including the Defense Production Act authority,
to provide capital to new American investments and also as a tool to
generate demand, through U.S. Government purchases, for national
security-related items that are produced within the United States.
Reliance on Government procurement authority is what will compel many
companies to take a leap of faith and re-invest in the United States.
This is an important tool that we are using and should be empowered to
use even more.
Fourth, it is, of course, axiomatic that U.S. investments must be
encouraged to grow to commercial scale in order to compete against more
mature foreign competitors. Further, an industry's commercial viability
will generate robust upstream and downstream supply chains, draw in new
market entrants to enhance production efficiency and moderate prices,
attract greater private sector investments, and encourage competition
to accelerate R&D. These are the fundamental building blocks of a
resilient domestic supply chain.
Finally, we have the ability to increase exports of all U.S.
firms--including those that re-shore to the United States--through
trade agreements. We have begun to increase exports thorough the U.S.-
Mexico-Canada Trade Agreement and the U.S.-Japan Trade Agreement, and
we should continue to encourage greater exports through new trade
deals.
With the support of Congress, we can build the strongest supply
chain in the world, enhance our comparative advantage with allies, and
create an ecosystem where market-based principles prevail and market
distortions are eliminated. We have begun doing this; we can do more
together, which is why this hearing is so important.
CONCLUSION
Historically, through times of adversity, the United States has led
the world out of war and economic turbulence into recovery. And now
too, the world will look to the United States to lead the way in
solving today's supply chain challenges. It should not be forgotten
that the global economy of the 20th century was developed by the United
States and, although China is aggressively seeking to shape the global
economic order of the 21st century, it is not too late to act. While
the United States remains the largest economic power in the world (a
status that is not guaranteed as China's exponential growth continues),
it has the ability and leverage to act in coordination with allies.
Time is of the essence, and our supply chain vulnerabilities are too
great to await another national security crisis that may expose this
country to even more devastation and destruction.
Senator Sullivan. Thank you, Secretary Nikakhtar and Mr.
Secretary, thank you.
I want to begin with you on really, I think, kind of the
critical question here and that is this issue of alliances.
Some of my colleagues have been critical of the Trump
Administration's approach. I believe that certainly our
previous panel mentioned something that I believe we are an
ally rich nation, China is an ally poor nation, maybe North
Korea is their only true ally, and a strategy of deepening and
expanding our alliances is one that I think is very important.
I actually think that this Administration has been working
hard on that in areas, such as Vietnam, India, but your
statement about a new coalition, the previous panel actually
talked about the idea of a D10 democracy coalition.
Can you talk about that in more detail and what you and
Secretary Pompeo are starting to do in that regard and the
success you're seeing and how we in the Senate, and I think
there's strong bipartisan support to help you with this, how we
can support that?
Just one of many anecdotes. Of course, we see a number of
world leaders and senior officials from all over the world that
come through the Senate. A number of them have been saying it
has to be the United States to lead on this coalition against
China. We want it to happen, but if we step out, a smaller
country, we feel that we'll get really creamed by the Chinese.
If the United States leads, we will support that under U.S.
leadership.
So can you give us a little bit more detail on what you
talked about in your opening testimony which I think is very
promising and will have strong support in the Senate?
Mr. Krach. So you're absolutely right, Senator.
Senator Sullivan. Mike.
Mr. Krach. You're absolutely right. The biggest elephant in
the room is China's retaliation. It terrifies countries and it
terrifies companies and this is the whole reason for an
alliance of democracies which would also include the private
sector because there is strength and power and unity and
solidarity and if you look at China's tactics, they're a bully,
and we've all----
Senator Sullivan. Do you believe like the panelists that
testified before that China recognizes that this is our
ultimate strength right now, our long-term deep global network
of alliances that we have and that they pretty much don't have
at all?
Mr. Krach. Yes. So if you--by the way, if you look at what
our strategy's comprised of, it's taking our comparative
advantages and amplifying those and actually create component
advantages and a big one is our like-minded partners and our
friends and so it's time to turn the table on them and use that
against actually China because they've been using it against
us.
I think the biggest delta in terms of opportunity of
strategy is--and I said this when I got confirmed--is for the
strengthening of our relationship with our allies and friends,
leveraging the innovation and resources of private sector and
amplifying the moral high ground of American values.
So to be able to combine that all into one is huge and, you
know, bullies back down when they're confronted. We've all
experienced them at some point and they really back down if you
have your friends by your side and that's why, for example,
when Boris Johnson said, hey, we're going to reconsider that
Huawei decision. That was a few months ago. You could see
immediately the retaliation by the CCP.
Beijing threatened the HSBC Bank and the Chinese U.K.
Ambassador threatened to take away their $100 billion
infrastructure investment in the U.K.
Secretary Pompeo stood right up and he said, look, we stand
with our allies. We stand with the U.K. against this China
bully. We'll stand up for anybody, whatever we need to do and
that is the most powerful concept because what China's done is
they've fragmented. They go after the weakest gazelle of the
herd and----
Senator Sullivan. So we're starting to see success in that
realm in terms of building a coalition of democracies in other
countries?
Mr. Krach. Sure. So what we see is in this coalition is to
build a network of trusted partners and the fastest way to
build a network is to build that network of networks.
So here are some of the things that have been going on. The
Blue Dot Network, which is a network for infrastructure, for
high-quality private sector-led infrastructure around the
world, particularly in developing nations.
Another one is the 5G Clean Initiative. That in essence is
a network, as well. There's another one in rare earth minerals
that we announced and Secretary Pompeo signed off at UNGA last
year. Nine initial nations and we're growing that.
We envision an energy security network, as well, and also a
health care and prosperity network and really if you think of
it, the pandemic's really kicked that into big gear.
So if you look at these different networks, it's all areas
of collaboration. So it is investment, it's trade, it's
commerce, it's energy, digital, infrastructure, research,
education, and those are the things that we're going to take
advantage of that momentum, and it's going to be based on those
trusted principles, and as Nazak said, they're trying to take
over international standards.
The way to counter that is to have an overriding set of
principles that all these standards have to comply with and you
can't participate unless you do. So if you have a national
intelligence act that requires any Chinese company, state-owned
or otherwise, any citizen, to turn over any proprietary
technology, intellectual property or data upon request or
suffer the consequences, then need not apply.
Senator Sullivan. Well, Mr. Secretary, I think focusing on
our allies and what you're talking about, networks is something
that will have strong support here, bipartisan support here.
Your focus on critical minerals, energy, that's certainly
important in my state, the great state of Alaska, but it's
important to America.
These are really important comparative advantages. So we
want to help you with that.
Senator Young.
Mr. Krach. Thank you.
STATEMENT OF HON. TODD YOUNG,
U.S. SENATOR FROM INDIANA
Senator Young. Thank you, Mr. Chairman, and welcome, Mr.
Under Secretary, grateful for the incredible service you're
doing over at E.
We know that a new power competition is unfolding before
the eyes of the world. America's predominant challenger, China,
is an unscrupulous authoritarian regime that doesn't share our
values. In fact, their values are the inverse of our own and to
meet these challenges, we have to once again show America has
the resiliency and dynamism that it has shown over the last
century.
We can harness our economy. We can renew the American
project itself if we make the right moves during this moment in
history.
The Endless Frontier Act is a piece of legislation I co-
authored with Senator Schumer and we believe that it will
provide the rocket fuel for America's innovators and
entrepreneurs moving forward.
In this bill, we propose bolstering U.S. leadership in
science and tech innovation and boldly increasing premarket
investment in emerging tech. We propose providing in this
Endless Frontier Act $100 billion of strategic investment in
the National Science Foundation to bolster science and tech
research and to deliver $10 billion to establish regional tech
hubs around various areas of the country where there are
existing pockets of expertise in particular sectors and
technologies. That will lead to the launching of innovative
companies, reviving American manufacturing and the creation of
new jobs across the country.
In coming years, it will strengthen American power. It will
increase our prosperity and it will carry on America's never-
ending quest to continuously improve the world through
innovation. We've done this before. See the 20th Century.
Under Secretary Krach, do you believe the U.S. Government
should ramp up investment in large-scale domestic innovation
efforts to ensure American leadership in key technologies?
Mr. Krach. Absolutely. And by the way, I want to thank you,
Senator Young, as well as Senator Schumer, for the Endless
Frontiers Act because that will tremendously move the needle in
these 10 critical national security sectors and will be a great
catalyst for kicking off that Sputnik moment that I talk about.
One thing that I've learned out in Silicon Valley is that
American innovation entrepreneurs are the best in the world,
but you also got to give them time and time equals money and so
talking about a $100 billion is huge and as we've discussed
before, we believe we could get some serious match from the
private sector. We believe if we choose, we could get it from
our allies, too.
Senator Young. Well, let's explore that a little further.
How could we utilize our relationships? Arguably, our greatest
geopolitical resources, a country, which are those alliances
that we've developed, how can we leverage those relationships
with close partners and allies to speed up development and
broaden the base of innovation?
Mr. Krach. Yes. So an example, and I think Chairman
Sullivan alluded to a similar concept, we call it the TD10,
Techno-Democracy 10. It would start off with 10 of our closest
technological allies and it would really be with two main
objectives.
One is protect the strategic assets for these allies, but
the other would be from an offensive position in terms of joint
collaboration, joint research, all of that, as well as
collaboration in terms of export controls and investment
screening.
There's no doubt about it that in the China Competition,
the battlefield is high-tech. Their soft underbelly is they
need hard currency and to be able to put this amount of funds
and to get it coupled with the private sector is going to
dramatically move the needle.
Senator Young. So as we think about competition with China,
what I hear you saying is we shouldn't only play defense,----
Mr. Krach. Absolutely.
Senator Young.--to use a sports analogy, right? Not only
apply tariffs, although tariffs have a role, not only encourage
our partners and allies to forswear Huawei technologies, if
there's a fear of a back door, not only ensure that our
partners and allies are aware of the implications of accepting
foreign aid through the Belt and Road Initiative, but also
invest in ourselves, outgrow, outcompete, out-innovate the
Chinese, which is arguably the most important thing we did to
take down the Soviet Union.
Mr. Krach. By the way, that is by far the Number 1 thing.
If there's anything I've learned about economic state graft,
because that's what we practice out in Silicon Valley, is the
best defense is a strong offense. So this puts us on the
offensive and gets us out of a reactionary posture and this is
the Communist Party's biggest fear is that we really turn up
the heat on developing these new technologies and put a serious
amount of money behind it.
Senator Young. So let me change my line of inquiry
momentarily and you've been very thoughtful. We've met
privately on this matter before, but do you envision, Mr. Under
Secretary, a future where countries around the world have to
choose between either the United States or China? Can we avoid
this, some call it, decoupling, this economic decoupling
between China and the United States?
Mr. Krach. You know, when we envision with, for example,
the alliance of democracies is we're not asking them to choose
between the United States and China. We're giving them an
opportunity to participate because when you talk to them,--by
the way, I've probably had 80 bilateral meetings with my
foreign counterparts, you know, ministers of finance or
economics, and I'll say how's your relationship going with
China? What's it like? They'll go one of importance, you know.
They're a big trading partner, and then they'll lean in.
They'll look both ways. This will be a bilateral meeting. They
go but we don't trust them.
You know, if you look at those values that we talk about,
those American values, those trust principles, they form the
basis of trust, and you do business with people that you trust.
So think about it.
Senator Young. I referred to arguably our greatest
geopolitical resource is that alliance system. I challenge
people. Name one ally the Chinese Communist Party, the People's
Republic of China has. They have none.
Mr. Krach. North Korea.
Senator Young. They have vassal states. They have vassal
states, Mr. Chairman, like North Korea. They don't have genuine
alliances.
Mr. Krach. By the way, I did write an op-ed last week in
the Wall Street Journal about the tyrannical twins that deal
between China and Iran and, I mean, here's two countries that
they haven't honored an agreement. It's like the Hitler-Stalin
pact.
Senator Young. By the way, you're absolutely right. Your
point is they would carve up Poland.
Mr. Krach. Yes.
Senator Young. That's not an alliance.
Mr. Krach. That's right.
Senator Young. That's a marriage of convenience subject to
divorce at any time.
Mr. Krach. That's right, and that's why you hear these
developing nations describe the One Belt One Road as the One
Belt One Way Toll Road to Beijing because they're getting the
resources sucked up. They're getting their hard currency sucked
up. There's a lot of things that are going on.
Senator Young. Thank you for your support and encouragement
as it pertains to the Endless Frontier Act. I'm grateful for
the service of you and your team over there at E. You have
clearly elevated that department. I know Colonel Sullivan
served there before and I didn't think it could be elevated any
further, but, no, I mean, it's an especially important period
of time to ensure that our economic state craft is properly
scoped and I'm grateful for your presence here today.
I yield back.
Senator Sullivan. Thank you, Senator Young, for your
leadership on all these issues----
Mr. Krach. Thank you.
Senator Sullivan.--and it's important that you're
highlighting how important the E Section of the U.S. State
Department is that the Under Secretary leads.
Senator Blumenthal.
Senator Blumenthal. Thank you, Mr. Chairman, and thank you
both for being here today, both witnesses. Thank you for your
service to our country.
I don't know whether you were here for the last panel to
hear my questions to Mr. Wessel and Mr. Doshi, but let me
repeat them for you.
This morning, Senator Hawley and I wrote to the Assistant
Attorney General of the United States Department of Justice,
John Demers, asking for an investigation of Zoom and TikTok
because of their reported, reliably reported and repeated
surveillance of United States citizens, possible censorship of
participants on their platforms, and essentially suppression of
rights and liberties by people in this country, and those
reports of censorships and other abuses led us to ask for an
Investigation by the Justice Department.
Senator Hawley and I, along with other Members of Congress,
have written repeatedly to Zoom and TikTok asking them about
their practices of collecting information about Americans and
about providing it to China, the Government of China, and they
both failed to answer these basic questions.
So we have turned to the U.S. Government to protect United
States citizens.
Is the Administration aware of the cooperation between Zoom
and TikTok and the company that apparently owns it, Bytedance,
with the People's Republic of China, and what do you plan to do
about it?
Mr. Krach. Well, I think that picks up right where I was
talking about, the 5G Clean Program and Huawei.
So if you look at apps like TikTok, WeChat, if you look at
the cloud providers, if you look at drones, if you look at
underwater cable, it's all part of that nervous system of
China's surveillance state and that's why we're preparing plans
now, not just the clean network side, the 5G side, but the
entire system, and I couldn't agree with you more because what
these are is they're appendages to that surveillance state.
So, you know, I think what you're going to see is you're
going to see a similar campaign to what we did with 5G and I
just couldn't agree with you more, Senator.
Senator Blumenthal. Well, I appreciate that. I think that
support is very meaningful, and I hope you will take that view
to the Department of Justice because if the Administration is
really going to put its money where its mouth is,----
Mr. Krach. Yes.
Senator Blumenthal.--so to speak, an Investigation by the
Department of Justice has to begin right away. It has to be
swift and sure and fair, but this kind of surveillance and
censorship and the tracking of Americans, the providing of data
to the Government of China is a direct intrusion on our civil
liberties, and I hope that you will be in touch with the
Department of Justice. Will you do so?
Mr. Krach. And they've been great allies. They're actually
working arm-in-arm with us in defining the clean apps, clean
cloud, clean store, and all these different areas. They've been
great. They really have. So they've been great partners.
Senator Blumenthal. I'm glad they?ve been great. I hope
they will send a message and respond to Senator Hawley and
myself and respond favorably, but I'm glad that you will
support it and I appreciate your public endorsement of it.
Let me ask you. Are there measures, such as a CFIUS review,
that could impose on Chinese firms collecting information about
Americans real assurances that the data will not wind up in the
hands of the Chinese Government?
Mr. Krach. So can you state your question again, Mr.
Senator? I didn't quite catch it.
Senator Blumenthal. Are there measures, like a review by
the Committee on Foreign Investment in the United States, known
as CFIUS, that would impose on Chinese firms collecting
information about Americans a barrier or prohibition against
sharing that information with the Chinese?
Mr. Krach. Yes. By the way, I think there are a number of
tools in the U.S. Government. Obviously CFIUS is a good one
and, by the way, on that dimension, it's an ever-changing
landscape. Even since I've been in office, I've seen it change
and there are all kinds of ways to get around mitigation and
those kind of things.
The other is the Executive Order with regard to the ICT
industry, in particular focused on China. I think that is a
great tool. I don?t want to get out ahead of the President on
that one, but that pretty much gives us all the tools we really
need to do what you're talking about.
Senator Blumenthal. You mentioned drones. Tell us why we
should be concerned about drones?
Mr. Krach. Well,----
Senator Blumenthal. Eighty percent of the world's drones
are made by the Chinese. They're sold in the United States.
They can collect information and send it right back to the
Chinese, correct?
Mr. Krach.--they do. So if you look at a company called
DGI, they probably have about 90 percent market share. So
imagine you're like a drone hobbyist or you're doing something
with your son or something like that. You know, you want to
kind of take the video from up there. Well, those feeds go
directly back to China, unless, you know, you're pretty tech
savvy and you go through about seven different menu picks and
you can have it then just download right to your iPhone, but
otherwise it's going there.
Obviously drone technology is some of the scariest military
technology and, by the way, that was one of the things that I
saw on my last trip to China and why I came out to Washington
as I saw their swarm drone technology and, by the way, I don't
know how you defend against it. Hopefully, I know we're working
on it.
So, by the way, that's one of the other ones that we're
working on is clean drones because those are dangerous. It's
one more appendage.
Senator Blumenthal. Well, you say you don't know how we
defend against it.
Mr. Krach. Well, from a military aspect, I don't want to
get into that with their swarm drone technology.
Senator Blumenthal. I'm on the Armed Services Committee as
is Senator Sullivan, but I'm talking about ordinary civilian
uses.
Mr. Krach. By the way,----
Senator Blumenthal. I need percent of the market and the--
--
Mr. Krach. I am, too, for the drone hobbyist. Because it's
doing the same thing TikTok is, sending your video feeds back.
So they're collecting information on our children. I've got
five children. I don't want the Chinese spying on my children.
Senator Blumenthal. So should we just ban Chinese drones?
Mr. Krach. By the way, I think that's a very important
thing to heavily consider. Once again, I don't want to get out
in front of it, but it is on the table.
Senator Sullivan. We need to be able to manufacture our
own.
Senator Blumenthal. Exactly.
Mr. Krach. By the way, that gets back to Senator Young, is
the best defense is a good offense. We have to invest in our
drone business because they have--I mean, last I checked and
Nazak may know better than me, but I think they have about 90
percent market share.
Senator Sullivan. We held a hearing on that topic in this
subcommittee.
Mr. Krach. Yes.
Senator Blumenthal. And I might just say that Senator
Sullivan is absolutely right that in order to ban the product,
we have to be able to manufacture it in this country and I
would submit as a matter of national security that we do it in
this country because that's the only way to in fact defend or
protect our rights and liberties but that's easier said than
done.
As you well know, a company with 90 percent of the market
share can undersell or outcompete, in fact engage in predatory
pricing to squelch competition.
Mr. Krach. Yep.
Senator Blumenthal. So I'd like to know from you in the
future, you know, when you say it's on the table, I'm hoping
that you will report back to us. I'd ask you for a report back
on what is planned.
Mr. Krach. By the way, you got it,----
Senator Blumenthal. Thank you.
Mr. Krach.--Senator, because you're absolutely right. We
have the technologists. We have the entrepreneurs to build
market drone companies and, you know, the problem is, as you
pointed out, the Chinese subsidize it. It takes capital. It
takes money and, you know, the way China ink works, it all
comes out of the same pot and I know and I deeply appreciate
what the Congress is doing to make sure we get those funds.
Another great example is the semi-conductor business. It
was our God-given right to have the semi-conductor fabrication
business in the United States. We started it. We invented it.
What happened is Asian countries came over and they bought it
from us and they subsidized the semi-conductor business between
30 and 50 percent. We were able to get Taiwan semi-conductor to
kind of bet a little bit on the come, so to speak, and you
passed the CHIPS Act 96 to 4 last week and a hundred percent in
the House and that money goes for the entire semi-conductor
industry to help bring it back on to United States shores
because only 12 percent of semi-conductor fabrication is done
in the United States and that is the key for our semi-conductor
equipment manufacturers.
So these things make a difference and it's a tipping point,
so, and it boils down to money.
Senator Sullivan. Let me turn to Senator Cruz here, Mr.
Secretary.
Senator Cruz.
Thank you, Senator Blumenthal.
Senator Cruz.
STATEMENT OF HON. TED CRUZ,
U.S. SENATOR FROM TEXAS
Senator Cruz. Thank you, Mr. Chairman. Thank you to both of
the witnesses for your service. Thank you for your testimony
today.
I want to start with something that was discussed in the
first panel, as well, which is supply chain issues. I am deeply
concerned about China's control of our supply chain,
particularly insofar as it affects critical infrastructure, and
one area that poses a serious national security threat to the
United States concerns rare earth and critical minerals
supplies.
I've introduced legislation, The Onshoring Rare Earths Act,
the ORE Act, to bring rare earth mining back to the United
States.
How does the Administration view the threat of Chinese
control of rare earth minerals and what should we be doing to
fix the problem?
Mr. Krach. Absolutely. Because we collaborate on this one,
Nazak?
Ms. Nikakhtar. OK. Thank you for the question. So rare
earth----
Senator Sullivan. Please turn on your mike.
Ms. Nikakhtar. I'm sorry. Thank you.
Rare earth has been one of sort of a comprehensive
reshoring strategy, the comprehensive reshoring strategy that
is being led by the White House, my office is taking the lead
on. Rare earth is very much a part of it, cannot underscore the
importance of it.
My office did the Critical Minerals Report of 2018 and
really when you look at rare earths and critical minerals, one
after another, our supply chain vulnerabilities are great.
China threatens to withhold access to rare earths, as we
know, to basically have countries bend to its will. We can't
stand for that.
So the solution which is what we're discussing in the
Administration is going to have certain pillars, right. One of
the first pillars is really providing financial incentives for
processing in the United States. That is what gives companies
the leap of faith to invest in the United States.
The next part of it is technology sharing with our allies.
One of the things that I'm personally trying to stress is that
if our supply chains are located far away and if China
decides--or if we decide with any adversary that tensions are
going to escalate, we're not going to have enough ships to
basically fight a war and ship rare earths back and forth to
one another.
So we need to enhance the processing and the technologies
associated with clean processing for both ourselves and our
allies. Till we get there, collaborate on all fronts but every
country or the U.S. and our allies, we have to basically be
able to be self-reliant in this respect.
Finally, so we have the investments for R&D in terms of
incentivizing investments and processing, but at the end of the
day, what company is actually going to invest in the United
States if they know that the cheap rare earths from China are
ultimately going to displace them, right, and so then we need
to look at how do we--what is the delta and the cost and what
measures are we going to seriously think about?
I know this is taboo. I know nobody likes to talk about
restricting imports, quotas, tariffs, or whatever, but what is
the other alternative, and I'm speaking as an economist, what
is the other alternative when China's predatory low prices,
which is its key strategy, displaces.
So we need to have a serious conversation about that, and
then certainly we need to look at the downstream impacts,
right. Rare earths are more expensive and what are the
downstream impacts and think about financial incentives to
bolster those companies that rely on rare earths in the defense
sector in particular, and what are some of the measures we can
put in place to again prevent the predatorily priced imports
from coming in and eroding our defense base.
So I appreciate what you're doing. We've studied this
through the economic and legal lens a lot and I think these are
the steps that are going to give us a resilient supply chain.
Senator Cruz. Well, I think you made a very important
point, that China's strategy here in terms of slashing prices.
Their objective is not profit maximization and the way the
Chinese Communist Government has approached the United States
is I believe they are engaged in a battle for global domination
and they have deliberately identified key vulnerabilities of
America and they have determined to dominate and so when
they're pricing it, it's not even simply predatory pricing in,
say, the antitrust context.
It is in fact these are not money-making endeavors. Their
objective is not to earn a profit. These are military dominance
efforts and so their efforts are to attack America.
Let me ask for someone watching at home, as a practical
matter, why do rare earth and critical minerals matter? Why
should we care that China has a stranglehold on them?
Ms. Nikakhtar. Well, because, I mean, they're essential.
They're essential to our micro-electronics. They're essential
to our defense systems, really everything that is today
critical to national security, they underpin.
I want to raise an interesting quote which I think you're
going to very much appreciate. We almost treat sort of the
China hollowing out our industries as a new thing, and I have
this in my written statement. It actually has its root in the
Cold War.
Khrushchev famously said, ``We, meaning the Sino-Soviet
Bloc, declare war upon you, the United States. In the peaceful
world of trade, we will declare a war. We will win over the
United States.'' Again quoting from Khrushchev, ``We, again
referring to the Communist States, value trade the least for
economic reasons and most for political reasons.'' This is from
the hearing transcript of the 1962 Trade Act.
Interestingly, the Trade Act 19 USC 1801 in the Statements
on Purpose, one of the purposes is ``through trade agreements
affording mutual trade benefits to prevent the Communist
Economic Penetration.'' This is the problem that was back in
the 1950s, and in the 1962 Trade Act it was discussed. It is
the same problem we're dealing with today and guess how much
progress we've made on it. Zero.
The Administration, I think, for the first time and
rightfully so is tackling all of these problems almost
simultaneously. We're looking very hard at it. We're looking
closely at it. We welcome, we welcome congressional support
because these are complex problems that have been decades in
the making and we're trying to solve them now and guess what.
Time isn't on our side. We need to do it now.
Senator Cruz. Thank you very much.
Senator Sullivan. Thank you, Senator Cruz.
I just want to comment on the rare earths and other
critical minerals. We have them in America. We certainly have
them in my state and, by the way, our record on mining them and
producing them is much higher in terms of the environmental
standards than the Chinese by far.
So if we have them and it's good jobs and it's important
for national security and we have a strong record on
environmental protection on mining them, then we should utilize
that.
Mr. Krach. And I would say you're absolutely right. In the
United States, rare earth minerals aren't that rare, but----
Senator Sullivan. Well,----
Mr. Krach.--what the Chinese have done is they put our
processing plants out of business by subsidizing pricing. I
mean because, you know, I agree with you, Senator Cruz. Their
aim is not just to compete. Their aim is to drive you out of
business. Then they can do two things. They can jack up prices
and feed that giant kitty where they're going off and doing it
to the next sector and they're very good at this. It's a
strategic pinch point underlying everything and they've studied
it.
The one thing I must say, it has been great to see in this
Administration coming in, is that when you look at what the
work Nasaki is done at Commerce, what we're doing at State, the
NSC, in terms of really analyzing strategic pinch points in the
supply chain. I don't know if it was ever done before.
Then you have to get to a level of specificity where it's
like what's the plan, what's the company, what's the product,
and how do we get the over here or how do we, you know, get
them in our allies' hands. Ideally, it's in the United States
and you really have to really, really dig in.
Senator Sullivan. Well, I want to thank Senator Cruz again
for his leadership on rare earths and critical minerals and
we're making progress on that in an important way.
Let me turn to one final question, Mr. Secretary, Madam
Secretary, both of you. I'd like your comment on this very
challenging issue that we've seen really over decades and
that's the temptation, I would call it, by U.S. companies that
want to access the Chinese market and then what ends up
happening is that the U.S. companies are either forced to
transfer their technology beyond probably what they want to do
or they in some ways kowtow to Chinese interests, think the
NBA, on broader kind of statements that China finds
objectionable and we have American companies or organizations
that start to tow the China line.
So it's a dilemma because a lot of this has taken place in
decades in the private sector. CEOs making these calls may be
for short-term profit to access the China market but longer-
term in terms of U.S. strategy, it might be undermining our
broader strategic goals as a nation if some of our best
companies are selling out their own IPR to gain access to the
Chinese market.
So what should we as a government, this is beyond just
State or Commerce, do about this very important issue where our
private sector is leveraged to get access to the market of
China but then has to give up things or tow the line on broader
issues relating to Taiwan or other things where they're almost
forced to make statements that are in line with Chinese
Communist Party objectives? I'd like to hear from both of you.
Go ahead.
Ms. Nikakhtar. Yes. I'll start just to kind of give the
economist perspective, right. When you're a company and you
have no choice but to deal with the Chinese under-valued
export, your only way of survival is actually to go into the
Chinese market and benefit from the same distorted cost
structures.
So what ends up happening? I mean, you not only have to
transfer your technology but also now you're even flooding the
global market more with distorted prices, right.
So in many ways, the companies, in terms of market access,
as you said, or just, you know, in order to compete with their
own Chinese competitors have to flock to that market.
What's really interesting that I've noticed happening is a
few things. China has announced the implementation this year of
a corporate credit rating system, kind of like the social
credit rating system, where any time it can ask companies
operating in China to hand over their data, most sensitive
technology, and their IP.
The European Chamber of Commerce has deemed this to be
essentially life or death for companies because if you don't,
you will be sanctioned by the Chinese Government. I think
companies are starting to get spooked.
Two, with respect to Huawei, Huawei made some pretty
significant threats against Nokia and Erickson, European
companies, but they basically said if Europe is going to ban
Huawei from--the EU is going to ban Huawei from its 5G
networks, then it's going to put restrictions on the exports of
Nokia and Erickson from China.
So now it's causing Nokia and Erickson to rethink their
operations----
Senator Sullivan. If I may, what should we be doing in
terms of government policy? This is mostly taking place in the
sphere of the private sector. What should we be doing? I mean,
there's one view that we should punish our own companies for
doing this. I think that might backfire.
What is the Government of the United States, the executive
branch, view that we should be doing to really in some ways
give these CEOs backbone not to comply with these demands that
we certainly--this goes to reciprocity. We certainly don't do
this to Chinese companies, but as government policy, what
should we be doing? I need a succinct answer.
Ms. Nikakhtar. Yes. This is exactly what I was getting at.
So if it's cheaper to operate in China, right, to compete with
China, then we've got to figure out how to give these companies
a financial boost so they cannot compete offshore to another
country.
Two, we have to amplify as the U.S. Government the risks of
doing business with China now. Given everything I said with the
Chinese threats to companies, the European companies and U.S.
companies, amplify the risks and give them a way to be cost
competitive if they leave China.
Thank you.
Senator Sullivan. Mr. Secretary, do you have a view on
that? It's a very----
Mr. Krach. Yes.
Senator Sullivan.--important topic. I'm sure you've seen it
both in your government position but also in the private
sector.
Mr. Krach. Yes. I would make three points. You've hit on
the really, really important issue and so when I hosted
Secretary Pompeo out at Silicon Valley for 4 days at the
beginning of the year, one of the things we did at dinner at my
home in San Francisco, I had like 36 of the top CEOs, said,
guys, you know, we say corporate responsibility, social
responsibility. It's also national security because this is a
real and urgent threat to democracy but it's a real and urgent
threat to your companies because they want to put you out of
business.
Now the elephant in the room is the retaliation and so it's
all about standing up to that bully with your friends behind
you and so if you think of the laws that we put in place in
terms of anticorruption, U.S. company, it's illegal to give a
bribe. By the way, we might think of some of the things that
we--where the U.S. companies need to be able to say to China I
can't do that. It's against our law because they will obey the
laws.
Senator Sullivan. So doing that and getting our allies to
do that would give us leverage globally over Chinese practices
that we certainly don't want to help promote but we want to
prohibit but if we do it with our allies, you think that's a
leverage point that could start to help on that?
Mr. Krach. It's huge, and this is also one where I might
recommend in terms of developing laws like this collaboration
with the private sector because they'll tell you because it's
got to be--you know, that's got to be crafted just right
because it is a big point.
The other thing we do have to do is we have to shine the
light on China, yes, but sometimes we have to shine the light
on ourselves.
Senator Sullivan. Yep.
Mr. Krach. And, I mean, if you look at what Chinese
companies on our American Stock Exchanges, these are the only
companies that don't obey Sarbanes-Oxley and can't get audited.
Honest to God, I was taking three companies public, it kind of
makes me mad, but that's not the point.
The point is it puts our American investors at risk and, by
the way, it also creates an unlevel playing field for our
companies because anybody, you know, in the business world
understands that financial strategy is a key part of your
competitive strategy and this allows them to misstate their
earnings, hide subsidized revenue, count things as perpetual
revenue versus not. Lucky Coffee is a great example. American
investors lost $300 million. So it gives the Chinese company a
competitive advantage.
The third thing is, is that it sacrifices the gold standard
of our American exchanges, and then the other thing, too, is
that the average American bond holder has financed the One Belt
One Way Road and, you know, the emerging index funds. It's all
buried in there and, by the way, that's why one of the things
that I wrote in an op-ed is that it is incumbent on U.S.
companies to disclose who are the financial institutions or who
are the Chinese companies they invest into, particularly state
pension funds, university endowments, mutual funds, and I think
shining that light in terms of disclosure is a great tool, just
like reciprocity is a great tool, just like enforcement is a
great tool.
So we should really use that to the full extent we can
because those concepts are just simple, right on, and easy to
understand.
Senator Sullivan. Well, listen, I want to thank you. I know
that there are a number of other Senators who will be
submitting questions for the record here, but I want to thank
both the witnesses. I think that, as I mentioned, this is the
important beginning of not only laying out the strategy but the
implementation and execution.
I believe it's very bipartisan if you saw from the number
of Senators, both sides of the aisle, focusing on many of the
same concepts, and to both of you, we're hoping that this
really starts to begin to establish a policy that can be
utilized and implemented for decades like the containment
policy against the Soviet Union that was well-regarded, well-
accepted, and continued throughout Administrations.
I think we're at the beginning of that moment in our
country's history, and I think this hearing is a helpful
beginning.
So with that, the record will remain open for two weeks for
this hearing. During this time, Senators may submit questions
for the record. Upon receipt, we respectfully ask witnesses to
submit their written answers as soon as they can back to this
committee but by no later than Friday, August 14.
I want to thank both of our witnesses again for appearing
here, for the good work you're doing, for educating the broader
American public on these challenges.
We have a lot of work to do, but I think we're finally
realizing the challenge and we're off to a good start.
With that, this hearing is adjourned.
[Whereupon, at 12:34 p.m., the hearing was adjourned.]
A P P E N D I X
[GRAPHIC(S) NOT AVAILABLE IN TIFF FORMAT]
Response to Written Questions Submitted by Hon. Edward Markey to
Hon. Michael Wessel
Question 1. The pandemic has highlighted shortcomings in U.S.
supply chain resiliency and demonstrated just how strong China's
control over supplies has become in some sectors. While there is
agreement on the need to address dependence on China for critical
supply chains, Beijing is working actively to counteract such efforts.
President Xi has said that protecting supply chains is one of China's
six national priorities in the wake of COVID-19. How have other
countries succeeded in diversifying and rehoming their supply chains?
Supply chain realignment is in its early stages and will be
challenging to achieve. The United States and other countries
are just beginning to formulate and implement supply chain
reshoring and diversification initiatives. It is too early to
assess which governments have been successful on this score.
Unfortunately, with supply chains in China, the outsourcing and
offshoring that has occurred is also a result of deeply-
embedded and supported industrial policies designed to promote
China's interests often at the expense of other countries.
While many of the dependencies have existed for some time, the
current pandemic has elevated attention on these issues in the
United States and in other nations.
Some governments are making concerted efforts to mitigate
supply chain risks. Although the intricacy of global supply
chains and China's outsized role in global production make
supply chain restructuring highly complex, some governments are
taking proactive steps toward this end:
a. Taiwan: The Taiwan government has accelerated efforts to reduce
the Taiwan economy's reliance on China. The urgency of this
pursuit has elevated in recent years against the backdrop
of U.S.-China trade frictions and the COVID-19 pandemic in
2020. In July 2019, Taipei launched ``Invest Taiwan,'' a
three-year program incentivizing Taiwan firms, particularly
those with manufacturing operations in the Mainland, to
increase their domestic investment through preferential
loan financing, land rental concessions, assistance in
ensuring stable water and electricity supplies, and other
perks.\1\ Taipei set a target for the initiative to
generate $45.7 billion in domestic private sector
investment and create 118,000 new jobs by December 31,
2021.\2\ Taiwan is on track to meet these targets ahead of
schedule, with $36.8 billion in investment already
generated and more than 90,000 new jobs created as of late
August 2020.\3\ Taiwan businesses returning from China have
underpinned this success, accounting for nearly three
quarters ($26.6 billion) of total investment and 71.2
percent (64,232) of new jobs created.\4\
---------------------------------------------------------------------------
\1\ Invest Taiwan, Three Major Programs for Investment in Taiwan
(Chinese language). Translation. https://investtaiwan.nat.gov.tw/
showPagecht1135?lang=cht&search=1135; Taiwan's Executive Yuan, Three
Major Programs for Investment in Taiwan--Government Encourages Taiwan
Firms to Invest at Home (Chinese language), April 23, 2020.
Translation. https://www.ey.gov.tw/Page/5A8A0CB5B41DA11E/af6d44ca-f3df-
467e-8538-b4213684bbf6.
\2\ Taiwan's Executive Yuan, Three Major Programs for Investment in
Taiwan--Government Encourages Taiwan Firms to Invest at Home (Chinese
language), April 23, 2020. Translation. https://www.ey.gov.tw/Page/
5A8A0CB5B41DA11E/af6d44ca-f3df-467e-8538-b4213684bbf6.
\3\ InvesTaiwan, Three Major Programs for Investment in Taiwan
(Chinese language). Translation. https://investtaiwan.nat.gov.tw/
showPagecht1135?lang=cht&search=1135.
\4\ Bryan Chuang, ``Taiwan Makers Invest Nearly NT$780 Billion
Domestically,'' DigiTimes, July 28, 2020. https://www.digitimes.com/
news/a20200728PD203.html.
b. Japan: As part of a stimulus package deployed in April to
contain the COVID-19 pandemic's economic fallout, Tokyo
earmarked $2.2 billion to subsidize manufacters' relocation
of production out of China and diversify supply chain
risks.\5\ So far, 57 companies have received a total of
$535 million to open new factories in Japan while another
30 companies have received $220 million to expand
production in Vietnam, Myanmar, Thailand, and other
Southeast Asian countries.\6\ Separately, the Japanese
government has recently initiated discussions with the
governments of India and Australia to establish a
trilateral supply chain resilience initiative.\7\ According
to a joint statement issued by the trade ministers of each
country, the initiative will focus on ``enhancing the
resilience of supply chains in the Indo-Pacific region''
and promoting a ``stable trade and investment
environment.'' \8\
---------------------------------------------------------------------------
\5\ Isabel Reynolds and Emi Urabe, ``Japan to Fund Firms to Shift
Production out of China,'' Bloomberg, April 8, 2020. https://
www.bloomberg.com/news/articles/2020-04-08/japan-to-fund-firms-to-
shift-production-out-of-china?sref=FlHD1WjR.
\6\ Hiroyuki Akiyama, ``Japan Companies Line Up for `China Exit'
Subsidies to Come Home,'' Nikkei Asian Review, September 9, 2020.
https://asia.nikkei.com/Economy/Japan-companies-line-up-for-China-exit-
subsidies-to-come-home; Simon Denyer, ``Japan Helps 87 Companies to
Break From China After Pandemic Exposed Overreliance,'' Washington
Post, July 21, 2020. https://www.washingtonpost.com/world/asia_pacific/
japan-helps-87-companies-to-exit-china-after-pandemic-exposed-
overreliance/2020/07/21/4889abd2-cb2f-11ea-99b0-8426e26d203b_story
.html
\7\ Pranab Dhal Samanta, ``India-Japan-Australia Supply Chain in
the Works to Counter China,'' Economic Times, August 19, 2020. https://
m.economictimes.com/news/economy/foreign-trade/india-japan-australia-
supply-chain-in-the-works-to-counter-china/amp_articleshow/
77624852.cms.
\8\ Japan's Ministry of Economy, Trade, and Industry, Australia-
India-Japan Economic Ministers' Joint Statement on Supply Chain
Resilience, September 1, 2020. https://www.meti.go.jp/press/2020/09/
20200901008/20200901008-1.pdf.
Companies are also restructuring their supply chains as
market conditions change. It is important to note that
companies themselves are already diverisyfing production and
supply lines away from China. Against the backdrop of NAFTA
renegotiations in 2017 and particularly the escalation of U.S.-
China trade frictions in 2018, multinational companies are
moving to regionalize production around key markets. In the
automotive sector, for example, production is increasingly
hubbed around Mexico to serve North American consumers; eastern
Europe and Morocco to serve European consumers; and Southeast
Asia and China for Asian consumers.\9\
---------------------------------------------------------------------------
\9\ Economist, ``Supply Chains for Different Industries Are
Fragmenting in Different Ways,'' July 11, 2019. https://
www.economist.com/special-report/2019/07/11/supply-chains-for-differ
ent-industries-are-fragmenting-in-different-ways.
The U.S. government is taking preliminary steps to bring
supply chains closer to home. In May 2020, the Trump
administration authorized the Development Finance Corporation
to execute loans using the Defense Production Act's Title III
authorities to shore up domestic production of strategic
resources needed to respond to the COVID-19 pandemic.\10\
Adminsitration officials are also reportedly considering
establishing a $25 billion ``reshoring fund'' to subsidize U.S.
companies' movement of manufacturing activity out of China.\11\
---------------------------------------------------------------------------
\10\ White House, ``EO on Delegating Authority Under the DPA to the
CEO of the U.S. International Development Finance Corporation to
Respond to the COVID-19 Outbreak,'' May 14, 2020. https://
www.whitehouse.gov/presidential-actions/eo-delegating-authority-dpa-
ceo-u-s-inter
national-development-finance-corporation-respond-covid-19-outbreak/.
\11\ Andrea Shalal, Alexandra Alper, and Patricia Zengerle, ``U.S.
Mulls Paying Companies, Tax Breaks to Pull Chains from China,''
Reuters, May 18, 2020. https://www.reuters.com/article/us-usa-china-
supply-chains/u-s-mulls-paying-companies-tax-breaks-to-pull-supply-
chains-from-china-idUSKBN22U0FH.
But U.S. companies continue their China sourcing strategies
for a variety of reasons. U.S. businesses' deep commitment to
the Chinese market may frustrate U.S. policy efforts to reshore
production. In its September 2020 China Business Report, for
example, the American Chamber of Commerce in Shanghai found
just 4 percent of U.S. member companies surveyed plan to shift
production to the United States.\12\ Instead, more than three
quarters of these firms plan to stay in China.\13\ While
reaching China's consumers is a factor, the Chinese Communist
Party continues to pursue policies that prefer domestic
production to serve the market, rather than having an open and
fair import climate. Companies continue to be pressed to
produce there if they want to sell there, based on a variety of
formal and informal policies. It is notable that 46 percent of
China's exports emanate from foreign-invested enterprises.\14\
China is still an export platform for many U.S. and
multinational firms.
---------------------------------------------------------------------------
\12\ Bruce Einhorn, ``U.S. Businesses in China Not Heeding Trump's
Call to Return Home,'' Bloomberg, September 9, 2020. https://
www.bloomberg.com/news/articles/2020-09-09/u-s-businesses-in-china-not-
heeding-trump-s-call-to-return-home?sref=FlHD1WjR.
\13\ AmCham Shanghai, ``AmCham Shanghai Releases 2020 China
Business Report,'' September 9, 2020. https://www.amcham-shanghai.org/
en/article/amcham-shanghai-releases-2020-china-business-report.
\14\ Mary E. Lovely, testimony before the U.S.-China Economic and
Security Review Commission, Hearing on Risks, Rewards, and Results:
U.S. Companies in China and Chinese Companies in the United States,
February 28, 2019. https://www.uscc.gov/sites/default/files/Mary%20
Lovely_Testimony.pdf.
Question 2. In your testimony, you lay out robust recommendations
for policymakers to address the challenges discussed at the hearing. In
your view, what are the most important steps that Congress can take in
---------------------------------------------------------------------------
the short term?
Address critical U.S. dependence on pharmaceuticals from
China. As I noted in my testimony to the Committee, 80 percent
of active pharmaceutical ingredients (APIs) in U.S.
pharmaceuticals--key inputs into finished drugs--are sourced
from abroad, and China is the world's leading source of APIs.
Critical medicines like penicillin and doxycycline contain APIs
that originate from China and are no longer produced in the
United States. We are dependent on China for many life-saving
and life-sustaining drugs. Indeed, our U.S. dependence on China
for certain pharmaceutical ingredients is directly related to
potential COVID-19 treatments. For example, of the active 10
ingredients in Remdisivir, one of the therapeutics reportedly
showing promise for treating COVID-19, eight come from
China.\15\ Congress can play an important role in assessing the
productive capacity of the U.S. pharmaceutical industry and
identifying the risks of U.S. dependence on Chinese
pharmaceuticals and active ingredients. Therefore, the
Commission recommended in 2019:
---------------------------------------------------------------------------
\15\ Mary Denigan-Macauley, written testimony for U.S. House of
Representatives Subcommittee on Oversight and Investigations, Committee
on Energy and Commerce, Hearing on Securing the U.S. Drug Supply Chain:
Oversight of FDA's Foreign Inspections Program, December 10, 2019, 1.
a. Congress hold hearings assessing the productive capacity of the
U.S. pharmaceutical industry, U.S. dependence on Chinese
pharmaceuticals and active pharmaceutical ingredients
(APIs), and the ability of the U.S. Food and Drug
Administration (FDA) to guarantee the safety of such
imports from China, with a view toward enacting legislation
---------------------------------------------------------------------------
that would:
i. Require the FDA to compile a list of all brand name and
generic drugs and corresponding APIs that: (1) are not
produced in the United States; (2) are deemed critical to
the health and safety of U.S. consumers; and (3) are
exclusively produced--or utilize APIs and ingredients
produced--in China.
ii. Require Medicare, Medicaid, the U.S. Department of Veterans
Affairs, the U.S. Department of Defense, and other
federally funded health systems to purchase their
pharmaceuticals only from U.S. production facilities or
from facilities that have been certified by the FDA to be
in compliance with U.S. health and safety standards and
that actively monitor, test, and assure the quality of the
APIs and other components used in their drugs, unless the
FDA finds the specific drug is unavailable in sufficient
quantities from other sources.
iii. Require the FDA, within six months, to investigate and
certify to Congress whether the Chinese pharmaceutical
industry is being regulated for safety, either by Chinese
authorities or the FDA, to substantially the same degree as
U.S. drug manufacturers and, if the FDA cannot so certify,
forward to Congress a plan for protecting the American
people from unsafe or contaminated drugs manufactured in
China.
Bring listing standards for Chinese companies in line with
those applied to U.S. companies. The Commision has longstanding
concerns about how Chinese companies use U.S. exchanges to
raise capital in significant amounts, which affords them
additional advantages that U.S. companies do not enjoy. In our
first hearing of this year's annual report cycle, expert
witnesses were unanimous in underscoring that existing U.S. law
enabling the delisting of Chinese issuers noncompliant with
U.S. accounting standards must be upheld and better enforced.
The lack of disclosure, oversight, and enforceability in
listing of Chinese companies on U.S. stock exchanges opens the
door to adverse activities such as insider trading and
accounting fraud, among other things.* Such issues
remain present in U.S. capital markets in 2020, as evidenced by
revelations of accounting fraud at Chinese headquartered and
formerly Nasdaq listed Luckin Coffee.\16\ Congress must act to
ensure compliance with U.S. listing standards and protect the
integrity of U.S. capital markets. To this end, in 2019, the
Commission recommended:
---------------------------------------------------------------------------
\*\ For a comprehensive introduction to U.S. regulatory concerns
regarding insufficient oversight of U.S.-listed Chinese companies, see
Jay Clayton et al, ``Emerging Market Investments Entail Significant
Disclosure, Financial Reporting and Other Risks; Remedies are
Limited,'' U.S. Securities and Exchange Commission, April 21, 2020.
https://www.sec.gov/news/public-statement/emerging-market-investments-
disclosure-reporting.
\16\ Luckin Coffee, ``Luckin Coffee Announces Formation of
Independent Special Committee and Provides Certain Information Related
to Ongoing Internal Investigation,'' April 2, 2020. https://
investor.luckincoffee.com/news-releases/news-release-details/luckin-
coffee-announces-formation-independent-special-committee.
a. Congress enact legislation to preclude Chinese companies from
---------------------------------------------------------------------------
issuing securities on U.S. stock exchanges if:
i. The Public Company Accounting Oversight Board is denied
timely access to the audit work papers relating to the
company's operations in China;
ii. The company disclosure procedures are not consistent with
best practices on U.S. and European exchanges;
iii. The company utilizes a variable interest entity (VIE)
structure;
iv. The company does not comply with Regulation Fair Disclosure,
which requires material information to be released to all
investors at the same time.
Strengthen our ability to analyze U.S.-China economic
relations. The development of approaches to preserve and
protect U.S. economic competitiveness will necessitate more
granular data on the profile of U.S.-China economic relations.
As I noted in my testimony, there are many questions concerning
the scope and scale of U.S. multinational firms' business in
China that are left unanswered by data aggregated by the U.S.
Department of Commerce. Enhanced collection of data on U.S.-
China commercial ties will enable the United States to more
readily assess supply chain vulnerabilities with respect to
China and determine where we should prioritize our efforts to
strengthen economic resilience. The Commisson thus recommended
in 2019:
a. Congress enact legislation requiring the collection of data on
U.S.-China economic relations. This legislation would:
i. Direct U.S. economic statistics-producing agencies, including
the U.S. Census Bureau, the U.S. Department of Commerce's
Bureau of Economic Analysis, and the U.S. International
Trade Commission, to review methodologies for collecting
and publishing not only gross trade flows data, but also
detailed supply chain data to better document the country
of origin for components of each imported good before it
reaches U.S. consumers.
ii. Direct the U.S. Census Bureau to restart data releases in
its Current Industrial Reports at the ten-digit industry
level.
iii. Direct the U.S. Department of the Treasury to coordinate
with the U.S. Census Bureau to match U.S. firm-level data
with their U.S. employees' data.
Question 3. Has the Trump administration done enough to work with
partners and allies to build a coalition to oppose China's increasing
power at international institutions, particularly when it comes to
technology and business interests?
Coordination with allies and partners is key to responding
to China's undue influence in international organizations. This
issue has not been given adequate attention. Disunity among the
United States and its European allies amid the election of the
Food and Agriculture Organization director-general in June 2019
enabled Beijing to split the vote and allow its preferred
candidate, Qu Dongyu, to secure 108 out of 191 votes from the
organization's 194 member countries.\17\ Contrastingly, ahead
of the March 2020 election of the director-general for the
World Intellectual Property Organization, the United States
coordinated its vote with key allies such as the United
Kingdom, Japan, and Australia to ensure Daren Tang, the Chief
Executive of the Intellectual Property Office of Singapore, won
the election.\18\ Such coordination must be sustained, as
Chinese officials currently hold leadership positions in four
out of 15 UN specialized agencies, far more than those from any
other country (see Table 1).
---------------------------------------------------------------------------
\17\ Colum Lynch and Robbie Gramer, ``Outfoxed and Outgunned: How
China Routed the U.S. in a UN Agency,'' Foreign Policy, October 23,
2019. https://foreignpolicy.com/2019/10/23/china-united-states-fao-
kevin-moley/.
\18\ David Ignatius, ``Trump's Pushback Against China Pays Off with
an Important Win,'' Washington Post, March 10, 2020. https://
www.washingtonpost.com/opinions/global-opinions/us-dip
lomats-scored-a-quiet-but-important-win-against-china/2020/03/10/
64dd0fdc-62fb-11ea-845d-e35b0234b136_story.html.
Table 1: UN Special Agency Leadership
------------------------------------------------------------------------
Leadership
Organization Nationality Next Election
------------------------------------------------------------------------
Food and Agriculture Organization Chinese Jun. 2023
------------------------------------------------------------------------
International Civil Aviation Chinese Oct. 2022
Organization
------------------------------------------------------------------------
International Fund for Togolese Feb. 2021
Agricultural Development
------------------------------------------------------------------------
International Labour Organization British Nov. 2021
------------------------------------------------------------------------
International Maritime South Korean Nov. 2022
Organization
------------------------------------------------------------------------
International Monetary Fund Bulgarian Nov. 2022
------------------------------------------------------------------------
International Telecommunications Chinese Nov. 2022
Union
------------------------------------------------------------------------
United Nations Educational, French Oct. 2021
Scientific and Cultural
Organization
------------------------------------------------------------------------
United Nations Industrial Chinese Nov. 2021
Development Organization
------------------------------------------------------------------------
Universal Postal Union Kenyan 2020-TBD
------------------------------------------------------------------------
World Bank Group U.S. Apr. 2024
------------------------------------------------------------------------
World Health Organization Ethiopian May 2022
------------------------------------------------------------------------
World Intellectual Property Singaporean May 2026
Organization
------------------------------------------------------------------------
World Meteorological Organization Finnish Dec. 2023
------------------------------------------------------------------------
World Tourism Organization Georgian Dec. 2021
------------------------------------------------------------------------
Source: Various.\19\
---------------------------------------------------------------------------
\19\ World Intellectual Property Organization, ``Daren Tang of
Singapore Appointed as WIPO Director General,'' May 8, 2020. https://
www.wipo.int/pressroom/en/articles/2020/article_00
11.html; Bishar A. Hussein, ``Postponement of 27th UPU Congress,
Abidjan,'' April 20, 2020. http://www.upu.int/uploads/tx_sbdownloader/
circularLetterPostponementOf27ThUpuCongress
AbidjanEn.pdf; World Bank Group, ``David R. Malpass, 13th President of
the World Bank Group,''2020. https://www.worldbank.org/en/about/people/
d/david-malpass; World Meteorological Organization, ``Petteri Taalas
Secretary-General,'' 2020. https://public.wmo.int/en/about-us/
secretariat/petteri-taalas; International Civil Aviation Organization,
``ICAO Assembly Elects New Council for Three-Year Term,'' October 1,
2019. https://www.icao.int/Newsroom/Pages/ICAO-Assembly-elects-new-
Council-for-three-year-term-A40.aspx; International Monetary Fund,
``Kristalina Georgieva,'' October 1, 2019. https://www.imf.org/en/
About/senior-officials/Bios/kristalina-georgieva; Food and Agriculture
Organization, ``Candidates for the Post of FAO Director-General
Announced,'' March 4, 2019. http://www.fao.org/news/story/en/item/1183
644/icode/; Julian Bray, ``Kitack Lim Wins Re-Election to Lead IMO amid
Regulatory Upheaval,'' TradeWinds November 22, 2018. https://
www.tradewindsnews.com/legal/kitack-lim-wins-re-election-to-lead-imo-
amid-regulatory-upheaval/2-1-483743; International Telecommunications
Union, ``Secretary-General,'' November 1, 2018. https://www.itu.int/
web/pp-18/en/home/electionResult; UN World Tourism Organization, ``New
Year Message by UNWTO Secretary-General, Zurab Pololikashvili,''
January 5, 2018. https://www.unwto.org/global/press-release/2018-01-05/
new-year-message-unwto-secretary-general-zurab-pololikashvili; UN
International Development Organization, ``Director General Re-Appointed
for Second Term as 17th UNIDO General Conference Opens,'' November 27,
2017. https://www.unido.org/news/director-general-re-appointed-second-
term-17th-unido-general-conference-opens; World Health Organization,
``World Health Assembly Elects Dr Tedros Adhanom Ghebreyesus as New WHO
Director-General,'' May 23, 2017. https://www.who.int/news-room/detail/
23-05-2017-world-health-assembly-elects-dr-tedros-adhanom-ghebreyesus-
as-new-who-director-general; International Labour Organization, ``Guy
Ryder Re-elected as ILO Director-General for a Second Term,'' November
7, 2016. https://www.ilo.org/global/about-the-ilo/newsroom/news/
WCMS_534283/lang--en/index.htm; Post and Parcel, ``Kenya's Bishar
Hussein Elected As New UPU Director General,'' October 10, 2012.
https://postandparcel.info/51121/news/breaking-news-kenyas-bishar-
hussein-elected-as-new-upu-director-general/; International Fund for
Agricultural Development, ``IFAD Governing Council to Elect President
for Next Four Years,'' September 24, 2012. https://www.ifad.org/en/web/
latest/news-detail/asset/39069474; UN Education, Scientific, and
Cultural Organization, ``Director-General, Audrey Azoulay.'' https://
en.unesco.org/director-general.
The Chinese government seeks to bring the UN system in line
with its preferences. Beijing's expanding leadership in
international organizations and subsequent accumulation of
geopolitical and economic influence threatens U.S. interests.
Beijing increasingly exploits this influence within UN
organizations to advance its political objectives, including
promotion of Chinese companies and technical standards and
marginalization of Taiwan.*
---------------------------------------------------------------------------
\*\ For example, in early 2020 Beijing exerted pressure on both the
World Health Organization and International Civil Aviation Organization
to suppress information about the novel coronavirus outbreak within
China's borders and marginalize Taiwan from international coordination
and global pandemic response. Anastasya Lloyd-Damnjanovic, ``Beijing's
Deadly Game: Consequences of Excluding Taiwan from the World Health
Organization during the COVID-19 Pandemic,'' U.S.-China Economic and
Security Review Commission, May 12, 2020, 1.
Question 4. What steps can the United States take to reassert U.S.
influence, particularly in bodies that directly impact American
businesses like the International Telecommunication Union (ITU) which
---------------------------------------------------------------------------
sets standards for communications technologies worldwide?
The United States needs to first show up to reassert its
influence. In the United States and in international standards-
making bodies, technical standards are developed in response to
commercial need and adopted by consensus. In contrast, Beijing
uses standards as a policy tool to elevate its technological
leadership. Beijing has been especially
active in international standards setting for technologies that
will support application of artificial intellifence, such as
the Internet of Things and 5G. Tactics deployed include placing
Chinese nationals or companies in leadership positions within
standards-setting bodies focused on connected technologies and
coordinating between firms to ensure their participation in
international processes is unified.\20\ This enables Beijing to
influence international norms to China's strategic and economic
advantage.\21\
---------------------------------------------------------------------------
\\ The Chinese government is expanding its presence in
international standards-setting bodies to increase the adoption of
Chinese technology abroad and shape how emerging technologies are
deployed. China now leads 64 out of roughly 750 technical committees
and subcommittees in the International Standards Organization, compared
to 104 for the United States, and 11 out of 196 technical committees
and subcommittees in the International Electrotechnical Commission,
compared to 26 for the United States. As the Chinese government's
prominence in such standard-setting bodies rises, it is able to
undermine U.S. technological leadership. Adam Segal, written testimony
for U.S.-China Economic and Security Review Commission, Hearing on A
``China Model?'' Beijing's Promotion of Alternative Global Norms and
Standards, March 13, 2020, 4-5.Cui Gang, ``Press Briefing on the
Results of China's Standardization Reform and Development (Chinese
language here),'' State Council Information Office, September 11, 2019.
Translation. http://www.scio.gov.cn/xwfbh/xwbfbh/wqfbh/39595/41645/
zy41649/Document/1664162/1664162.htm; Eric Thun and Timothy Sturgeon,
``When Global Technology Meets Local Standards: Reassessing China's
Communications Policy in the Age of Platform Innovation,'' in Loren
Brandt and Thomas G. Rawski, eds., Policy Regulation and Innovation and
China's Electricity and Telecom Industries, Cambridge University Press,
2019, 184-189, 207.
\20\ John Chen et al., ``China's Internet of Things,'' SOSi Special
Programs Division (prepared for the U.S.-China Economic and Security
Review Commission), October 25, 2018, 69-81.)
\21\ U.S.-China Economic and Security Review Commission, Hearing on
Technology, Trade and Military-Civil Fusion, written testimony of
Jeffrey Ding, June 7, 2019, 6-7.
U.S. engagement in standards-setting needs to be both broad,
but also targeted. In order to determine where the United
States should prioritize engagement, policymakers must first
determine where Beijing's influence is most pervasive and
harmful to U.S. interests. To this end, in 2019, the Commission
---------------------------------------------------------------------------
recommended:
Congress direct the National Science Foundation, in
coordination with other agencies, to conduct a study on the
impact of the activities of Chinese government, state-
sponsored organizations, or entities affiliated or
supported by the state in international bodies engaged in
developing and setting standards for emerging technologies.
The study should examine whether standards are being
designed to promote Chinese government interests to the
exclusion of other participants.
U.S. participation in the global standards-setting process
must be sustained and appropriately funded. In our third
hearing of this year's annual report cycle, expert witnesses
underscored that the U.S. government should attach more
importance to its participation in international standards
setting processes moving forward. For example, Naomi Wilson,
Senior Director for Policy, Asia at the U.S. Information
Technology Industry Council, recommended the U.S. government
establish consistent standards participation as a U.S. priority
related to maintaining U.S. technological competitiveness and
innovation.\22\ Ms. Wilson also recommended ensuring multi-year
funding lines for U.S. government staff to participate in
standards bodies and streamline processes for their sustained
participation.\23\
---------------------------------------------------------------------------
\22\ Naomi Wilson, written testimony for U.S.-China Economic and
Security Review Commission, Hearing on A ``China Model?'' Beijing's
Promotion of Alternative Global Norms and Standards, March 13, 2020, 8.
\23\ Naomi Wilson, written testimony for U.S.-China Economic and
Security Review Commission, Hearing on A ``China Model?'' Beijing's
Promotion of Alternative Global Norms and Standards, March 13, 2020, 8.
---------------------------------------------------------------------------
______
Response to Written Questions Submitted by Hon. Edward Markey to
Dr. Rush Doshi
Question 1. The pandemic has highlighted shortcomings in U.S.
supply chain resiliency and demonstrated just how strong China's
control over supplies has become in some sectors. While there is
agreement on the need to address dependence on China for critical
supply chains, Beijing is working actively to counteract such efforts.
President Xi has said that protecting supply chains is one of China's
six national priorities in the wake of COVID-19. How have other
countries succeeded in diversifying and rehoming their supply chains?
Answer. A number of countries have sought to ``reshore''
manufacturing currently in China or to diversify supply chains to
markets outside China. Japan has subsidized exit from China for eighty-
seven companies, expending $2 billion on efforts to bring production
back to Japan or to diversify it into Southeast Asia. Similar
discussions are underway in the EU as well, with top officials
discussing the possibility of reshoring or diversification of some
critical industries. And of course, the United States is also
considering a variety of instruments to promote reshoring and supply
chain diversification, including through low-interest loans, corporate
tax cuts, a dedicated fund, and proposals to pay 100 percent of a
company's reshoring expenses.
Most of these efforts at reshoring undertaken by other leading
economies have not had great success yet. China retains significant
advantages in manufacturing and continues to function as the world's
workshop. Moreover, its large domestic economy means that many firms
will retain capacity there for China's domestic market, even as they
consider duplicating supply chains outside of China to serve foreign
markets.
Taiwan has attempted a fairly ambitions program of reshoring that
has met with mixed success, but more than other economies. Taiwan's
effort to develop a ``non-red supply chain'' offers the outlines of an
approach the United States could adopt. To lure manufacturers back from
China, Taiwan used a wide range of policy instruments that went far
beyond tax credits and subsidies, relying on measures like rent
assistance, cheap finance, land acquisition, and simplified provisions
on reinvestment, among others. The effort self-consciously addressed
what Taiwan calls its ``five shortages'': land, water, power, manpower,
and talent to entice companies to return. Most critically, the
initiative was housed in a dedicated office serving as a ``one-stop
shop'' for manufacturers considering reshoring. The United States could
create a similar single point of contact for its manufacturers to
proactively work with businesses and to address a wide range of
concerns beyond questions of credits and subsidies.
Question 2. In your testimony, you lay out robust recommendations
for policymakers to address the challenges discussed at the hearing. In
your view, what are the most important steps that Congress can take in
the short term?
Answer. In the short term, there is much Congress could do
immediately that does not require creating new government agencies or
capacities. A technology ecosystem requires skilled workers and human
capital as much as it does financial capital. The United States could
increase funding for basic science research, ideally doubling it from
.6 percent of GDP to something closer to 1.2 percent, though this would
still remain below China's levels. In immigration, Congress could also
(1) raise the cap on H1-B visas; (2) automatically grant green cards
(exempt from green card caps) to postgraduate degree holders,
particularly in STEM; and (3) emulate Canada's dedicated post-
graduation employment visa for international students. Foreign students
flows to the United States have fallen in light of the coronavirus
pandemic and visa restrictions. If the United States is to remain at
the technological frontier, it needs to plan now to attract those
students once more after the pandemic abates.
Other recommendations in the testimony are also critically
important, but because they involve creating new administrative
capacity in some cases, they are more complex and less immediately
implementable, and therefore may not qualify as ``short-term.''
International Institutions. I am concerned that the United States
has fallen sorely behind in terms of our engagement at international
institutions, and with our allies, in support of our own interests. For
instance, the decision to withdraw from the World Health Organization
will leave the United States out of important public health decisions,
such as the development of the seasonal flu vaccine, and hand China an
even greater opportunity for influence.
Question 1. Has the Trump administration done enough to work with
partners and allies to build a coalition to oppose China's increasing
power at international institutions, particularly when it comes to
technology and business interests?
Answer. I do not believe that the Trump administration has done
enough to work with allies and partners to build a coalition to
counteract China's increasing influence in international institutions.
Four of fifteen UN special agencies are led by Chinese nationals, and
no other country approaches this number. Some officials--like former
undersecretary general for the UN Department of Economic and Social
Affairs Wu Hongbo--have been explicit that they see themselves not
primarily as international civil servants but more specifically as
Chinese civil servants advancing Chinese interests.
The U.S. agenda on international institutions is broad, but it is
unique as an area of competition in that the United States need not
invest enormous sums to be competitive. An agenda for the future should
involve ratifying UNCLOS, contesting elections for leadership of key
bodies (as the Trump administration did for the World Intellectual
Property Organization), refusing to cede institutions to China (as the
Trump administration did with its withdrawal from the UN Human Rights
Council and World Health Organization), and paying attention to the
composition of senior management at a given institution. We cannot
exercise influence if we do not show up. This is doubly true for
standard setting bodies and other UN agencies that focus on technology,
business, or development where there are important implications for
U.S. companies and workers.
Question 2. What steps can the United States take to reassert U.S.
influence, particularly in bodies that directly impact American
businesses like the International Telecommunication Union (ITU) which
sets standards for communications technologies worldwide?
Answer. First, in standard setting bodies that involve states, the
United States needs to engage them more vigorously, pay attention to
the politics of their membership, consult closely with business--and,
critically, ensure the United States government has offices with the
capability and institutional memory to engage them effectively over the
long term.
Second, in bodies that primarily involve companies, the United
States cannot be a bystander and leave decisions entirely up to
industry. Instead, as China does, it should take efforts to work with
U.S. industry and companies in allied and partner states, play a role
in coordination among them, keep informed of the activities of Chinese
companies within these bodies, and consider the implications of
standards for security as well as the health of the industrial base.
Not all standards will require U.S. government intervention, though
others might. Knowing the difference is not possible without greater
U.S. capacity and attention.
Third, the United States should build democratic and allied
technology coordination bodies that can collectively exert pressure and
influence on other standard setting bodies when necessary. A ``D10'' or
``D11'' as some have proposed would do this. While some fear that such
ad hoc coalitions would fragment technology standards, these bodies
need not adopt contradictory standards but simply threaten to do so in
cases where standards evolve in ways unfavorable to democratic values
or allied interests. The credible threat of exit can exert pressure.
Moreover, when necessary, coordination prior to exit from another
process can actually minimize fragmentation.
______
Response to Written Questions Submitted by Hon. Dan Sullivan to
Hon. Keith Krach
For us to compete effectively, we have to have good people on the
ground who can advance our economic and commercial partnerships. That's
certainly true in every region, but especially in the Indo-Pacific.
There have been calls for shifting more U.S. government personnel to
the Indo-Pacific region, and that would include Econ Officers at the
Department of State and Foreign Commercial Service officers--something
I've looked at as Co-Chair of the Senate Foreign Service Caucus and an
issue that was and addressed in SFRC Chairman Risch's recently
introduced STRATEGIC Act.
Question 1. What are both the Departments of State and Commerce
doing to ensure that your personnel footprint matches the strategic
importance of the Indo-Pacific region?
Answer.
1. More than anything else we must lead while we amplifying American
values.
2. At State, we are shifting more personnel into that region from a
few other ones
3. Bringing in more Econ officers.
4. Significantly increasing the level of partnership, communication,
planning and leveraging strengths between State and Commerce.
We set a goal a year ago to make the level of partnership
between State and Commerce so tight that it would serve as the
role model of teamwork in the interagency. So far, I'm pleased
with the progress. Here is an example:
5. I launched with my partner Commerce Acting Under Secretary Joe
Semsar the first DC Central Deal Team on February 18 at the
State Department. The DC Central Deal Team is tracking,
promoting, and marshaling government support, to secure new
business opportunities for U.S. companies in key economic
sectors abroad. While U.S. government agencies have unique
mandates, I believe the whole is greater than the sum of its
parts and all the agencies share the common goal of
accelerating economic growth that is key to economic security.
The DC Central Deal Team is a new and proactive multi-agency
initiative. It will advance U.S. strategic economic interests
by: facilitating and identifying new business opportunities for
U.S. companies abroad; proactively supporting U.S. companies
competing for contracts; developing a common methodology and
sharing best practices for Embassy Deal Teams; ensuring
integration of the multiple programs at various U.S. government
agencies and financial entities to support U.S. companies
abroad. DC Central and Embassy Deal Teams are an important part
of establishing a level playing field for U.S. businesses and
taking economic statecraft to the next level. The agencies
represented in the DC Central Deal Team (DCC) include the
Departments of Agriculture, Commerce, Energy, State,
Transportation, and Treasury; the United States Agency for
International Development (USAID), the U.S. Trade and
Development Agency (USTDA), the Export-Import Bank of the
United States (EXIM), the U.S. International Development
Finance Corporation (DFC), and the Millennium Challenge
Corporation (MCC).
President Trump has identified advancing a free and open Indo-
Pacific region as a top priority, and United States prosperity and
security are inextricably linked to its future development and
progress. The Department is optimizing its diplomatic presence and
programmatic engagement in the region to: ensure the freedom of the
seas and skies; insulate sovereign states from the coercion, cooption,
and control of authoritarian nations; promote market-based economies,
open investment environments, reciprocal trade, clean technology
systems, and clean infrastructure; and support good governance and
respect for human rights. The Department recently concluded a global
review of strategic priorities and associated resource needs and, as a
result, expects to internally realign a considerable number of
positions to the region. The Department of State is working in close
coordination with the Department of Commerce to advance economic
interests in the Indo-Pacific.
Question 2. What more needs to be done?
Answer. Three critical things:
1. Leverage even more the innovation and resources of the private
sector, taking our partnership to the next level.
2. Further strengthen our relationships with our allies and
partners.
3. Build a trusted network of partners comprised of many like-minded
countries, companies, and civil society that operates under a
set of trust standards for all areas of economic collaboration.
In the Department's recent global review of strategic priorities
and associated resources, we identified the need to internally realign
positions to the Indo-Pacific region. We may request additional
resources to keep pace with strategic competitors in this critical
region, including the President's $105 million FY 2022 request for
regional programs. The Department is bolstering our efforts in the
region, increasing our diplomatic engagement, amplifying our messaging,
promoting the Clean Network, and expanding our programming. For
instance, our economic diplomacy is promoting opportunities for U.S.
firms to enter and compete in clean infrastructure projects through the
Blue Dot Network and improving investment climates to facilitate free,
fair, and reciprocal trade.
Question 3. Do your Departments need any flexibility to make these
shifts? How can Congress be helpful in that regard?
Answer. Yes, thank you for asking.
1. The Department is grateful for the funding Congress has provided
us. In order to have the greatest impact with these funds
however, it is important that the funds have flexibility on how
and where they can be spent. Conditions change on the ground
extremely fast. The most important competitive weapon is speed.
Statutorily directed spending extremely limits our degrees of
freedom to direct funding to skillful use and slows us down in
deploying it. My recommendation is that you dramatically reduce
earmarks for funds dedicated to combat China's economic
aggression. We know what to do with these resources. The
current restrictions are a constant frustration for us and
impede our ability to get the job done.
2. In addition to speed, we need to be proactive on the ground. We
need to free up the time to do that. Congressionally mandated
reports are a big time consumer. My recommendation is that we
double down on efforts to combine reports or eliminate those
that no longer make sense, freeing up time for our economic
officers to conduct economic diplomacy in the field.
3. We continue to explore ways to further increase our linkages with
the private sector. I have run an experiment by bringing in 12
senior advisors from the private sector Silicon Valley and
teamed each one of them up with career officers. It is
synergistic and magical.
Department leadership continually evaluates priorities and resource
needs to determine where tradeoffs must be made to meet our strategic
objectives, including in the Indo-Pacific region. Congress can support
the Department's regional objectives by reinforcing with foreign
governments, the private sector, and civil society our key goals there:
preventing China from expanding its surveillance state and establishing
regional hegemony; addressing the Democratic People's Republic of
Korea's illicit nuclear and ballistic missile programs; and assisting
our partner countries on their journeys to self-reliance. In addition,
reducing statutorily directed spending and providing additional
discretionary funding, as we are provided with in the Countering
Chinese Influence Fund, is a useful mechanism that allows us to bolster
our programs and is something Congress could consider using elsewhere.
China is rolling out a network of corporate social credit systems.
In 2018, the Civil Aviation Administration of China pressured multiple
international airlines to change their websites' descriptions of
Taiwan, threatening to lower their social credit records if they
didn't. This issue is a major focus in the STRATEGIC Act introduced by
Chairman Risch last week, and it's important to both the Foreign
Relations Committee and this Committee.
Question 4. What are the U.S. government's views on the corporate
social credit system?
Answer.
1. This is a great question because the implications are enormous.
The corporate social credit system also allows the CCP to
reward behavior that they want to see. So, for companies they
use it as a carrot and a stick.
2. There are two choices for companies, treat the symptom by having
companies game the system or attack the problem. This is the
aim of the Clean Network.
3. The Clean Network is the U.S. State Department's comprehensive
effort to address the long-term threat to data privacy,
security, human rights, and trusted collaboration posed to the
free world from authoritarian malign actors, such as the CCP.
The Clean Network is rooted in internationally accepted digital
trust standards and reflects our commitment to an open,
interoperable, reliable, and secure global Internet based on
shared democratic values and respect for human rights. This
effort represents the execution of a multi-year, enduring
strategy built on a coalition of trusted partners.
The Chinese Communist Party (CCP) has explicitly described the
corporate social credit system as a tool for ``enhancing China's soft
power and international influence,'' and is another example of the
willingness of the People's Republic of China to weaponize its economic
leverage to coerce countries and companies to toe Beijing's political
line. Just as the individual social credit system is intended to
increase CCP control over all aspects of PRC citizens' lives, the
corporate social credit system seeks to control the behavior of
companies that do business in or with China. We oppose CCP efforts to
extend its influence through intimidation and retaliation. That is why
we are encouraging companies to join the Clean Network, which is
intended to keep their critical technology systems and supply chains
free from the control of malign actors, including the CCP.
Question 5. How is it affecting U.S. companies?
Answer.
1. Though the corporate social credit system remains in a pilot
phase, over 30 million entities already have been enrolled in
this system.
2. Once fully active, businesses with low corporate social credit
scores may be subject to more frequent audits and inspections
and may face exclusion from public procurement opportunities
and commercial incentive programs.
3. Several behaviors, ranging from tax fraud and sustained
noncompliance with environmental regulations to spreading false
information online, can result in a company's inclusion on a
blacklist.
4. Inclusion on the blacklist would effectively prevent a firm from
doing business in or with PRC firms. This is a prime example of
the CCP's strategy of seduce with money and reinforce with
intimidation and retaliation.
Question 6. What role do you think the U.S. government should be
playing when it comes to the Chinese government putting pressure on
U.S. companies to comply with this system?
Answer.
1. The U.S. government will continue using diplomatic and commercial
engagement to ensure U.S. companies enjoy fair treatment, a
level playing field, and reciprocal market access.
2. We will continue our work to build a Clean Network of companies
and countries that are free from the influence or control of
authoritarian malign actors, such as the Chinese Communist
Party.
3. To turn the tide, on April 29, 2020, Secretary Pompeo announced
that, as part of the 2019 National Defense Authorization Act,
the State Department will require a Clean Path for all
standalone 5G network traffic entering and exiting U.S.
diplomatic facilities at home and abroad. Last month, he
announced the expansion of the Clean Network to include Clean
Carrier, Clean Store, Clean Apps, Clean Cloud, and Clean Cable.
4. Momentum for the Clean Network initiative is accelerating. The
United States calls on our allies and partners in government
and industry around the world to join the growing tide to
secure our data from the CCP's surveillance state and China's
Great Firewall.
5. By building a coalition of partners, we will enhance efforts to
protect our citizens' data and our freedoms. The Clean Network
protects national security and preserves the open global
Internet. It maximizes connectivity without the risks from
untrusted vendors, counters the CCP's balkanization of apps
while safeguarding user data privacy, and takes down the CCP's
Great Firewall inside the U.S. that is censoring Americans'
free speech.
6. The network will provide strength in numbers to help all parties
overcome the threat of CCP retaliation or intimidation.
In May, the White House published the U.S. Strategic Approach to
the People's Republic of China announcing a multi-faceted posture
towards China on several fronts. For the economic aspect, this strategy
document announced a whole-of-government approach to support fair
trade, advance U.S. competitiveness, promote U.S. exports, and break
down unjust barriers. Part of accomplishing this, is the creation of an
Economic Security Strategy, which, in my opinion, is long overdue.
Question 7. In crafting our Economic Security Strategy, how do you
view the security risk that is posed by China's ownership of over $1
trillion in American debt?
Answer.
1. People's Republic of China (PRC) ownership of U.S. debt, by
itself, does not pose a security risk. Countries hold U.S. debt
due to the soundness of the U.S. economy and the liquidity of
our debt instruments.
2. While the PRC owns a large amount debt in absolute terms, it only
owns approximately 15 percent of the U.S. debt held by
foreigners, five percent of U.S. debt held by the public, and
four percent of total U.S. debt outstanding.
3. Nonetheless, we should be prepared to ensure that the CCP does
not use this debt as an attempt to gain any sort of undue
leverage over the United States, including considering all
appropriate preemptive moves that signal we are serious about
protecting our financial markets and demanding a level playing
field as described in the question below.
Question 8. By calling in our loans, is China able to use this
credit as a pressure point for economic leverage over the United
States?
Answer. No, because the United States dollar is the world's reserve
and settlement currency. There is ample demand for U.S. assets both
domestically and internationally to limit the consequences to the
United States of a PRC divestiture, and the United States is capable of
managing any short-term market disruption. Moreover, the PRC stands to
lose economically if it attempts to use this credit as a pressure
point. Divesting a portion of its holdings of U.S. debt would depress
the value of its remaining U.S. debt. If the PRC were to sell off all
its holdings of U.S. debt at the same time, the resulting market
disruption would likely damage the PRC's own economy and reduce the
value of the People's Bank of China's foreign reserves.
In addition, due to the United States' and the U.S. dollar's
central roles in the global financial system, we have far more leverage
than they do. Therefore, we can insist that PRC firms abide by the same
standards of transparency that are required for U.S. companies in order
to access U.S. financial markets. We need to do much more to safeguard
our financial systems from the PRC's national securities laws designed
to withhold critical audit papers for accounting oversight purposes in
order to protect our citizens investments and create a level playing
field for our companies. The President's Working Group of Financial
Markets does not go into effect until 2022. In the meantime, I sent a
letter to all U.S. CEOs and then another one to all the Governing
Boards of American Universities and Colleges making them aware the
risks associated with investing Chinese companies' stocks and emerging
market index funds.
______
Response to Written Questions Submitted by Hon. Rick Scott to
Hon. Keith Krach
Under Secretary Krach, we have seen Communist China employ an array
of unfair business practices, like luring U.S. companies to the
mainland China to force technology transfers. Some of these same U.S.
companies operating in Communist China fear retribution from the
government of they speak up against these practices.
Question 1. Do you believe that our focus on short-term prosperity
in dealing with Communist China has severely impacted the United
States' long-term economic success?
Answer.
1. Absolutely. The 800-pound elephant in the room is PRC retaliation
for companies as well as countries.
2. The CCP's doctrine is seduce with money and reinforce with
intimidation and retaliation. The CCP is a bully. Bullies back
down when they're confronted. They really back down when
they're confronted with your friends by your side.
3. The Department continues to expand coordination and joint efforts
with allies and partners. There is strength in numbers, and
power in solidarity and unity.
4. This is the beauty of the Clean Network comprised of like-minded
countries and companies. The CCP can't retaliate against all of
us at once. Their strategy has been to divide and conquer.
As Secretary Pompeo recently noted, the United States for years
allowed the PRC to engage in unfair business practices and exploit our
country. It's time to see the PRC as it is, not as we wish it to be.
This Administration has prioritized a global strategy that aims to both
protect our national and economic security interests and ensure U.S.
long-term economic success. We are strengthening U.S. economic
competitiveness in key emerging technologies. We are protecting our
firms and workers from unfair competition, rampant intellectual
property theft, forced technology transfer, and infiltration from the
CCP's surveillance state. And we are building networks of trusted
partners--democracies and the private sector--to push back against
unfair practices, and through the Clean Network, to ensure that our
supply chains do not wittingly or unwittingly support PRC human rights
violations and abuses.
Under Secretary Krach, earlier this month you sent a letter to U.S.
business leaders bringing attention to the Department of State's
Xinjiang Supply Chain Business Advisory, where you state, ``corporate
responsibility is social responsibility.''
Question 2. Do you find it hypocritical that American companies,
including some that have been in the news recently for fighting against
``social injustices'', have spent years profiting off slave labor in
China?
Answer. No, because many leaders of U.S. companies have not been
sufficiently aware of conditions in Xinjiang, China. I would point out
three factors behind their lack of awareness:
1. Many of them had no idea of the magnitude and scope of horrific
human rights abuse and did not understand that the forced labor
is shipped all over China. (This was one of the purposes of the
business advisory that went out.)
2. U.S. Government officials had not previously reached out to them
directly about this matter in such a formal way. (That is why I
sent a letter directly to U.S. business leaders as well as to
all American universities drawing their attention to the issue
and the Supply Chain Business Advisory.)
3. They often lack detailed information because it is difficult to
conduct supply chain due diligence within China.
As I stated in my recent letter to U.S. business leaders, all U.S.
businesses have a moral and perhaps even a fiduciary duty to ensure
that they are not doing business with Chinese firms that engage in or
benefit from forced labor. Most U.S. businesses take seriously the law
that prohibits importation of goods produced by forced labor into the
United States. What has changed in recent years is that the Chinese
Communist Party has engaged in large-scale human rights abuses against
Uyghurs, ethnic Kazakhs, ethnic Kyrgyz, and members of other Muslim
minority groups in Xinjiang, including forced labor involving members
of these groups outside Xinjiang. The Supply Chain Business Advisory
called attention to certain firms and entities that are complicit in
these abuses, so that U.S. businesses can make informed decisions about
with whom they do business and how to begin mitigating these risks. In
order to mitigate potential reputational, operational and legal risks,
businesses should implement human rights due diligence policies and
procedures and should also consider disclosing their investments in or
relationships with suspect Chinese firms and entities.
Question 3. Did you receive any responses or outreach from the
companies who received the letter?
Answer.
1. Absolutely. The CEOs were very appreciative of the letter because
it was personal in nature and in the spirit of partnership from
someone who has been a Chairman/CEO of three public companies.
2. They also appreciated understanding the magnitude of the human
rights abuse and what the government's position and
recommendations are.
3. Also very enthusiastic response from trade associations as well
such as Trade groups Such as the U.S. Chamber of Commerce,
Motion Picture Association of America, PhRMA, National
Association of Manufacturers and others when they also
distributed the letter to their members.
4. Stripe CEO Patrick Collison tweeted ``As a U.S. business (and
tech) community, I think we should be significantly clearer
about our horror at, and opposition to, the atrocities being
committed by the Chinese government against its own people.''
5. It was a great exchange when I talked to the NBA CEO Adam Silver
about his experiences in Xinjiang. He shared the NBA's
governance policies and position on its training camp in
Xinjiang. So, it also educated me. I sent a similar letter to
all the Governing Boards of American institutions of higher
education but this time as the former Chairman of the Board of
Purdue University which also got tremendous pick up in the
press and TV.
https://www.wsj.com/articles/state-department-urges-
universities-to-disclose-
china-stocks-held-in-index-funds-11598015636
https://www.bloomberg.com/news/articles/2020-08-18/state-
department-urges-
colleges-to-divest-from-chinese-companies?sref=RfJLbe1B
https://money.usnews.com/investing/news/articles/2020-07-02/
state-depart
ment-warns-top-us-firms-over-supply-chain-risks-linked-to-
chinas-xinjiang
6. The University letter about the CCP threat covered the broad
implications for ensuring academic freedom, honoring human
dignity, protecting university endowments, and safeguarding
intellectual property.
7. AGB CEO sent out this tweet after he got my letter: ``We deeply
appreciate Under Secretary of State Krach's letter to the
Boards of our institutions and our partnership with the U.S.
Department of State, in dealing the authoritarian influence of
the Chinese Communist Party on our campuses,'' said Association
of Governing Boards' CEO Henry Stoever. ``As the former
Chairman of Purdue, Under Secretary Krach recognizes ensuring
academic freedom, honoring human dignity, protecting university
endowments, and safeguarding intellectual property is a
responsibility that sits squarely on the shoulders of all
institution's board members.''
The response to the letter was overwhelmingly positive. U.S.
businesses of all kinds have expressed their continued support and
focus on identifying and eradicating forced labor from their supply
chains. They want to make sure their operations adhere to U.S. values
such as transparency, accountability and respect for human rights. As I
often tell my team: U.S. business leaders are patriots.
Question 4. How do you think U.S. companies should rethink their
foreign supply chains?
Answer. This is what I tell my fellow CEOs--keep five things top of
mind:
1. Corporate responsibility is national security. You are an
American company first.
2. Demand reciprocity for how we treat foreign companies in the
United States.
3. Insist on transparency. For everything.
4. Never be overly dependent on one country.
5. Always get advice from the United States State Department and
Commerce Department. (Before I came to government, I had no
idea the level of resources available to U.S. businesses and,
conversely, how much the government needs advice from the
private sector.)
COVID-19 has highlighted the risks of overreliance on single
suppliers of goods that are critical to national security. The PRC has
a long history of anti-competitive practices, including market access
restrictions, subsidies, forced technology transfers, and intellectual
property theft. These practices allow PRC companies to compete unfairly
and create economic dependency that Beijing exploits to advance its
political agenda. To protect our businesses and prosperity, it is
essential that we diversify global supply chains by prioritizing
investment not in countries with a record of predatory economic
policies, but rather in countries where the rule of law is respected,
where businesses can compete on a level playing field, and where
institutions are accountable to citizens and consumers.
______
Response to Written Question Submitted by Hon. Edward Markey to
Hon. Keith Krach
Question. You described in your testimony the Administration's plan
to form a group ``comprised of like-minded countries, companies, and
civil society [organizations] that operate under a set of `trust
principles.'' One of the principles you have mentioned is ``respect for
the planet.'' Please explain how, specifically, environmental concerns
will be translated into principles and implemented by the Economic
Prosperity Network, the name you have previously used to describe such
a group.
Answer. In my testimony, I referenced several of the principles
that underpin American values, including: integrity, accountability,
transparency, reciprocity, respect for rule of law, respect for
property of all kinds, respect for sovereignty of nations, respect for
human rights, and respect for the planet. These principles are
interrelated, each supporting the others. Respect for the planet
requires adherence to these same principles. Environmental concerns
feature prominently in our efforts to build a network or an alliance of
democracies to oppose malign actions by the People's Republic of China
(PRC).
The PRC claims to be a ``torchbearer'' on global environmental
issues, but the facts point to the opposite.
Beijing is the largest emitter of numerous pollutants and
greenhouse gases, and irresponsibly exploits natural resources
around the globe, threatening the world's economy and
environment.
The PRC is the largest source of plastic pollution, which
harms marine life and clogs the world's oceans. According to
its own experts, in 2017 the PRC released up to one million
tons of plastic waste into the ocean, and China's marine debris
costs the global economy billions of dollars each year.
The PRC subsidizes the world's largest distant water fishing
fleet. Many PRC-flagged vessels engage in illegal, unreported,
and unregulated (IUU) and irresponsible fishing, stealing
resources from nations across the globe and further depleting
declining fish stocks.
As Secretary Pompeo stated, it may be time for a new grouping of
like-minded nations, a new alliance of democracies to advance
international actions that push the PRC to change its problematic
behaviors and hold it accountable. We work with partners and like-
minded countries to expose and push back against the PRC's harmful
activities that diminish natural resources, create global health risks,
and negatively impact economic prosperity globally. We expect this
alliance to operate under the same set of trust principles that apply
to all areas of economic collaboration.
______
Response to Written Questions Submitted by Hon. Dan Sullivan to
Hon. Nazak Nikakhtar
For us to compete effectively, we have to have good people on the
ground who can advance our economic and commercial partnerships. That's
certainly true in every region, but especially in the Indo-Pacific.
There have been calls for shifting more U.S. government personnel to
the Indo-Pacific region, and that would include Econ Officers at the
Department of State and Foreign Commercial Service officers--something
I've looked at as Co-Chair of the Senate Foreign Service Caucus and an
issue that was and addressed in SFRC Chairman Risch's recently
introduced STRATEGIC Act.
Question 1. What are both the Departments of State and Commerce
doing to ensure that your personnel footprint matches the strategic
importance of the Indo-Pacific region?
Answer. Recognizing the importance of the Indo-Pacific region, the
International Trade Administration (ITA) is reallocating resources to
ensure that by the summer of 2021 it will add: a second Commercial
Service Officer in Australia to engage on Pacific Island Country (PIC)
outreach; a third Commercial Service Officer in Thailand to work on
Thai and ASEAN matters; and a third Commercial Service Officer in
Singapore to support commercial interests in the region. We are adding
a Commercial Liaison detail to INDOPACOM in Honolulu in early FY21 to
support expanded PIC outreach.
Additionally, the Bureau of Industry and Security (BIS) has fully
staffed a contingent of five new Export Control Officers (ECOs) in our
embassies and consulates in the Indo-Pacific region, which includes two
ECOs in Beijing, one in Hong Kong, one in Singapore, and one in New
Delhi. These transitions are underway, consistent with travel
restrictions related to COVID-19, and will ensure compliance with U.S.
export controls in the region.
With regard to the PIC outreach initiative, ITA is providing
technical assistance to multiple congressional committees to enhance
the U.S. presence in the PICs through a pilot project using Locally
Engaged Staff (LES). Managed by ITA Senior Foreign Commercial Service
Officers in Australia and Japan, the LES would focus on expanding U.S.
commercial engagement in this strategic region by promoting U.S.
exports, strengthening bilateral trade, and ensuring a strong U.S.
commercial presence across the Indo-Pacific. The PIC pilot project
would build upon ITA Asia's existing footprint in the Indo-Pacific
region that currently covers 27 cities in 14 markets. Although the PIC
pilot project would be a commercial diplomacy initiative intended to
foster bilateral economic ties with, and American economic interests
in, the PICs, it also would play an important role in broader U.S.
efforts to counter strategic competitors and potential adversaries that
are attempting to expand their spheres of influence in the Indo-Pacific
region.
The Administration has a forward-leaning agenda in the Indo-Pacific
region. ITA's presence in overseas markets is needed to support that
agenda. ITA is working with U.S. allies to advance bilateral, multi-
lateral and sector-specific initiatives that will ensure free and fair
trade for U.S. businesses in the region. This includes efforts in the
Asia-Pacific Economic Cooperation (APEC) to promote telehealth,
cybersecurity, and data privacy. It also includes private sector
engagement in the energy sector as part of the Asia Enhancing
Development and Growth Through Energy initiative, or Asia EDGE (See
below). These efforts to work with our allies and partners in the Indo-
Pacific region will strengthen our economic and national security
relationships.
In addition, the Department of State has recently completed its
Strategic Staffing Initiative, which resulted in almost 100 positions
realigned from within existing resources based on Administration
priorities. Many of these realignments involved moving Political,
Economic, and Public Diplomacy positions in the Indo-Pacific Region.
Question 2. What more needs to be done?
Answer. The Administration is implementing the Indo-Pacific
Strategy as a whole-of-government strategy to champion the values that
have served the Indo-Pacific so well: (1) respect for sovereignty and
independence of all nations; (2) peaceful resolution of disputes; (3)
free, fair, and reciprocal trade based on open investment, transparent
agreements, and connectivity; and (4) adherence to international law,
including freedom of navigation and overflight.
Additionally, ITA is directly engaging with our Indo-Pacific
partners to ensure that regional standards and regulatory practices for
emerging technology allow U.S. companies to compete. As I mentioned in
my statement, China is taking aggressive action in international
bodies, such as standards organizations, to influence the development
of technology markets. If Chinese practices are adopted across the
region, it will put U.S. technology leadership at risk.
Another way the United States can counter this risk is by
participating in regional fora. ITA is working with APEC countries to
foster policy discussions with regional partners that simultaneously
allow technology markets to grow in a way that fits the needs of the
partner country and also enable U.S. companies to continue to compete.
The United States must also ensure U.S. companies have the
information they need to compete for business in the region. As one
example, ITA leads the Communications, Industry Engagement, and
Outreach Sub-Committee of the Asia EDGE Secretariat. Asia EDGE is a
whole-of-government effort to grow sustainable and secure energy
markets in the Indo-Pacific. Further, ITA is currently hosting a 10-
part series of virtual workshops from June to December 2020 to deepen
private sector engagement. The Asia EDGE Virtual Workshop Series
convenes U.S. private sector stakeholders and U.S. Government (USG)
officials across nine Federal agencies to: (1) ensure U.S. firms
understand Asia EDGE priorities and current programming; (2) increase
access to the strategic tools and resources available to U.S. companies
pursuing energy projects in the Indo-Pacific region; and (3) leverage
U.S. private sector feedback to inform future Asia EDGE programming.
We are also leveraging our BIS colleagues in the region to enhance
the effectiveness of export control implementation by our partners in
the region, including through government capacity building, outreach to
industry, and enforcement liaison.
Question 3. Do your Departments need any flexibility to make these
shifts? How can Congress be helpful in that regard?
Answer. Within our existing authorities and appropriations, we are
focusing our resources as appropriate on the Indo-Pacific region in
support of the USG's strategy. We are working closely with the State
Department, which has provided funding for the ITA-directed APEC
programs noted above in question 2.
Question 4. China is rolling out a network of corporate social
credit systems. In 2018, the Civil Aviation Administration of China
pressured multiple international airlines to change their websites'
descriptions of Taiwan, threatening to lower their social credit
records if they didn't. This issue is a major focus in the STRATEGIC
Act introduced by Chairman Risch and it's important to both the Foreign
Relations Committee and this Committee.
What are the U.S. government's views on the corporate social credit
system?
Answer. We are very concerned by many aspects of China's corporate
social credit system (CSCS), a Chinese program to use big data to track
and score companies' behavior. First, there is, as Vice President Pence
has pointed out, the Orwellian aspect of a system that seeks to rate
and punish companies based on their `social behavior.' More
specifically, we are concerned about the data protection implications
of requiring firms to transfer the large amounts of data necessary to
comply with the system; the system's potentially extraterritorial
reach; the lack of transparency into how scores will be calculated,
including lack of clear procedures to challenge an adverse score; the
potential for the system to be misused to induce the production of
information or changes to company policies that are disfavored by the
Chinese Communist Party; and the cost and difficulty of compliance,
including monitoring the compliance of suppliers and the possibility
for numerous enforcement authorities to impose penalties for a single
alleged compliance problem. The European Chamber of Commerce in China
stated that this program could spell life or death for individual
companies.
The CSCS is situated within a broader ecosystem of Chinese laws and
policies--including Military-Civil Fusion, the Cyber Security Law, the
National Intelligence Law, and the National Security Law--designed to
enhance the Chinese government's influence and its ability to access
information held largely by the private sector. For example, CSCS
intersects with Made in China 2025 (MIC 2025) because the next-
generation information technologies China is developing under MIC 2025
will be integral to gathering data needed to support the CSCS. China's
July 2019 Guiding Opinion on Accelerating the Building of the Social
Credit system and Building a Credit-based Monitoring System focuses on
making ``full use of next-generation information technologies such as
big data and artificial intelligence to achieve comparable credit
monitoring data.'' CSCS is also explicitly identified in the State
Council's 2014 planning outline as a means of ``enhancing China's soft
power and international influence'' and is intended to impact firms
operating outside of China.
Question 5. How is it affecting U.S. companies?
Answer. U.S. companies operating in China are expected to meet the
political demands of the Chinese Communist Party (CCP), but in recent
years these demands have increased, which has increased the difficulty
of operating in China. The CSCS is being implemented this year, and it
is one of several recent legal initiatives aimed at augmenting the
Chinese government's coercive exercise of power.
Given this history of economic coercion and corporate intimidation,
Beijing may very well use the CSCS to extraterritorially pressure
companies to comply with party doctrine and penalize those companies
that do not toe the CCP line. This system may be used against U.S.
companies directly, by preventing them from being able to operate in
China unless their behavior meets Chinese government standards. It
could similarly be used against U.S. companies' employees, as a means
of influencing or controlling their personal behavior.
In practice, the CSCS could be used to further China's efforts to
acquire data from foreign firms for reasons not directly related to the
CSCS. The rating system could be leveraged as a means to acquire
personal information and access intellectual property. Threatening a
company with a low social credit score may compel companies to hand
over information they would not otherwise have chosen to share or
engage in other behaviors not otherwise in their interest.
As noted, China's CSCS model may be applied beyond Mainland China.
The recently passed Hong Kong National Security Law has also raised
concerns that the CSCS will have serious implications for U.S. firms
and Americans conducting business in the financial hub.
Question 6. What role do you think the U.S. government should be
playing when it comes to the Chinese government putting pressure on
U.S. companies to comply with this system?
Answer. The Administration continues to press China to on market
principles, and compliance with principles of fair trade, the rule of
law, transparency, and the right to privacy.
However, as I noted in my testimony, because China is a sovereign
state, foreign laws may never be sufficient to fully address China's
predatory conduct. It is also not an actor that has shown a great
interest in adhering to international laws. Part of the USG response
must include decreasing the United States' overall reliance on China so
that the impact of programs like the CSCS on U.S. firms and people can
be minimized. Protecting the innovations, creations, and inventions
that power our country are vital to our economic prosperity and
national security. This Administration is committed to keeping
persistent pressure on China to keep it from taking advantage of the
United States.
Question 7. In November 2019, the Bureau of Economic Analysis at
the U.S. Department of Commerce announced it would solicit new
information in its surveys of U.S. multinational enterprise activity
abroad, including on R&D employment and sales of digital services such
as cloud computing.
How will the resulting data and information collected enable the
U.S. government to better assess U.S.-China commercial ties?
Answer. The Bureau of Economic Analysis (BEA), a statistical
agency, conducts surveys of U.S. multinational enterprises to collect
detailed information about their U.S. and foreign activities that is
used to produce and publish economic statistics on foreign direct
investment. The mandatory annual and benchmark surveys collect
financial and operating data for U.S. parent companies and their
foreign affiliates in all countries where they operate. Data items
include employment and compensation of employees; property, plant, and
equipment; research and development expenditures; balance sheet and
income statement details; sales or gross operating revenues; and data
used to calculate value added. The statistics are needed to understand
and evaluate the impact of the activities of U.S. multi-national
enterprises (MNEs) on the economies of the United States and foreign
host countries. They help business leaders make more informed
investment decisions, aid policymakers' decisions on international
trade and investment policy, and have been extensively used by the
academic research community. The data are collected for statistical
purposes only and the information on individual companies is
confidential by law.
For the 2019 benchmark survey of U.S. direct investment abroad that
is currently underway, BEA added questions about collaborative R&D
agreements, such as cost-sharing agreements, and revenues related to
the provision of digital services. The questions about R&D agreements
will provide information on the production and use of intellectual
property in global value chains, and the questions related to digital
services will contribute to BEA's ongoing efforts to measure the
digital economy. These questions, like all others on the survey, are
collected from foreign affiliates in all countries, including China.
This is the first time these data will be collected on the survey, and
BEA will assess the robustness of the data before deciding how best to
present them in its publications and whether to continue collecting
these measures in the future.
Question 8. Is there other information the U.S. government ought to
be soliciting from U.S. companies operating in China?
Answer. BEA regularly updates the content of its surveys to provide
relevant and timely information to meet the evolving needs of data
users in understanding the activities and economic significance of
multinational enterprises. For example, in past benchmark surveys BEA
has collected additional destination information on foreign affiliate
sales and information on contract manufacturing services, based on
suggestions by data users. BEA consults with key users in the academic
and business communities, as well as users from across the government,
and these efforts are particularly comprehensive during the planning
stages of benchmark surveys, conducted once every five years. Changes
to the survey are submitted to OMB for approval and are highlighted in
notices published in the Federal Register to solicit public comment. In
reaching decisions on what questions to include in the survey, BEA
considers the government's need for the data and resources for
processing the data, the burden imposed on respondents, the quality of
the likely responses (e.g., whether the data are readily available on
respondents' records), and BEA's experience in previous surveys.
______
Response to Written Questions Submitted by Hon. Rick Scott to
Hon. Nazak Nikakhtar
Question 1. Assistant Secretary Nikakhtar, our Nation has become
too reliant on imports from adversaries like Communist China, which was
become even more apparent in this pandemic. I believe we can no longer
rely on countries like Communist China for our critical supply chains
like PPE, and we can no longer accept Chinese technology that could be
used to spy on us.
In your opinion, are there other industry sectors where the United
States is overly reliant on the global supply chain that we should be
addressing? If so, what are they?
Answer. The International Trade Administration (ITA) is analyzing
critical supply chains and overall industry competitiveness, performing
assessments of industries weakened by predatory import competition and
foreign direct investment practices, and developing policy
recommendations. This work has been used to develop U.S. policy
responses on a range of topics, from Section 301, to solutions to
encourage U.S. 5G competitiveness, to addressing vulnerabilities in the
national security supply chain. In many cases, this work ties directly
back to Chinese government activities that impede the competitiveness
and national security of the United States. In this context, we are
also leading the Administration's reshoring initiative, including
working through ITA's SelectUSA unit to leverage interagency efforts
and engage companies to encourage them to reshore supply chains to the
United States.
Supply chain resiliency concerns have been brought to the spotlight
by COVID-19. I note that Senators Portman and Peters recently proposed
legislation to address U.S. vulnerabilities in PPE such as masks and
gloves. Our dependence on China for a range of health and safety
products remains an issue of national concern, and we are working to
resolve this through our reshoring strategy.
It is worth noting that Chinese companies, strongly supported by
Chinese government policies--including distorted domestic prices,
intellectual property misappropriation, and enormous subsidization--
dominate global production in key areas. Below are some areas where my
office is working with other USG agencies and the private sector to
advance U.S. industry competitiveness and domestic supply chain
resilience:
Advanced Energy Storage: Chinese companies, strongly supported by
Chinese government policies, dominate global production for lithium-ion
batteries for electric vehicles, for example. ITA's Industry and
Analysis unit is currently working with the Department of Energy and
others on policy options for encouraging the advanced energy storage
industry in the United States.
Critical Minerals: As we stated in the Department of Commerce's
2019 report A Federal Strategy to Ensure Secure Reliable Supplies of
Critical Minerals, the United States is highly dependent on imports of
some critical minerals. The Commerce Department has been working
holistically to support the six calls to action laid out in that
report.
Large Power Transformers and High Voltage Circuit Breakers: The USG
has had long-standing concerns about large power transformers (LPTs)
due to their criticality to the bulk power system and their difficulty
to replace. High Voltage Circuit Breakers are critical to the safe and
reliable operation of the bulk power system at both the transmission
and sub-transmission system.
On May 1, the President signed Executive Order No. 13920 on
``Securing the United States Bulk-Power System,'' which prohibits
acquisitions of LPTs and other ``bulk-power system electric equipment
designed, developed, manufactured, or supplied, by persons owned by, or
controlled by, or subject to the jurisdiction or direction of a foreign
adversary'' when the transaction is determined to pose an undue or
unacceptable risk to national security or the security and safety of
U.S. persons. High voltage circuit breakers also fall within the scope
of this Executive Order, which applies to acquisitions by both public
and private sector entities. The Secretary of Energy is tasked with
implementing this Executive Order, and in the coming months the
Department of Energy's Office of Electricity will coordinate with
Commerce and other interagency counterparts listed in the Executive
Order to formulate rules and procedures for implementation.
Semiconductors: The semiconductor industry is critical to U.S.
economic growth, underpinning many of the advanced technologies that
consumers depend on including smart phones, transportation safety
applications, advanced medical devices, and telecommunications. TSMC's
announced investment in the United States will reinforce American
leadership in cutting-edge semiconductor design and manufacturing and
will further accelerate Arizona's rise as a global hub for the
technology industry.
Civil Nuclear: China and Russia's efforts to displace the United
States in the international civil nuclear market are detrimental to
global nonproliferation, safety, and security culture and harm U.S.
national security, the U.S. economy, and U.S. influence in the global
energy sector. ITA supports the policy recommendations noted in the
Department of Energy's Strategy to Restore American Nuclear Energy
Leadership. We will work with other USG agencies to implement these
recommendations. Action on the Report's recommendations will help to
revitalize and strengthen the U.S. civil nuclear industry so that it
can compete effectively in the global civil nuclear energy market.
Solar Energy: The United States is the second largest consumer of
solar power in the world but is largely dependent on China for the
solar panels (modules) that are being deployed throughout the country.
Due in part to the Section 201 safeguard remedy, for which President
Trump signed a Presidential Proclamation in January 2018, solar module
manufacturing is making a comeback in the United States. However, these
U.S. manufacturers still struggle to compete with the massive scale of
Chinese manufacturing and injurious Chinese imports, despite the huge
domestic demand for solar.
Question 2. Beyond additional Federal spending when our Nation is
already severely in debt, what actions or policies can we implement to
incentivize the growth of U.S. industry bases and further U.S.
competitiveness?
Answer. Many of the actions the Administration has taken over the
past four years were designed to incentivize the growth of U.S.
industries. This includes enforcing our trade laws to protect our
industries against the predatory practices of foreign governments,
negotiating new trade agreements to ensure free and fair trade between
nations, and removing burdensome, unnecessary regulations that make our
companies less competitive. In addition, the Department of Commerce
provides a robust set of products and services to U.S. businesses and
our state and local partners to help U.S. companies compete and win in
the international marketplace.
From technical assistance and development grants to export support
and supply chain analysis, the Commerce Department is at the forefront
of providing American businesses and workers with the resources needed
to support the growth of U.S. industry bases and further U.S.
competitiveness. The Department of Commerce will continue to identify
new and effective ways to leverage its existing resources to advance
these important objectives.
______
Response to Written Questions Submitted by Hon. Edward Markey to
Hon. Nazak Nikakhtar
Question 1. Has the Department of Commerce identified the relevant
international laws and agreements to which China is viewed to be
noncompliant? If so, which international laws and agreements are
included?
Answer. The Administration has published many documents detailing
China's unfair practices that impact U.S. businesses. The Commerce
Department provided significant input to the Office of the United
States Trade Representative's (USTR) Section 301 Report into China's
Acts, Policies, and Practices Related to Technology Transfer,
Intellectual Property, and Innovation, published in March 2018. Further
information on China's practices with respect to intellectual property
are described in the 2020 Special 301 report also published on USTR's
website.
The Commerce Department is a key part of the Administration's work
in closely monitoring China's compliance with its international trade
obligations. For example, the 2020 National Trade Estimate Report
devotes 26 pages to outlining China's trade practices of concern. Even
more detail is provided in USTR's 128-page annual report on China's
World Trade Organization Compliance. The Administration has not
hesitated to challenge Chinese practices that violate China's WTO
obligations, and in fact has pursued a number of WTO dispute settlement
cases against China for failure to comply with its WTO obligations,
ranging from China's antidumping and countervailing duty actions to its
agricultural subsidies to its restrictions on electronic payment
services to its restrictions on the export of important raw materials.
Examples of cases include:
That China's unilateral decision to adopt retaliatory duty
and tariff measures on 3 billion dollars-worth of U.S. products
violated the General Agreement on Tariffs and Trade (GATT)
1994's Article I:1 most-favored nation provision and Article
II:1(a) and (b). This matter is still pending in the WTO.
That China's insufficient and discriminatory intellectual
property protection for foreign right holders violated Articles
3, 28.1 & 28.2 of the Trade-Related Aspects of Intellectual
Property Rights (TRIPS) Agreement. This matter is still pending
in the WTO.
That China's subsidies to domestic producers of primary
aluminum violated Articles 5(c), 6.3(a), 6.3(b), 6.3(c) and
6.3(d) of the Agreement on Subsidies and Countervailing
Measures (SCM Agreement), and Article XVI:1 of the GATT 1994.
This matter is still pending in the WTO.
That China's administration of tariff rate quotas (TRQs) on
wheat, short-and medium-grain rice, long-grain rice, and corn
violated Article X:3(a), XI:1, and XIII:3(b) of the GATT 1994
and Part 1 of China's Protocol of Accession. In particular, the
United States argued that China failed to administer its TRQs
in a transparent, predictable, and fair basis, and failed to
clearly specify requirements and administrative procedures in a
manner that would not inhibit the filling of each TRQ. The WTO
Panel agreed with the U.S. complaint in part.
That China's ``market price support'' and subsidies program
for domestic agricultural producers, which exceeded the level
set out in Section I of Part IV of China's Schedule of
Concessions on Goods (CLII), violated Articles 3.2., 6.3, and
7.2(b) of the Agreement on Agriculture. The WTO Panel agreed
with the U.S. complaint in full.
That China's export duties and quantity restrictions on
various forms of antimony, cobalt, copper, graphite, lead,
magnesia, talc, tantalum, and tin violated Part 1 of China's
Accession Protocol. This matter is still pending in the WTO.
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