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CHINA’S INDIGENOUS INNOVATION TRADE AND

INVESTMENT POLICIES: HOW GREAT A THREAT?

HEARING

BEFORE THE

SUBCOMMITTEE ON TERRORISM, 

NONPROLIFERATION, AND TRADE

OF THE

COMMITTEE ON FOREIGN AFFAIRS 

HOUSE OF REPRESENTATIVES

ONE HUNDRED TWELFTH CONGRESS

FIRST SESSION

MARCH 9, 2011

Serial No. 112–5

Printed for the use of the Committee on Foreign Affairs

(

Available via the World Wide Web: http://www.foreignaffairs.house.gov/

(II)

COMMITTEE ON FOREIGN AFFAIRS 

ILEANA ROS-LEHTINEN, Florida, Chairman 

CHRISTOPHER H. SMITH, New Jersey 

DAN BURTON, Indiana 

ELTON GALLEGLY, California 

DANA ROHRABACHER, California 

DONALD A. MANZULLO, Illinois 

EDWARD R. ROYCE, California 

STEVE CHABOT, Ohio 

RON PAUL, Texas 

MIKE PENCE, Indiana 

JOE WILSON, South Carolina 

CONNIE MACK, Florida 

JEFF FORTENBERRY, Nebraska 

MICHAEL T. MCCAUL, Texas 

TED POE, Texas 

GUS M. BILIRAKIS, Florida 

JEAN SCHMIDT, Ohio 

BILL JOHNSON, Ohio 

DAVID RIVERA, Florida 

MIKE KELLY, Pennsylvania 

TIM GRIFFIN, Arkansas 

TOM MARINO, Pennsylvania 

JEFF DUNCAN, South Carolina 

ANN MARIE BUERKLE, New York 

RENEE ELLMERS, North Carolina 

VACANT 

HOWARD L. BERMAN, California 

GARY L. ACKERMAN, New York 

ENI F.H. FALEOMAVAEGA, American 

Samoa 

DONALD M. PAYNE, New Jersey 

BRAD SHERMAN, California 

ELIOT L. ENGEL, New York 

GREGORY W. MEEKS, New York 

RUSS CARNAHAN, Missouri 

ALBIO SIRES, New Jersey 

GERALD E. CONNOLLY, Virginia 

THEODORE E. DEUTCH, Florida 

DENNIS CARDOZA, California 

BEN CHANDLER, Kentucky 

BRIAN HIGGINS, New York 

ALLYSON SCHWARTZ, Pennsylvania 

CHRISTOPHER S. MURPHY, Connecticut 

FREDERICA WILSON, Florida 

KAREN BASS, California 

WILLIAM KEATING, Massachusetts 

DAVID CICILLINE, Rhode Island 

YLEEM D.S. POBLETE, Staff Director 

RICHARD J. KESSLER, Democratic Staff Director 

SUBCOMMITTEE ON TERRORISM, NONPROLIFERATION, AND TRADE

EDWARD R. ROYCE, California, Chairman 

TED POE, Texas 

JEFF DUNCAN, South Carolina 

BILL JOHNSON, Ohio 

TIM GRIFFIN, Arkansas 

ANN MARIE BUERKLE, New York 

RENEE ELLMERS, North Carolina 

BRAD SHERMAN, California 

DAVID CICILLINE, Rhode Island 

GERALD E. CONNOLLY, Virginia 

BRIAN HIGGINS, New York 

ALLYSON SCHWARTZ, Pennsylvania 

(III)

C O N T E N T S 

Page

WITNESSES 

Ms. Karen Laney, acting director of operations, U.S. International Trade 

Commission ........................................................................................................... 7

Mr. Peter Brookes, senior fellow, national security affairs and Chung JuYung fellow for policy studies, The Heritage Foundation ................................ 45

Mr. Philip I. Levy, resident scholar, The American Enterprise Institute for 

Public Policy Research ......................................................................................... 52

Ms. Thea M. Lee, chief of staff, AFL–CIO ............................................................. 64

LETTERS, STATEMENTS, ETC., SUBMITTED FOR THE HEARING 

Ms. Karen Laney: Prepared statement .................................................................. 10

Mr. Peter Brookes: Prepared statement ................................................................ 47

Mr. Philip I. Levy: Prepared statement ................................................................. 54

Ms. Thea M. Lee: Prepared statement ................................................................... 66

APPENDIX 

Hearing notice .......................................................................................................... 84

Hearing minutes ...................................................................................................... 85

The Honorable Gerald E. Connolly, a Representative in Congress from the 

Commonwealth of Virginia: Prepared statement .............................................. 87

(1)

CHINA’S INDIGENOUS INNOVATION TRADE 

AND INVESTMENT POLICIES: HOW GREAT A 

THREAT? 

WEDNESDAY, MARCH 9, 2011

HOUSE OF REPRESENTATIVES, SUBCOMMITTEE ON TERRORISM, NONPROLIFERATION, AND TRADE, COMMITTEE ON FOREIGN AFFAIRS, Washington, DC. 

The committee met, pursuant to notice, at 2 o’clock p.m., in room 

2172 Rayburn House Office Building, Hon. Edward R. Royce (chairman of the subcommittee) presiding. 

Mr. ROYCE. This hearing of the Terrorism, Nonproliferation, and 

Trade Subcommittee will come to order. 

Today’s hearing is going to focus on China’s indigenous innovation trade and investment policies, an issue that Brad Sherman 

and I have worked on in the past. China’s economy has been rapidly growing and this has meant opportunities for American businesses, but it’s also meant perils. Mr. Sherman and I have worked 

to bring attention to the fact that many U.S. business people are 

getting fleeced in China, their property stolen, and much worse. 

We heard from Nancy Weinsten of Long Beach, California, previously in a hearing who went through a nightmare in Shanghai. 

And we’ve heard from many other business people about their similar experiences. The State Department even reports that Americans may be held hostage. 

Today we consider China’s ‘‘indigenous innovation’’ policies. 

The Chinese Government has been turning up the pressure on 

U.S. and other foreign businesses to share sensitive technology 

with Chinese state-owned enterprises as the cost of selling in the 

Chinese market. This is done through an ever-changing web of government policies, official policies as it pertains to procurement, regulation policies, tax policies, and governmental policies that encourage U.S. companies to move research dollars and jobs to China. 

China is looking to move its economy from ‘‘Made in China’’ to 

‘‘Designed in China.’’ And they’re playing hardball to do it. A top 

administration official has described the threat:

‘‘China’s indigenous innovation policies threaten global intellectual property protections, fair government procurement policies, market competition, and innovators’ freedom to decide 

how and when they transfer technology.’’

This presents some U.S. companies with the dilemma of agreeing 

to these terms and making sales, though at the risk of their longVerDate 0ct 09 2002 11:54 Apr 18, 2011 Jkt 000000 PO 00000 Frm 00005 Fmt 6633 Sfmt 6633 F:\WORK\TNT\030911\65057 HFA PsN: SHIRL
2

term competitiveness, because Chinese companies potentially will 

then take their technology and become their competitors. These 

commercial concerns are intensified by rampant Chinese Government industrial spying in the U.S. There are obvious national security concerns, too. This issue goes to the heart of a company’s competitiveness, and our country’s economic well-being. I’m not convinced that these policies are an economic winner for China in the 

long term either, but I know they’ll hurt U.S. businesses. 

While traditionally preferring ‘‘quiet diplomacy,’’ U.S. businesses 

are increasingly vocal. The U.S. Chamber of Commerce recently released a report, ‘‘China’s Drive for Indigenous Innovation,’’ sounding the alarm. We’ll hear from the U.S. International Trade Commission today, which has produced a detailed report on this problem. 

This comes against a backdrop of broader concerns over China’s 

trade and investment policies, including very poor intellectual 

property protection, which harms U.S. firms. In January, Chinese 

President Hu Jintao and President Obama signed a joint statement 

pledging to ‘‘delink’’ indigenous innovation from China’s very large 

government procurement market. On paper, this was a win for the 

United States. China also committed to join the WTO’s Government Procurement Agreement this year, which would help curb its 

indigenous innovation policies. But China has a history of promises 

made, promises broken. 

We should aggressively challenge these policies. They worsen our 

trade deficit with China. What we don’t want to do is blow up the 

system in a way that sets back U.S. exports, which are critical to 

economic recovery. Currently, U.S. exports to China are rapidly 

growing. 

China is emerging as a serious economic challenger. It’s building 

‘‘national champion’’ companies, as they call them in China, to compete globally. The Commercial Aircraft Corporation, for example, 

has Boeing in its sights. This challenge is coming, ‘‘indigenous innovation’’ or not. This means two things. One, pressing China, and 

two, better competitiveness. Our country needs to approach economic competitiveness with urgency. This means tax and regulatory and budget reform and a slew of other issues beyond this 

hearing’s scope. 

I will now turn to the ranking member, the gentleman from California, Mr. Brad Sherman for his statement. 

Mr. SHERMAN. Mr. Chairman, I thank you for your statement 

and those who think that this city is divided by partisanship will 

find that that’s not true when it comes to you and me and the 

issues that we face in this hearing today. 

Mr. ROYCE. We flipped gavels again, but continue these hearings. 

Thank you. 

Mr. SHERMAN. In the Year 2000, the United States made an 

enormous blunder in granting Permanent Most Favored Nation 

status to China in a bill that was H.R. 4444. Ironically, that number denotes extreme bad luck in the Chinese tradition. Of course, 

the bad luck has all been ours. 

The United States-China trade deficit swelled from $83 billion, 

already outrageous in the Year 2000, to a record high of $273 billion in 2010. It grew every year except the recession year of 2009. 

3

The Economic Policy Institute estimates that roughly 2.4 million 

American jobs were lost as a result of our intentional blindness to 

this trade deficit. 

We hear from supporters of the current trade policies that the 

volume of exports to China has never been higher. This is true. We 

hear that the rate of growth in exports to China is not greater than 

the growth of imports from China. True, but misleading; misleading in part because what we’re exporting to China is scrap iron 

and scrap paper so that they can ship us more exports. But what’s 

more telling is that the trade deficit with China continues to grow 

as increases in imports from China outpace increases in exports 

year in, year out in absolute terms. 

The industrial base and quality of U.S. employment continue to 

erode. 

China conducts a number of unfair trade practices that keep 

American exports out and more importantly aims to set up export 

promotion policies that the American public should not tolerate. 

And American firms have been all too happy to oblige in order to 

take advantage of cheap labor, various incentives and whatever 

they can do to up their particular corporation’s quarterly report. 

As the chairman noted, if you do business in China, good luck. 

You’ll have to enter into a joint venture, transfer your technology, 

and if you’re lucky, you may be allowed to flee China rather than 

being held as hostage. At the urging of our current chairman, back 

when our roles were reversed, we held a hearing in July 2008 on 

the topic of U.S. business operating abroad. That hearing detailed 

the horrible experiences of Americans, especially American small 

businesses doing business in China. 

I want to commend the chairman for today’s focus on an aspect 

of the China trade policy that has shaken even the most slavishly 

pro-China corporate interests. And those interests are so outraged 

that they have demanded that we take what they count as tough 

action, namely a strongly-worded letter. 

In 2006, the Chinese Government announced a strategy for promoting what it reportedly translates as indigenous innovation. 

China no longer wants to make iPads. They want to develop the 

next iPad. They no longer want to license technology from the 

West. They want to develop it there or at least steal it and claim 

ownership of it. Among the policies that have imploded since that 

time to implement this dream is a restrictive government procurement policy. Overall, China’s effort is to increase its trade deficit 

with the United States, not to decrease it. 

Promulgated in November 2009, this draft policy provided for the 

creation of a product catalog that would list goods in several categories approved for purchase by Chinese Government agencies. 

Such goods would have to be developed in China and the intellectual property held by Chinese firms. These draft regulations were 

softened somewhat in April 2010, but are still considered to be objectionable by the U.S. business community. 

During his recent visit to Washington, President Hu committed 

to de-link procurement from indigenous innovation. Whatever that 

means, and it probably means almost nothing, what is important 

in the Chinese system is that the central government has, through 

its actions to date, already informed bureaucrats, provincial offiVerDate 0ct 09 2002 11:54 Apr 18, 2011 Jkt 000000 PO 00000 Frm 00007 Fmt 6633 Sfmt 6633 F:\WORK\TNT\030911\65057 HFA PsN: SHIRL
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cials and managers of state-owned enterprises that they need to 

buy Chinese products and Chinese intellectual property whenever 

possible. 

You can’t unring the bell. The word has already gone out. And 

whatever the final regulations provided, if you are a bureaucrat or 

provincial official in China, and you buy products containing American intellectual property instead of Chinese intellectual property, 

you are subject to re-education, regardless of what the official regulations finally state. 

Nominally, the policy is not already on the books, but the word 

is already out. We can’t complain about anything because there’s 

nothing official in their publishing final regulations. This is how 

China beats us at the so-called free trade process. We operate only 

by written standards. They get the message out orally or through 

unofficial documents. And then we deliberately ignore the fact that 

that gives them a way to restrict American exports that we do not 

have. 

The procurement policies were complemented by anti-monopoly 

patent technical standards and other policies that discriminate 

against foreign products and/or forced technology transfers as a 

condition of doing business in China. If anything gets the attention 

of the business community it should be this: Another aspect of China’s innovation policies is to develop 16 so-called megaprojects. 

Chinese managers seek to co-innovate technologies borrowed from 

the West to develop passenger aircraft and chip and circuit manufacturing equipment, etcetera. I think the chairman outlined this 

well. 

What happens to American firms that are helping China develop 

these industries after China can make the products on their own? 

It was Lenin who said, ‘‘The capitalists will be happy to sell the 

rope.’’

I think my time has more than expired. I thank the chairman 

for his indulgence and I’ll use some of my question time to go over 

some of these points. Thank you. 

Mr. ROYCE. Thank you, Mr. Sherman. We’re joined today by Jeff 

Duncan of South Carolina. We have with us Bill Johnson of Ohio 

who has an opening statement. Go ahead, please. We’ll try to keep 

these opening statements to 1 minute each, if you can. 

Mr. JOHNSON. Thank you, Mr. Chairman. I want to thank our 

panel for being here today to discuss an issue that has attracted 

growing concern in recent years, particularly for American businesses that have worked hard to become innovators in high-tech industries, whether it’s through currency manipulation, massive government subsidies to Chinese industry or newer concerns surrounding indigenous innovation efforts, the threat China poses to 

American exports is of growing concern. 

U.S. businesses have taken great risk to develop new technologies, innovate like never before. Because of American leadership and technology, protecting U.S. intellectual property is more 

important than ever, especially when it comes to our biggest trade 

rivals. We must have safeguards in place to ensure our continued 

position as a global leader in the high-tech sectors of the world 

economy. American businesses are faced with tough decisions these 

days. Our economy is showing some positive signs of recovery, but 

5

many business owners are still struggling to discern what is best 

for their development. 

China’s aggressive indigenous innovation policies are the cause of 

one more tough decision; abide by China’s terms and risk long-term 

competitiveness, as Chinese companies steal American technology, 

or lose access to the enormous fast-growing Chinese market and 

put American exports and jobs on the line. 

The American people have always expressed a strong desire to 

achieve and move our nation forward, sometimes taking risks in 

order to do so. We must protect the investments that American 

businesses have made in innovation, as other nations attempt to 

imitate our ingenuity and surpass us and we can’t allow our willingness to be open go the benefits of trade to defeat the gains that 

we have made. 

As we move forward and evaluate China’s trade policies, we must 

keep this cautious optimism at the forefront of our global trade 

strategy. 

Thank you, Mr. Chairman. I yield back. 

Mr. ROYCE. Thank you very much, Mr. Johnson. Ms. Schwartz, 

I think yours is the last opening statement. 

Mr. CONNOLLY. Actually, Mr. Chairman——

Mr. ROYCE. Mr. Connolly, go ahead, please. 

Mr. CONNOLLY. I thank the chairman. 

Mr. ROYCE. Gerry Connolly of Virginia. 

Mr. CONNOLLY. And just very briefly, Mr. Chairman, I have a 

full statement I would ask be entered into the record without objection. 

Mr. ROYCE. Without objection. 

Mr. CONNOLLY. Obviously, I represent a very high-tech district, 

but I think the whole battle of Chinese policy with respect to innovation, Chinese requirements with respect to the transfer of technology and knowledge, the lack of protection of intellectual property, are real issues for businesses—to say nothing of repatriation 

of profits and capital or even making a profit as Mr. Sherman indicated. 

So I’m very interested in Ms. Laney’s point of view about this 

and her insights into it. But I think that moving forward, part of 

the problem with doing business in China is it cannot be just one 

way. And the United States Government has an obligation at some 

point to protect the interests of U.S. companies doing business in 

such a broad and large market. 

I thank the chair. 

Mr. ROYCE. Thank you. Mr. Rohrabacher, I think you had a 

statement. Before I mentioned that Ann Marie Buerkle serves as 

vice chairman of this committee. We’re delighted to be working 

with her and to welcome Renee Ellmers, as well, as a member of 

the committee. 

Mr. Rohrabacher, go ahead with your opening statement. 

Mr. ROHRABACHER. Mr. Chairman, thank you very much for 

holding this hearing and I appreciate Mr. Royce and Mr. Sherman 

and the great work that they’ve been doing on this for a number 

of years. 

Let’s just note that there’s been a massive transfer of wealth 

from the American people to China. This has happened as a result 

6

of policy decisions made not by the Chinese, but by the people who 

run the United States Government. This is working against the interests of the people of the United States. At first, it was thought 

to build up their economy would create a more democratic society. 

Mr. Chairman, instead of a democratic society in China, we now 

see emerging a threat to the peace of the world, a dictatorship, the 

world’s worst human rights abuser. It’s time to take a look at those 

policies that have permitted this transfer of wealth and the transfer of technology and investment from the United States into China 

at the expense of the people of this country. Our people have been 

betrayed by a lack of action on the part of our own Government to 

watch out for them, rather than some globalist perspective. So I’m 

very pleased to be here today and I’m going to be listening to the 

witnesses and hopefully, we can alert the American people to the 

changes that need to be made to protect our country. 

Mr. ROYCE. Thank you, Mr. Rohrabacher. Before I go to Allyson 

Schwartz, another new member from Pennsylvania of this committee for her statement, let me just take a moment and we have 

a distinguished visitor with us, Ben Gilman, who served as chairman of the International Relations Committee. 

Ben, if you would just stand for a minute here and be recognized. 

Thank you for all of your service. Ben, it’s good to see you. 

Ms. Schwartz. 

Ms. SCHWARTZ. Thank you, Mr. Chairman. I just wanted to say 

this is my first meeting in the subcommittee. I’m pleased to serve 

on the committee on this subcommittee and as we begin this hearing I just want to say I’ve heard from some of the large companies 

that do work, facilities here, of course, and some even have headquarters here, have been seeking to do business in China. They 

have often, to this point said, we’re fine. It’s a huge market. But 

are now calling us to do even more to make sure that their intellectual property is protected, that some of the not well articulated, but 

well understood requirements the Chinese put on them to put 

plants, to share their intellectual property which is then shared, is 

a nice word, I think. Really is doing us great harm for the future. 

So we’ve got to figure this out. 

I look forward to the testimony and to this hearing to figure out 

how we can both have our companies take advantage of the huge 

marketplace that China is, but to do it in a way that protects their 

ability to grow not just there, but here and grow internationally 

and also to have some discussion about what effect it is having on 

employment and job growth here in the United States. Obviously, 

we’ve seen some progress. We do want to, I believe, operate in a 

global marketplace, but we need to do so in a way that is fair to 

our businesses and fair to our workers. 

So I look forward to the comments and understanding that you’ll 

share with us, our witnesses will share with us today so that we 

can take the kind of action again that will grow our economy, understanding what a huge market China is and how unfair some of 

their policies both to our businesses and to our own growth here. 

I yield back. 

Mr. ROYCE. Thank you, Ms. Schwartz. We’ll now go to Ms. Karen 

Laney who is the acting director of operations for the United States 

International Trade Commission. She previously served as the diVerDate 0ct 09 2002 11:54 Apr 18, 2011 Jkt 000000 PO 00000 Frm 00010 Fmt 6633 Sfmt 6633 F:\WORK\TNT\030911\65057 HFA PsN: SHIRL
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rector of the Office of Technology Policy at the Commerce Department. She’s also served as deputy director of U.S. steel trade policy 

at the U.S. Trade Representative’s Office during WTO negotiations. 

And she holds an M.S. degree in resource economics from the Colorado School of Mines. 

Now I should note that the ITC is an independent, U.S. Government agency that supports policy makers through fact-finding investigations and research. It does not make policy recommendations. The Senate Finance Committee directed the Commission to 

prepare two reports on intellectual property infringement and indigenous innovation policies in China. Director Laney will present 

information from the first completed report. She cannot address the 

second on-going report. 

So Ms. Laney, thank you for presenting your reports’ key findings to this subcommittee, and afterwards, if you’ll keep this brief 

to within 5 minutes, maybe summarize it, we’ll go right to questions. 

STATEMENT OF MS. KAREN LANEY, ACTING DIRECTOR OF 

OPERATIONS, U.S. INTERNATIONAL TRADE COMMISSION 

Ms. LANEY. Thank you, Chairman Royce and members of the 

subcommittee, for this opportunity to testify before you today. As 

the chairman noted, my remarks will be summarizing the more extensive written submission from the Commission’s first report. 

Those written remarks are entered into the record. 

The first report was delivered in November of last year, and our 

second report will be given to the Senate Committee on Finance 

May 2nd. 

Today, I’ll be describing what indigenous innovation policies are, 

how they are being employed in China, and why they are of concern to U.S. firms. First, let me say there is a wide understanding 

about what indigenous innovation policies actually are. In the Commission’s first report, we broadly considered these policies as the 

collection of Chinese policies that are aimed at increasing domestic 

innovation and, where possible, replacing foreign intellectual property with domestic intellectual property in goods that are produced 

in China. 

The policies are intended to advance China’s innovation goals 

that were articulated in the 2006 National Plan called the Medium 

to Long Term Plan for the Development of Science and Technology. 

I’ll be referring to that as the MLP. 

The broad goals in the MLP are for China to become an innovation-oriented society, a global leader in science and technology. The 

policies that are reflected in the MLP are broadly focused on hightech industries of national interest in which innovation plays a key 

competitive role. These sectors include agriculture, energy, environment, manufacturing, national defense, some frontier technologies 

such as biotechnology, advanced materials, lasers, ocean technology, and as Mr. Sherman indicated, certain large-scale megaprojects, such as core electronic components, large aircraft, water 

pollution control and treatment technologies. 

In our report, the Commission identified several areas in which 

indigenous innovation policies are being drafted or applied, but 

today, I’m just going to touch briefly on two of those. The first is 

8

technical standards. China’s technical standards strategy recognizes the importance of technical standards as drivers of technology 

innovation and trade. The MLP has highlighted the importance of 

incorporating Chinese intellectual property into technical standards. And in China, there is a top-down approach to standards. 

The central government ministries decide what standards will be 

developed and lead the process. This is in contrast to the United 

States, which has a much more decentralized process led by the 

private sector. Reportedly, the Chinese system for development of 

standards tends to be nontransparent and to exclude meaningful 

opportunities for foreign companies to provide input and comment. 

According to U.S. firms, Chinese standard-setting bodies frequently take an existing standard and change the technology requirements slightly—just enough to add significant costs and make 

it much more difficult for foreign manufacturers to sell their products in China. This restriction of market access is one way that 

Chinese-developed technical standards reportedly affect U.S. companies. A second is that they reduce royalty payments to U.S. 

firms. More examples and more explanation of this are in my written comments today, so I will move on to talk just briefly about 

government procurement policies. 

During the Commission’s research, government procurement 

policies promoting indigenous innovation were one of the areas of 

greatest concern for U.S. firms. The annual market for Chinese 

Government procurement is estimated to be between $88 billion 

and $200 billion annually. I want to note, as the members here 

have already said, that the government procurement policies were 

a focus of discussion during the December meeting of the U.S.-

China Joint Commission on Commerce and Trade (JCCT), which 

occurred after the release of the Commission’s first report. 

Our second report does include information and analysis about 

subsequent events since November 2010. 

Of particular industry concern during our first investigation were 

the draft national government procurement policies that were 

issued in April 2010. These applied to six high-tech sectors and as 

indicated, they contain certain provisions that must be met in 

order for any product to be included in a national procurement 

catalog. 

Another requirement was that approved products must be free 

from any type of intellectual property dispute which was not defined in the draft regulation. U.S. firms expressed concern that an 

unsubstantiated allegation raised by a third party, perhaps a competitor, could be used as a reason to exclude a foreign-made product from the government procurement catalog. 

One important point which has been made, but let me stress 

this: Although no national procurement catalog has been released, 

there are a number of provincial procurement catalogs which are 

actively in use for government procurement decisions at the local 

level. Most of these catalogs include very few products that are 

made by foreign companies or by joint ventures. This situation underscores the fact that the Chinese Government ministries and 

agencies at all levels are working to implement the central ideas 

of the MLP for a wide variety of policies under separate jurisdicVerDate 0ct 09 2002 11:54 Apr 18, 2011 Jkt 000000 PO 00000 Frm 00012 Fmt 6633 Sfmt 6633 F:\WORK\TNT\030911\65057 HFA PsN: SHIRL
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tions. This variation makes it extremely difficult to track the development and implementation of such policies. 

Although relatively new and still evolving, indigenous innovation 

policies have the potential to pose significant problems for U.S. 

companies trading with or operating in China. It is clear from the 

MLP that China is intent on raising the level of scientific and technological innovation that originates within the country. Policies appear to be promoting indigenous innovation in sales of domestically 

made high-tech products at the expense of foreign firms. U.S. firms 

note that China’s approach to innovation policy seems to vary significantly from global business practices. For example, requirements that R&D take place exclusively in China are broadly incompatible with the global innovation policies of many multinational 

companies. 

In sum, some U.S. industry representatives believe that indigenous innovation policies pose a greater potential threat to their 

business in China than do either intellectual property infringement 

or currency-related issues. They described, as Mr. Sherman indicated, a web of interrelated policies that work together to help 

build ‘‘national champions,’’ which are Chinese industries capable 

of competing with foreign companies, both inside China and in 

third-country markets. 

This concludes my testimony this afternoon, summarizing some 

of the findings from the Commission’s first report. I would say that 

the Commission’s second report will provide more specific analysis 

of the scope and impact of China’s indigenous innovation policies. 

It updates information about U.S. firms’ concerns, provides several 

case studies, and presents the results that were obtained through 

mailing out 5,000 questionnaires to U.S. companies asking for their 

experiences and insights regarding indigenous innovation in China. 

After the public release of the report in May, we would be pleased 

to come back and brief the committee on those findings as well. 

Thank you. 

[The prepared statement of Ms. Laney follows:]

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Mr. ROYCE. Ms. Laney, let me ask you a couple of quick questions. First of all, China has not signed the WTO’s government procurement agreement, right? So that means that U.S. and other foreign firms that try to do business there can be discriminated 

against by China in government contracting. 

What I’m wondering is if you have a sense of the scope of that? 

If you could give us some examples? And I think it’s important because we have a number of us here that have called for Congress 

to act to preclude Chinese companies from bidding on U.S. Government contracts until China makes this decision to join and sign 

this agreement and keep to the agreement so that we’ve got a twoway street. 

Ms. LANEY. During the JCCT in December, the Chinese did make 

a commitment to apply for admittance to the WTO government procurement agreement, of course, by the end of this year, 2011. I’d 

be happy to provide—get back to you with some examples. 

Mr. ROYCE. I’ll get the examples from you later. 

Ms. LANEY. Yes. 

Mr. ROYCE. But in the meantime, do you know the extent of current Chinese contracting at the state, local, and Federal level here 

in the United States with our U.S. Government? 

Ms. LANEY. No. And I will look into that and get back to you on 

that. 

Mr. ROYCE. I think that would be very important for us to know 

and for us to know as soon as possible. 

Ms. LANEY. Okay. 

Mr. ROYCE. Let me ask you another question. You testified that 

foreign businesses have reportedly been pressured to transfer 

know-how and technology to Chinese firms in order to gain access 

to the Chinese market, something that we hear about from businesses out in California all the time. But maybe you could give us 

some examples of specific U.S. businesses and how this plays out 

so that we can understand precisely, and so that the other members and the audience can understand precisely how this is done. 

Ms. LANEY. Most of the information that we have had concerning 

specific impacts of tech transfer policies are going to be reported in 

our second report. 

Mr. ROYCE. Do you have any examples right now that you’d like 

to share with us? Because I would imagine that someone in your 

position—I’m familiar with a half dozen, so I imagine you have access to some of this data. 

Ms. LANEY. Certainly we have heard about situations and have 

heard from industry, such as the semiconductor industry which has 

talked often and publicly about their concerns with different technical standards, for example, the WAPI standard that the Chinese 

employ rather than the WiFi standard that we use here in the 

unescorted access, and pressure to adopt those technical standards 

in order to be able to do business or sell products in China. Of 

course, semiconductors are in many different types of products, so 

that has a ripple effect. 

Also, the same industry has talked a lot about tax preferences, 

which are given to high-tech Chinese industries rather than foreign 

industries. So there are examples like this. In addition, the wind 

energy industry has talked to us about some of the discriminatory 

35

regulations that are in place requiring experience, requiring proof 

of certain business practices in order to be able to access the Chinese market. So we do have some specific examples in various 

high-tech industries about these concerns. 

Mr. ROYCE. And in fact, these violate current treaties with 

China, do they not? 

Ms. LANEY. I don’t know. 

Mr. ROYCE. Well, I’m going to allow Mr. Sherman here to ask his 

questions. I thank you again for appearing as a witness. 

Mr. SHERMAN. Thank you. Just to take a minute before I begin 

asking questions, I for one have lost patience with China and our 

trade policies toward China. We need balanced trade with China. 

The only way to achieve this is for Congress to revoke most favored 

nation status for China and to direct the administration to enter 

into emergency negotiations knowing that MFN will end by the end 

of the year to arrange a new system, one that results in balanced 

trade and one that perhaps follows Warren Buffet’s approach which 

is a voucher system where you in order to import anything from 

China, need a voucher from someone who has exported to China. 

I know all my colleagues are a bit frustrated with China. The 

question is are we actually going to do something or are we just 

going to send more strongly-worded letters. 

Now let me ask the witness, the ITC back in the Year 2000 predicted that granting most favored nation status to China and letting them into the WTO would be associated with roughly a $1 billion per year increase in our trade deficit with China. It turned out 

that over the last 10 years you’ve been off by a little less than $2 

trillion. Wouldn’t that make you just a little bit shy about issuing 

any kind of projection for the effect of the proposed Korea free 

trade agreements? 

Ms. LANEY. I would have to take a look at the basis upon which that prediction of $1 billion was made and compare that to what 

we’re doing for our Korea analysis. 

Mr. SHERMAN. Most organizations when they make a $2 trillion 

error, go back and look at that even without having to be prodded 

by a bald congressman from California, but I’m happy to play that 

role. 

Now picking up on the comments about China made by the 

chairman, our national approach with China does something by 

issuing this directive, unofficial as it may be, to all of their government-owned enterprises and provincial officials, they’ve already 

taken action to keep American intellectual property out of their 

procurement market. Our natural thing is to send a letter and then 

do nothing because that’s what the most moneyed interests in our 

country would suggest that we do. 

What we could do instead is introduce and adopt legislation prohibiting state, local, and Federal Governments from procuring anything from China until such time as they sign the WTO agreement 

on procurement and are certified by our President to be in compliance. Would such legislation be in violation of WTO? 

Ms. LANEY. I’m not prepared to comment on that. 

Mr. SHERMAN. Will you respond for the record? 

Ms. LANEY. I will take that question back to my agency. 

Mr. SHERMAN. So you may just refuse to answer? 

36

Ms. LANEY. No, sir. I just don’t know the answer. 

Mr. SHERMAN. I know, but you’ll go back to your agency and then 

respond for the record or are you committing to get me an answer? 

Ms. LANEY. Yes, sir. I am. I am. 

Mr. SHERMAN. Okay. Looking at the Korea free trade agreement, 

you have made an estimate that it would reduce our trade deficit 

slightly. Now the agreement allows for products such as automobiles, automobile parts, ships, electronics, iron and steel to be 65 

percent made in China and then only 35 percent made in South 

Korea. And then the work done in South Korea can be done by Chinese guest workers in barracks. Does your estimate as the effect 

that the Korea free trade agreement will have on U.S. balance of 

payments reflect those two factors? That is to say the 65 percent 

made in China, the 35 percent made in Korea access that this gives 

the Chinese and does it reflect the fact that South Korean firms 

can use grossly underpaid Chinese guest workers for products 

shipped to the United States? Are either of these in your estimate 

on the Korea free trade agreement? 

Ms. LANEY. The employment, the guest workers calculation is 

not. The rules of origin related to the percentage of parts that are 

sourced from various places is captured in a larger factor in our 

model analysis that looks at non-tariff measures. 

Mr. SHERMAN. I don’t think you’re off by a couple trillion dollars 

per decade, but you’re off, because Korea free trade agreement 

gives open access to the U.S. market to goods produced by Chinese 

labor, 65 percent in China, 35 percent guest worker in South 

Korea. I hope you will revise your estimates and not only does it 

give Chinese labor free access to U.S. markets, it does so without 

China making a single concession to the United States and they 

get a free trade agreement, in effect, and the resulting trade imbalance will be attributed to the South Koreans rather than the Chinese. There is nothing more beautiful about a trade agreement for 

China—you couldn’t have a more beautiful agreement for China 

than the U.S.-South Korea free trade agreement. I yield back. 

Mr. ROYCE. Mr. Duncan from South Carolina, but before we go 

to you for questions, we’ve been joined by Mr. Poe from Texas. We 

appreciate his attendance. 

Go ahead, Mr. Duncan, with your questioning. 

Mr. DUNCAN. Thank you, Mr. Chairman, and Ms. Laney, thank 

you for being here today. I had the opportunity after reading the 

Friedman book, The World is Flat, back in 2005 to travel to China, 

so I’ve been to southern China and the Guangzhou area and then 

up to Beijing. Really thought it was a fascinating experience for me 

as a legislator in the state at the time and bring those experiences 

to Congress. 

I wanted to bring up the issue this afternoon of production of 

rare earth minerals. We use rare earth minerals in many energy 

technologies and high security, high-tech national security applications. I’m concerned that while the U.S. was once self reliant in domestically-produced rare earth elements, over the past 15 years we 

have become 100 percent reliant on imports primarily from China 

which controls more than 95 percent of the world’s rare earth supplies. 

37

The Wall Street Journal published an article on March 6th stating that China has begun building its stockpile which further increases the Chinese Government’s power to influence the minerals’ 

prices. As we discussed the possible threats of China’s indigenous 

innovation trade and investment policies, I would like your 

thoughts regarding China’s monopoly of rare earth elements and 

how that would affect U.S. technology. 

Ms. Laney, is the U.S. vulnerable to supply disruptions of rare 

earth elements? What effect would the disruption have on our military’s ability to produce important defense applications like jet 

fighter engines, missile guidance systems, anti-missile defense, 

space-based satellites, communication systems, the technology 

things just go on and on. So if you will answer that? 

Ms. LANEY. The United States is vulnerable at this time because 

we have no operating capacity in the United States. However, we 

do have access to some types of rare earth minerals. And so the effect of supply disruption would depend on how rapidly we could reopen and get up running, in part. 

Mr. DUNCAN. We’re seeing China continually try to buy these in 

places like sub-Saharan Africa and South America and other 

places. What should the U.S. do about that, if anything? 

Ms. LANEY. I’m not prepared to offer a suggestion regarding policy, sorry. 

Mr. DUNCAN. Okay. Mr. Chairman, I yield back. 

Mr. ROYCE. We’ll go to Mr. Cicilline from Rhode Island. 

Mr. CICILLINE. Thank you, Mr. Chairman, and thank you for 

holding this important and very timely hearing and welcome, Ms. 

Laney. 

My home state is Rhode Island and we have been especially hard 

hit in this recession. In fact, it was the first New England state to 

go into the recession and currently we have the fifth highest unemployment in the country. Particularly, in manufacturing, where 

Rhode Island, we were the birthplace of the American Industrial 

Revolution, and home to a very important and robust manufacturing sector that’s been very hard hit in this recession. The Alliance for American Manufacturing concluded that there were 71,000 

manufacturing jobs in Rhode Island in 2008. That number has 

dropped to 47,900. And 15 percent of the manufacturing jobs lost 

in Rhode Island during that period were lost due to trade with 

China. 

And so with regard to the indigenous innovation policies that 

we’re talking about today, I’d like to first note that I know many 

of the indigenous innovation policies are in different stages of development and haven’t all been adopted yet and of course this practice really relates only to one area where the Chinese are undertaking a really conscious effort, I believe, to discriminate against 

U.S. exports and illegally promote their own exports. 

I have tremendous concerns in light of the history of what we see 

in Rhode Island and frankly, in states all across our country about 

what we are doing, what we can do about this. And so my question 

really is what kinds of retaliatory mechanisms do we have at our 

disposal to respond to this and other than filing dispute resolutions 

with the WTO, are there other things that we can do that can effectively respond to this? As Mr. Sherman said, this is a growing 

38

and serious problem that I think many members of this committee 

over many years are becoming increasingly frustrated with. 

Ms. LANEY. I would say that in our research, one of the things 

that we heard over and over again was companies asking that the 

government continue to talk to China. That may not sound like it’s 

sufficiently bold, but as Ms. Schwartz pointed out, a number of 

companies have concerns about being able to continue to operate in 

China and expressed their interest in continuing to have a dialogue 

with China, as opposed to punitive measures. These were the kind 

of information and suggestions that came to us as we did our research. 

Now with the questionnaire that we put out for our second study, 

we did ask for suggestions from companies. We asked them to give 

us information on what the economic impact has been to them, the 

employment impact, so there will be some concrete numbers and 

perhaps some more specific suggestions coming from the companies 

that we surveyed. 

Mr. CICILLINE. I understand. I think suggesting that conversations would be ongoing makes sense, but at the same time I think 

people expect that there be some vigorous enforcement and we’re 

arguing, I think, very hard for maintaining our investments in education, infrastructure, and innovation, because I think we all recognize that America is the home to ingenuity and innovation and we 

can compete in the world economy and succeed, but if at the end 

of that process, after we make that investment, we don’t have a 

fighting chance because there’s the kinds of violations that are 

present with respect to China, then we have no real opportunity to 

continue to grow our economy and succeed. 

And so I understand that conversations and negotiations continue, but I think many of us are looking for, and I know the manufacturers that I speak to back in my district are looking for enforcement and looking for protection of their intellectual property 

and compliance with their requirements with China with respect to 

trade. So I hope we will do that as vigorously as we talk and send 

letters. Thank you. I yield back the balance of my time. 

Mr. ROYCE. Thank you. We’re going to go to Mr. Bill Johnson of 

Ohio. Before we do, let me just explain to the members that the 

International Trade Commission is a government agency, and as 

part of their charter, they don’t make policy recommendations. 

That’s Panel 2. So Ms. Laney would probably be in a little hot 

water back home if she tried to roll out policy recommendations for 

us here and so I just wanted to explain that. We’ll be into all of 

that in the next panel. 

Go ahead, Mr. Johnson, with your questions. 

Mr. JOHNSON. Thank you, Mr. Chairman. Ms. Laney, you stated 

in your written testimony that the U.S. International Trade Commission performed two investigations on intellectual property infringement and indigenous innovation policies in China. In addition, you also mentioned the 21st U.S.-China Joint Commission on 

Commerce and Trade, the meeting this past December, which also 

focused on indigenous innovation. While I realize that the conclusions of the second investigation have not yet been released, let me 

ask you this, what similarities can be drawn between these recent 

inquiries into China’s indigenous innovation policies, more specifiVerDate 0ct 09 2002 11:54 Apr 18, 2011 Jkt 000000 PO 00000 Frm 00042 Fmt 6633 Sfmt 6633 F:\WORK\TNT\030911\65057 HFA PsN: SHIRL
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cally, how serious an effect do these policies have on American 

businesses that interact with China when compared to other trade 

practices such as currency manipulation and subsidies provided by 

the Chinese Government? 

Ms. LANEY. The companies that we interviewed for our first investigation and those that attended the hearing, the 2-day hearing 

that the Commission held, by and large indicated that they were 

more concerned about the indigenous innovation policies going forward than they were about currency manipulation. They would say 

that subsidies are probably a part of that whole web of indigenous 

innovation policies. Because these policies are relatively new, most 

of what we heard was concern going forward. The government procurement draft that came out in November I think sounded a real 

alarm for a lot of companies, that China was moving more aggressively to favor their domestic industries, their high-tech industries. 

So in terms of what is of greatest concern to U.S. companies, that 

varies somewhat between sectors, but they’re looking forward toward this web of policies. Some of them describe it almost as WhacA-Mole, you fix one policy, something else pops up. But in terms 

of currency manipulation versus indigenous innovation, what we 

were hearing is that high-tech companies are more concerned with 

the indigenous innovation web. 

Mr. JOHNSON. Thank you very much. Mr. Chairman, I yield back. 

Mr. ROYCE. We’ll go now to Ann Marie Buerkle from New York, 

who is the vice chair of this committee. 

Ms. BUERKLE. Thank you, Mr. Chairman, and thank you, Ms. 

Laney, for being here today. 

My question has to do with the indigenous innovation policies, 

how you would characterize those? If we had to look at it and I 

would just like your opinion on this, is it more of an extortion toward American businesses or is it something where the American 

businesses just realize the risks and they realize the gamble that 

they have to take and they think it’s worth it? 

Ms. LANEY. I would say that in our experience during our investigation the answer to that question depends a little bit on the experience and even on the size of the company doing business in 

China. Companies who have been in the Chinese market for a 

while report a different experience and have a different characterization of the regulations than do smaller firms or firms that are 

brand new to the market. So for those companies that have been 

in the market for a while, by and large, I would probably not characterize it as extortion. It’s a cost of doing business and one that 

they find discriminatory. But that is not a view that’s necessarily 

held by brand-new small entrants to the market. 

Ms. BUERKLE. I guess if you could clarify that for me, what—just 

because they’ve been in it longer, what is the reason why their 

view is so different than the newer? 

Ms. LANEY. It would be speculation on my part to say why that 

is. I think when I’m talking about the size of a company, often 

large firms have more resources in order to understand what the 

legal system is, in order to deal with multiple government officials, 

those kinds of things. So there are resource issues that go to how 

a company interacts with and experiences the business environment in China. 

40

Ms. BUERKLE. Thank you. I yield back. 

Mr. ROYCE. Ms. Laney, if you could pull your microphone closer? 

Ms. LANEY. Yes. 

Mr. ROYCE. We’ll go now to Ms. Ellmers from North Carolina. 

Ms. ELLMERS. Thank you, Mr. Chairman, and thank you, Ms. 

Laney, for being here today with us. 

I’d like to go back to the currency manipulation issue that you 

discussed a moment ago for Mr. Johnson’s question. Basically, considering the undervalued Chinese currency, 40 percent undervalued, and I know that’s estimation, it serves the government 

strategy for strong export market from China. And it affects us, of 

course, in our country, affecting our jobs and whatnot. 

What strategy should the United States Government be taking 

with this? Because I hear this continuously back home. This is of 

great concern to North Carolinians and what input can you give us 

on that? 

Ms. LANEY. I’m sorry to say that I’m unable to provide you with 

anything today, with any recommendations concerning currency 

manipulation. It’s really outside the scope of the indigenous innovation report that I’m here to summarize for you. I’m sorry. 

Mr. ROYCE. Ms. Laney, one idea I had was maybe you could just 

describe a couple of the options to us out there instead of making 

a set of recommendation. If you don’t feel comfortable with that, 

that’s okay, but it’s an idea. 

Ms. ELLMERS. If you could just give us an idea of some of the approaches that you have been taking, something that we can base 

some information, something that we can look forward to? 

Ms. LANEY. The Commission is not involved in setting policy or 

negotiating, so what we’re doing here is we’re reporting the suggestions of companies that we’ve interviewed. As I indicated, most of 

them have been saying to us, ‘‘We would like for you to keep talking. We would like to have the the WTO handle this. We appreciate 

the fact that this is coming under scrutiny.’’ In fact, several of the 

industry officials with whom we spoke pointed to the fact that increased scrutiny was one of the factors, in their opinion, that led 

to the concessions of the JCCT in December. And they advocate 

that government, the Executive Branch, Congress, continue to 

shine the light on this and that the Chinese are willing to change 

and again, whether it’s Whac-A-Mole or substantive long-term 

change can be debated, but the Chinese are willing to move on this 

when a spotlight is shined on this. This is what we’re hearing from 

businesses. 

Ms. ELLMERS. Thank you very much. I yield back. 

Mr. ROYCE. Thank you. Gerry, did you have any questions, Mr. 

Connolly? Go ahead, please. 

Mr. CONNOLLY. Thank you, Mr. Chairman, and I’ll try to be 

brief. I’ll ask two. One is, Ms. Laney, regarding the American 

Chamber of Commerce in China, 31 percent of the 300 members 

cited discriminatory government policies and inconsistent legal 

treatment as being the largest single barrier to doing business in 

or with China. 

What’s being done to try to make sure that we have a consistent 

commercial legal code in China and that it is consistently enforced? 

41

Ms. LANEY. I would defer to USTR on that one. I know that there 

are a number of cases that have been brought to the WTO concerning violations to our international agreements, our international trade agreements. There are also various government programs which work on the legal aspects of trade and of business in 

China, is my understanding. I can look into that more for you, if 

you would like. 

Mr. CONNOLLY. It would be helpful. Thank you. 

Ms. LANEY. Okay. 

Mr. CONNOLLY. What about, in the same category, the laws and 

the enforcement regarding intellectual property, how consistent are 

those laws under WTO rubric, international standards and how 

consistent is the enforcement of those laws? 

Ms. LANEY. The enforcement is very inconsistent of the laws. It 

varies between the national level and different provincial and local 

levels. It is not transparent in many cases. There is a slightly different patent system in China which does not afford the same 

strong protection as some of our intellectual property mechanisms. 

Much of this is detailed in the report that we provided to the Senate Finance Committee and I’d be happy to send you a summary 

of that. 

Mr. CONNOLLY. That would be very helpful. Thank you. Mr. 

Chairman, I know you want to move, so I yield back the balance 

of my time. 

Mr. ROYCE. Thank you, Mr. Connolly. We’ll go now to Judge Poe 

from Texas. 

Mr. POE. Thank you, Mr. Chairman. It seems to me that China 

operates under two systems, legalized theft and just old-fashioned 

theft. You can do business in my country of China if you show us 

how to make your product, and then on the sly, we’ll copy it and 

we’ll sell it ourselves. That’s sort of their legalized theft system. 

And then the traditional, old-fashioned stealing, they pirate all 

kinds of things, movies is a prime example; software, whether it’s 

the government or whether it’s private industry or industry in 

China, and seems to be that is their trade policy. 

I agree with the ranking member, Mr. Sherman, that we ought 

to look at the most favored nation status that we bequeathed on 

China and review that very closely, especially in light of the fact 

that we now import these CFLs from China that have mercury in 

them and pretty soon that will be the only place on earth where 

we get them. We don’t make them in the United States. We’ve gotten lead paint from China during the Christmas season of 2009, 

lead paint in toys. They send us dog food that had poison in them. 

Dry wall has been constructed throughout the United States that 

now turns out to have smelly sulphur gases and the dry wall falls 

down during a hot summer Texas heat. And now the FDA has 

taken Chinese toothpaste off the market because it’s got life-threatening chemicals in it. So I’m not so sure we get a good deal on 

what we get from them. 

It concerns me, all of these matters, and my question to you, I 

believe in free trade, but I also believe in free and fair trade. If—

I’m not asking policy—I asking you result, if we take away China’s 

most favored nation status how would that affect United States 

companies? 

42

Ms. LANEY. I’d like to think about that and get back to you on 

that one, if I may. 

Mr. POE. I’ll hold you to it, too. 

Ms. LANEY. Okay. 

Mr. POE. And the second question, how will that affect U.S. economy if we take away their most favored nation status? 

Ms. LANEY. Okay. 

Mr. POE. That’s two questions. I expect an answer sent to the 

chairman and the ranking member. Do you have——

Mr. SHERMAN. If the gentleman would yield? 

Mr. POE. Certainly. 

Mr. SHERMAN. My bill is designed to create an immediate crisis. 

Six months to negotiate a whole new trade process with China, 

rather than just end all U.S.-Chinese trade. 

Mr. POE. Reclaiming my time. How much money does the United 

States lose every year because China cheats? Do you know? 

Ms. LANEY. No, sir. 

Mr. POE. Can you find that out for me? Do you know what I 

mean by cheat? 

Ms. LANEY. No, sir. 

Mr. POE. It’s their legalized theft and their sort of old-fashioned 

stealing. Can you quantify that for me? 

Ms. LANEY. I’ll tell you, in our second report, we do give some 

estimates based on the questionnaires that we have received, the 

questionnaire responses where companies have given us some estimates of what they believe their losses have been due to intellectual property infringement. And so certainly when that report is 

made public in May, I’ll see that you get those figures that are 

based on U.S. company estimates and if there are further questions, we can follow up with you on those. 

Mr. POE. Thank you, Mr. Chairman. 

Mr. ROYCE. Ms. Laney, the Harvard Business Review, December 

2010, has an article on this, ‘‘China Versus the World.’’ They go 

through a lot of pages to say what Mr. Poe said very succinctly, but 

they lay out the argument on the cheating that he discussed, both 

in terms of what they do by way of espionage and copyright infringement, as well as what was previously referred to by one of 

our members here, as extortion. But it will be laid out in economic 

terms in that piece for you and we would like a report on that. And 

I think we now go to Mr. Rohrabacher of California. 

Mr. ROHRABACHER. I thought I would, by the way, I would like 

a copy of that report in May as well, if you could send that in my 

direction? 

Ms. LANEY. Certainly. 

Mr. ROHRABACHER. That would be very interesting. Mr. Chairman, an Orange County company run by someone you know and 

who I know, ran a dry cleaner cart manufacturing company. They 

had 150 employees, about 15 years ago, and it had been in business 

for 75 years. And they made the carts that you do—go to a dry 

cleaner or laundromat and you’d have these carts there. Well, 

about 5 years ago it came to my attention that Chinese, a group 

of Chinese businessmen had come to Orange County and purchased 

two of these dry cleaner and laundry carts. And a year later, the 

container arrived at the Port of Long Beach filled with exact repVerDate 0ct 09 2002 11:54 Apr 18, 2011 Jkt 000000 PO 00000 Frm 00046 Fmt 6633 Sfmt 6633 F:\WORK\TNT\030911\65057 HFA PsN: SHIRL
43

licas, exact replicas of the dry cleaner and laundry cart that this 

man’s business had been and their family had been in business for 

75 years and had about 150 employees. 

And it was such a copy that on the outside of the box, the box 

had been copied and they had a check mark red, black, or white 

for the different colored carts although the Chinese manufacturer 

only made one color which was black. The Chinese then went to my 

friend and said by the way, we can just keep doing this and drive 

you out of business or why don’t we become partners? Why don’t 

you hire us to do your manufacturing? I think it’s called extortion 

and he agreed to this. And do you know what happened then? After 

a few years, guess what happened? There’s not the 150 workers 

any more and he’s being edged out of the company. And now it’s 

all a Chinese company. So you have for 75 years an American company setting up a group of people in China to now make the laundry and the dry cleaning carts that used to be made by Americans. 

If we put up with this, shame on us, not shame on the Chinese. 

They’re avaricious. They’re out to make a buck. They’re watching 

out for their own people. Who’s watching out for the people of the 

United States of America? 

Now my question to you is, who would that dry cleaner complain 

to? Who in the government can help him so that over a 5-year period he doesn’t lose everything to an overseas group of people who 

are coming in and copying his product? Who in the government is 

it that he should go to? Who is not doing their job or at least who 

can we direct him to? 

Ms. LANEY. I would say this is a legal issue which he needs to 

pursue. 

Mr. ROHRABACHER. So who is that? You mean like hire a private 

lawyer and sue them? There’s nobody in the United States Government that’s responsible when entities from overseas, especially in 

China come in and basically commit extortion and pressure you 

into giving up what your family has built for 75 years? There’s 

nothing in our Government that does this? 

Ms. LANEY. I’m not aware of anything in the trade community. 

Mr. ROHRABACHER. My theory is that there are entities in the 

Chinese Government that are there to help the thieves. But we 

don’t have the entities here to help our people to protect themselves against organized foreign theft, especially that coming from 

China. 

By the way, the Chinese are not just stealing things like this. We 

are the victims of cyber attacks and everybody knows this. This is 

not something that has gone on without the Chinese Government’s 

knowledge. They are aware that there are business people who are 

coming from their country into our country and committing these 

types of acts of extortion. They are aware that there are hackers 

coming into our system, stealing all of our—all the information 

they can get their hands on. 

Mr. Chairman, we’ve got to get tough or those people overseas 

who are tough, are going to run us over, and steamroll our people. 

And that’s what’s been going on and shame on us if we don’t have 

the strength and courage to stand up to that kind of challenge. 

Thank you very much. 

44

Mr. ROYCE. Reclaiming the rest of Mr. Rohrabacher’s time, let 

me just make an observation. From political scientists to economists to philosophers, one of the great achievements of this Republic was in its Constitution. This is a conclusion of the history of the 

United States. One of the great achievements here was that we 

had in our very Constitution laid out a protection for intellectual 

property, copyright. And I guess what’s baffling is the fact that this 

was so obvious to the Founders of this Republic, the importance of 

this principle of protecting intellectual property. 

And I guess what is so obvious to us now is how cavalierly this 

has been treated both overseas and obviously by the United States, 

that we have turned a blind eye to a fundamental concept to protect human capital, to protect intellectual property, which is frankly the engine of our prosperity. 

So if we don’t have a ready answer to what to do about it, then 

I think we better return to first principles and we understand that 

your role is—you cannot give us policy recommendations, but I 

think it is our role as members, and we’ll hear shortly from the second panel who will give us those recommendations. But I think this 

highlights how important this is. And as for legal action, having 

gone through this with many of my constituents who have taken 

cases to court in China, I know just how futile that is, just how ridiculous it is to expect that to ever bear fruit, to see our own Government hesitate in terms of getting involved in what they call the 

Chinese legal system when that legal system frankly, from what 

I’ve seen of it, is not based on legality. It’s not based on a rule of 

law. 

So we face a very real challenge here that must be addressed 

now and with that said, I think you had an unanimous consent request. 

Mr. SHERMAN. I ask for unanimous consent to insert in the 

record the report commissioned by the AFL–CIO titled ‘‘Manufacturing and Security: America’s Manufacturing Crisis and the Erosion of the Defense Industrial Base.’’

Mr. ROYCE. Very good. Again, I want to thank our witness. We 

have quite a few follow-up questions for the record. And we look 

forward to that information. 

Ms. Laney, thank you. 

Ms. LANEY. May I say one other thing? 

Mr. ROYCE. Yes. 

Ms. LANEY. To Mr. Rohrabacher’s question about the dry cleaning cart. My colleague from the Commission reminded me that we 

do at the Commission have what we call 337 proceedings which are 

intellectual property. They’re a legal way for U.S. companies to 

challenge the theft of their intellectual property when products are 

imported and a U.S. company thinks that their IP has been infringed. They can come to the Commission and file a legal proceeding there. 

Mr. ROHRABACHER. 337? 

Ms. LANEY. Yes, sir. Section 337 it’s called. 

Mr. ROHRABACHER. Very good. 

Mr. ROYCE. All right, we will go now to our second panel. 

Thanks, Ms. Laney. 

45

For our second panel, we’re going to hear from Mr. Peter 

Brookes. He’s a senior fellow for national security affairs at the 

Heritage Foundation. He also serves as a commissioner with the 

Congressional U.S.-China Economic and Security Review Commission. And prior to coming to the Heritage Foundation, he served as 

deputy assistant secretary of defense for Asian and Pacific affairs. 

He also served with the Central Intelligence Agency and was on active duty with the U.S. Navy. 

Mr. Philip Levy is our second panelist. He’s been a resident 

scholar in economics at the American Enterprise Institute since ’06. 

He also is an adjunct professor at Columbia University School of 

International and Public Affairs. In ’05, he joined the State Department as a member of the Secretary’s Policy Planning Staff. He was 

responsible for international economic issues, which encompassed 

developing the responsible stakeholder policy toward China. So 

we’ll hear how that’s working out. 

And then lastly, we have Ms. Thea Lee, deputy chief of staff at 

the AFL–CIO. Previously, she worked as an international trade 

economist at the Economic Policy Institute in Washington and as 

an editor at Dollars and Sense Magazine in Boston. Ms. Lee serves 

on several advisory committees including the State Department 

Advisory Committee on International Economic Policy and the Export-Import Bank Advisory Committee. She’s also on the boards of 

directors of the Workers’ Rights Consortium and the National Bureau of Economic Research. 

I believe all of you have appeared before this subcommittee before. I ask you to summarize your testimony and keep it within 5 

minutes, if you would. We start with Mr. Peter Brookes. 

STATEMENT OF MR. PETER BROOKES, SENIOR FELLOW, NATIONAL SECURITY AFFAIRS AND CHUNG JU–YUNG FELLOW 

FOR POLICY STUDIES, THE HERITAGE FOUNDATION 

Mr. BROOKES. Thank you, Mr. Chairman. I also served as a staff 

member on this committee, many years ago under Ben Gilman. It 

was great to see him today. 

Mr. ROYCE. Welcome back. 

Mr. BROOKES. Thank you. Mr. Chairman, members of the committee, good afternoon. It’s a pleasure to be here to discuss China’s 

policy of indigenous innovation and my role as a foreign affairs specialist and observer of and participant in U.S.-China relations for 

some 15 years now. 

The views I express today in my testimony are my own and 

should not be construed as representing any official position of the 

Heritage Foundation or any other organization with which I’m associated. I will summarize my testimony that has been submitted 

for the record. 

There’s no question that China today poses a significant set of 

challenges for the United States and the international community. 

While its regional and global aspirations appear to be quite extensive, it has been reticent in publicly stating its grand ambitions. 

Nevertheless, we can observe a number of behaviors on the part 

of the Chinese that indicate that Beijing expects to see itself at or 

near the top of the international pecking order at some point in the 

not too distant future. As a result, we are faced with a number of 

46

current and potential problems posed by the Chinese that arise 

from their seeming ambitions to be a major power politically, militarily, and economically. 

China’s role in international economics and trade is a concern, 

especially issues resolving around its export-driven economy, trade 

imbalances, market access for foreign firms, state subsidies, its 

WTO obligations, and the convertibility and value of its currency. 

These issues are all well known to committee members. 

Today, the question is on China’s controversial policy of indigenous innovation. While there are differing definitions of this policy, 

generally, it might be considered the giving of preferential treatment to locally-developed technology and Chinese Government procurement which runs at about $105 billion annually. To be considered locally developed the Chinese Government must certify that 

technology involved in the product in question was developed or advanced in China. In return, foreign firms are allowed to do business in the potentially vast China market. 

But as many would agree, the indigenous innovation policy is the 

Chinese effort to gain access to foreign intellectual property which 

will, in turn, improve China’s commercial competitiveness at home 

and abroad. Via this policy and other means, China intends to propel China into the company of the world’s most technologically-advanced countries, including the United States. 

China’s indigenous innovation policy is, in my view, an unfair 

practice that disadvantages the foreign firms that are subjected to 

it. It inhibits market access for foreign firms. It is also a threat to 

our economic competitiveness globally. And if it remains in force or 

is expanded, it may allow China to move from its place as a major 

global manufacturer to a high-technology innovator. That, of 

course, is China’s goal. 

Finally, while there are U.S. policies and measures in place, we 

must also be wary of how any technology transfer, foreign or domestic, might affect our national security in light of China’s military modernization which is a growing concern. The bottom line, 

while indigenous innovation is one way for China to gain access to 

desirable foreign technology, the fact is that protecting high-technology, intellectual property in China has been, is, and will be a 

significant challenge for foreign firms. 

Beijing is bent on China becoming an advanced technology economy as quickly as possible. As such, we should not expect the 

multi-vectored Chinese threat to American technology which is not 

limited to the indigenous innovation policy to abate any time soon. 

The question, of course, is what can be done. 

First, and quickly, it is my belief that firms could choose not to 

do business in the China market. This is, of course, a private sector 

corporate decision that the government should not interfere with. 

U.S. firms should be aware of the threats of intellectual property 

while doing government in China. 

Second, it should be a priority for the U.S. Government to get the 

Chinese Government or any other government to walk back policies 

to make technology transfer a condition for access to its market. 

Third, when appropriate, an available remedy, the U.S. in concert with others, if possible, should bring Chinese trade practices 

and policies before the World Trade Organization for remediation. 

47

Mr. Chairman, thank you for the opportunity to present my 

views on this vexing matter that faces foreign firms, especially 

those of the United States doing business in China. 

I’m happy to take your questions. 

[The prepared statement of Mr. Brookes follows:]


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Ms. BUERKLE [presiding]. Thank you, Mr. Brookes. 

We’ll now go to Dr. Levy. 

STATEMENT OF MR. PHILIP I. LEVY, RESIDENT SCHOLAR, THE 

AMERICAN ENTERPRISE INSTITUTE FOR PUBLIC POLICY 

RESEARCH 

Mr. LEVY. Thank you, Madam Vice Chairman, Ranking Member 

Sherman, members of the committee. I appreciate the opportunity 

to testify today on the challenges posed by China’s indigenous innovation policies. With your permission, I’d like to offer a brief summary of my testimony and submit the extended version for the 

record. 

China’s approach to intellectual property and government procurement is and should be a real source of concern for the United 

States. It may well prove costly to American firms, but there are 

limits to how costly these policies can be. 

Indigenous innovation policies are unlikely to achieve their objective of vaulting China to the forefront of global innovation, a spot 

that the United States has traditionally enjoyed. The costs, instead, 

will be extracted from the gains that American firms would otherwise enjoy in the Chinese market. 

Contesting this policy should be a principal focus of U.S. commercial diplomacy with China. 

China’s indigenous innovation policies are part of a deep-seated 

effort by the Chinese leadership to advance the country from its 

status as a prolific low-end producer of manufactured goods to a position of technological leadership. China is pursuing these policies 

out of a sense of economic weakness, not strength. This may seem 

somewhat baffling to an American audience. China often appears 

to be a paragon of economic accomplishment, yet the country faces 

enormous challenges. It remains a relatively poor country with a 

per capita income in 2009 under $4,000, less than one tenth that 

of the United States. 

China’s recent dominance of the global manufacturing scene is 

neither as secure, nor as lucrative, as it may seem. Prices and 

wages are rising in China and the supply of young workers has 

begun to dry up. There are new comers such as Vietnam and Bangladesh eager to take China’s place. Further, China’s impressive 

exports statistics and participation in production of advanced products often conceal a much smaller role when carefully assessed. 

One recent study of Apple iPods highlighted this and found an iPod 

with $194 of captured value, $80 went to Apple, and $4 went to the 

manufacturers in China. 

The indigenous innovation policies themselves are an attempt to 

spur Chinese innovation by giving Chinese companies privileged 

access to the substantial Chinese Government procurement market. A central and troubling feature of the policies is that they 

seem intent on extracting foreign technology as the price of access 

to the Chinese market. 

There are two broad points I think worth particularly noting 

about the indigenous innovation policies. One, they’re malleable 

and in a state of flux. And two, the specific measures describing 

government purchase and preferences are just one aspect of the 

53

broader push to stimulate Chinese innovation, largely at foreign 

expense. 

The malleability of the policies suggest that this is an area in 

which diplomatic pressure could have an effect. China, as we’ve 

discussed, as others have discussed today, has been steadily revising its policies since these were first laid out in 2009. And in January of this year, as Chairman Royce described, China made commitments delinking government procurement and intellectual property protection. If those commitments were to be taken at face 

value, they would sound enormously promising. Their true value, 

of course, is going to depend on the way that they’re implemented. 

One implication of the rapid pace at which the policies are evolving is that the economic impact is particularly difficult to analyze. 

A central important point to establish, however, is the Chinese approach to indigenous innovation is unlikely to succeed. There is little history to indicate that cutting edge technology can emerge from 

a stultifying, government-dominated approach. Appropriation of 

other countries’ technological advances can facilitate catch up, but 

it is distinctly different from crafting a set of policies that will turn 

a country into a world leader. This means, in turn, that the economic impact on U.S. firms investing in China can be realized in 

a more conventional way. For such firms, China’s as yet ill-defined 

policies can be thought of as a means of extracting a higher price 

for participating in the Chinese market. 

The inadvisability of China’s approach to the promotion of innovation provides an opening for diplomatic dialogue. An alternative 

approach that shunned intellectual property theft, protected 

innovators of all nationalities, and supported basic research would 

be beneficial for both China and the West. 

China’s recent concessions may reflect the fruits of a reorientation of U.S. diplomacy away from a fixation on China’s undervalued 

exchange rate toward a set of policies that are arguably both more 

amenable to negotiation and more important to U.S. economic interests. At summit meetings, countries can only have a single top 

priority. There is an opportunity cost to pursuing one policy rather 

than another. 

To conclude, China is approaching the issue of technological leadership from a position of weakness, not strength. It faces a broad 

range of concerns about its economic future and is concerned about 

the economic effects of being relegated to a position of eternal, 

cheap, low-end manufacturing. The United States and China share 

an interest in seeing China emerge as a prosperous technological 

innovator, but this emergence should not come about through the 

expropriation of foreign technology or through skewed market access. 

China’s indigenous innovation policies represent a serious 

misstep along this path. The policies do not threaten U.S. technological leadership in the long run, but they do threaten to impose 

substantial costs on U.S. businesses. The willingness of China’s 

leaders to rethink some aspects of this policy is welcome, but a full 

reorientation is likely to require a sustained and focused 

prioritization of the issue in U.S. commercial diplomacy. 

Thank you. 

[The prepared statement of Mr. Levy follows:]

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Ms. BUERKLE. Thank you, Dr. Levy. 

Ms. Lee? 

STATEMENT OF MS. THEA M. LEE, CHIEF OF STAFF, AFL–CIO 

Ms. LEE. Thank you very much, Chair Buerkle, Ranking Member 

Sherman, members of the subcommittee. I appreciate the opportunity to testify this afternoon on behalf of the 12.5 million members of the AFL–CIO on this important topic of China’s indigenous 

innovation policies. 

In our view, these policies do pose a threat to the United States 

of America. Even as the U.S. Government has successfully challenged some of these policies, many of the damage and elements of 

indigenous innovation predated the official launch of the policy, 

just as some elements will survive the government’s decision to 

step back somewhat in response to the challenge. I think Ms. 

Laney said before that this is like a game of Whac-A-Mole, that 

there are many different ways of achieving some of the goals that 

have been laid out. 

And one of the points I wanted to make in general is that the 

AFL–CIO has been raising the issues about job loss with respect 

to our unfair and imbalanced trade relationship with China for 

many years and what we said many, many years ago was that the 

manufacturing jobs move first, but the engineering and the knowhow would surely follow. And I believe we are certainly at that 

place where we need to pay attention to this, as Ms. Laney said, 

for the future of American industry and the cutting edge technology that the United States has always enjoyed an advantage in. 

Our trade relationship with China remains enormously imbalanced and problematic. The Chinese Government has violated its 

international obligations with respect to workers’ rights, human 

rights, currency manipulation, export subsidies and intellectual 

property rights. Last year’s implementation of indigenous innovation policy simply extended and deepened this pattern of violation. 

Each one of these trade violations contribute to the erosion of our 

industrial base, costing us both our economic and national security. 

I want to make three big points today. First, indigenous innovation is a serious problem, but it does not exist in isolation. I think 

this is consistent with my fellow panelists. It is part of a much 

broader strategic pattern of behavior by the Chinese Government 

in violation of both U.S. and international trade law. And I would 

agree with the point that Mr. Rohrabacher made earlier, that it is 

the responsibility of the U.S. Government to enforce our laws more 

effectively and more aggressively than we have done in the past. 

The actions by the Chinese Government have led to the erosion 

of the U.S. industrial base, and this poses a direct threat to the nation’s economic and national security. And third, the U.S. Government needs to take action on trade law violation at the same time 

as we establish appropriate domestic policies, priorities, and strategies to restore America’s industrial leadership. 

The Chinese Government’s economic growth strategy relies heavily on export growth, primarily to the U.S. market. The elements 

in the strategy include maintaining the undervalued currency, the 

industrial policy of targeting favored sectors in technologies 

through the low market rate loans and subsidies, and protecting 

65

domestic markets through overt and covert trade barriers such as 

indigenous innovation. 

The indigenous innovation procurement policy sets a specific goal 

of reducing the degree of dependence on technology from other 

countries from 50 percent to 30 percent or less by 2020. The timing 

coincided with massive public investments at the height of the economic crisis. This action made transparent what other government 

practices on technology transfer that been achieved by other means 

and some of the businesses that had been formerly reticent and I 

think we’ve heard about some of those today, have publicly declared they’re gradually being squeezed out of the Chinese market 

by government policies that first demand technology transfer in exchange for market access and then favor domestic companies. 

I think Congressman Sherman mentioned before the enormously 

imbalanced trade relationship that the United States has with 

China with our trade deficit hitting $273 billion in 2010, up 20 percent from the previous year. I think it’s worth noting that fully one 

third of our trade imbalance with China is an advanced technology 

product, so $94 billion—we had a $94 billion trade deficit with 

China in advanced technology products that exceeds our ATP deficit with the world, with the rest of the world taking outshine that 

we had a $12 billion surplus in advanced technology products but 

with China, we had a $94 billion deficit. 

I think it is worth focusing in on that one number because what 

it tells us is is that this is not a future problem for us that one 

day China may overtake us in advanced technology products. That 

day is here and we need to have policy that recognize the urgency 

of the immediate situation today. 

Let me conclude by reiterating the point that we have two responsibilities here. One is for the U.S. Government to aggressively 

address the Chinese Government’s trade violations and the second, 

for us to establish our own strategic priorities and policies. In particular, a recommitment to investing in our infrastructure which 

we have seriously under-invested in, changing our tax policies to 

eliminate incentives to outsource production, to invest in renewable 

energy and clean energy so that we can be a leader in that important and growing field, to make sure that we are investing in innovation and in education and workforce policies so that our workers 

have the skills that they need to compete in the global economy. 

I thank you for your time and I look forward to your questions. 

[The prepared statement of Ms. Lee follows:]

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Ms. BUERKLE. Thank you, Ms. Lee, and thank you to all of our 

panelists today. I yield myself 5 minutes. 

I know that you all differ with respect to the impact of China’s 

implementation of its medium to long-term plan for the development of science and technology. And I also understand the disagreement regarding what the solutions to the issues raised by 

China’s determination to transition from an economy on manufacturing to an economy determined to expand its technological development. 

My question to all three of you, what would a transition from 

this quiet diplomacy to a more intensified, active, commercial diplomacy entail? And do you anticipate that the Chinese Government 

would be more receptive to robust diplomatic overtures? 

I’ll start with Dr. Levy. 

Mr. LEVY. Thank you, Madam Chairman. I think we have been 

making a bit of this transition. I think it’s a question of emphasis, 

when we are having summit meetings, we have a whole range of 

dialogues. There’s the JCCT, the Strategic and Economic Dialogue, 

and we just had a Presidential Summit, the question is what to put 

forward as a top priority and what we’ve seen is when we make 

this issue a top priority, we at least see some movement. It is sufficient movement? Do we declare that we’ve achieved success and it’s 

done? No. It hasn’t gone that far. But we did see some movement. 

So I guess the early indications are that at that level, there 

seems to be some progress. And I think it’s not entirely clear—people have different things in mind for more vigorous policy if it were 

something like withdrawing MFN status, I think that would have 

an entirely counterproductive effect. 

Ms. BUERKLE. Mr. Brookes? 

Mr. BROOKES. I think there’s some value in turning up the heat 

on China. I think over the years, my experience with China that 

strong public messages can have an effect, whether you’re talking 

about human rights or other issues. 

The challenge is that everything is important, then nothing is 

important in a certain sort of way. So I agree with Mr. Levy that 

you do have to choose what you find to be most important. And 

there are many, many issues on the table with regards to China. 

But I don’t see any problem at all with raising the visibility of this 

issue in public discourse by the U.S. Government which has all the 

authority and instruments and responsibility for dealing with this, 

whether you’re talking about indigenous innovation or any of the 

other things. 

So I think a more vigorous public sentiment expressed by the 

U.S. Government might be helpful, even though private diplomacy 

certain does have its place. 

Ms. BUERKLE. Thank you, Mr. Brookes. Ms. Lee? 

Ms. LEE. I’d like to be a little more blunt. And I would say that 

our current diplomacy with respect to China is muddled, excruciating slow, and ineffective by design. And part of that is because 

it’s not just that we have many priorities and none of them get 

achieved. I think part of it is that there is a serious disconnect between—within the business community in the United States of 

America. That you have two different groups, two very distinct 

groups. One is multinational corporations that may be operating 

75

both in the United States and in China. Some of those companies, 

let’s be honest, are actually profiting from the Chinese Government’s policies whether it’s subsidies or violations of workers’ 

rights and human rights, lack of democracy, not so much by indigenous innovation. And that’s why for the first time we actually have 

the business community rising up in outrage that there are unfair 

trade practices going on with the country of China. They just noticed it and they’re just getting active. 

But I think what’s really important for the U.S. Government is 

to make sure that we are standing up for domestic producers, those 

companies, whether they’re small and medium-size companies or 

large companies that are actually producing in the United States 

on American soil, certainly that’s where my members live. My 

members can’t outsource themselves. They need to find a good job 

here in the United States of America and they need their own Government to stand up for them in a much more consistent and coherent way than we’ve seen from our own Government so far with 

respect to currency, subsidies, intellectual property, and workers’ 

rights. 

Ms. BUERKLE. Thank you, Ms. Lee. 

Mr. Brookes, you mentioned and just in the short period of time 

we have left, turning up the heat, what would that entail? 

Mr. BROOKES. Well, certainly, the President of the United States 

has a bully pulpit to talk about these issues, whether he’s traveling 

in the region and he’s in Washington or even in China. So there 

are opportunities because people do listen to the President and I 

think that’s one of the ways to do it. Also with the Cabinet Secretaries. If they’re going to go over there, they have an opportunity 

for blunt talk and they can talk about these issues here as well and 

will be certainly picked up in the region and also try to get others 

to speak out. We’re not the only ones having this problem in trying 

to work in coalition with them to get them to make it clear to the 

Chinese that these policies aren’t acceptable. 

Ms. BUERKLE. Thank you all very much. I now yield 5 minutes 

to the gentleman from Rhode Island, Mr. Cicilline. 

Mr. CICILLINE. Thank you, Madam Chair. It strikes me from the 

testimony from all of the witnesses today that it appears as if the 

principal way that you are recommending we deal with this challenge of indigenous innovation is diplomacy and then commercial 

diplomacy which from my perspective seems to have not been very 

effective. And so I’d like each of the panelists to tell me are there 

other strategies that we can engage in that are likely to produce 

better results than simply raising the public discourse? I think we 

can do that, but it strikes me we are doing that to some degree and 

is it, in fact, are we in fact, limited simply to engaging in conversation and commercial diplomacy? And coupled with that question is 

do we have the ability under the current system and the resources 

devoted to it to actually know the scope of the problem and to have 

the information we need to be aggressive in this commercial diplomacy? I ask each of the panelists to respond to that. 

Mr. LEVY. Thank you, Congressman. I think there are a number 

of avenues through which we can pursue this. Diplomacy and sort 

of conversation about this—I think that’s what we’re putting—is 

one of them. There are other things that we can do and that we 

76

are doing. I think when there are clear-cut violations of the rules 

under the world trading system, the WTO and the GATT, we can 

and should and do pursue those. 

Sometimes those rules are not as comprehensive as we would 

like. We’ve already discussed how China is not a signatory to the 

agreement of government procurement. They are bound by some of 

the intellectual property restrictions, but we’ve already had fights 

with the WTO about just how extensive those obligations are. So 

I would put forward that one neat thing is to strengthen that global trading system because as Mr. Brookes said, we do have other 

nations which are facing similar problems and we strengthen our 

stance if we’re commonly pursuing this. But a stronger WTO system and a successful conclusion to the Doha talks would address 

this. That would be one element. And we also have aspects of U.S. 

law such as Section 337 for intellectual property violations that 

were raised earlier. 

So there’s a range of these, I think, but trying to influence China’s behavior domestically, it is going to be diplomacy which is our 

major tool. 

Mr. BROOKES. Beyond what Mr. Levy said and others on the 

panel talking about diplomacy and the WTO issue here, I think 

that one of the important things is to get our own economic house 

in order. I think that’s critically important. Our economic competitiveness which China is undermining through these policies is critically important. While we’re not economically competitive, economically powerful, it affects us in many ways besides the well being 

of the American people which is obviously a primary concern and 

it undermines our international influence. It also affects our military, our hard power, our ability to express, to do that as well. 

But I also think we also need to look forward to expanding free 

trade beyond China. I’m not necessarily calling it free trade with 

China, but free trade, in general. There are free trade agreements 

before the Congress that should be looked at. I think that’s critically important providing opportunities for American business to do 

commerce elsewhere. 

I also think that we need, and I’m not an expert in this field, but 

just as a generalist, is that we need to continue to provide robust 

opportunities for research and development in this country. What 

has made America great in an economic power that it is, is our 

ability to innovate and that’s why China wants to do exactly that 

because they saw what the United States did as opposed to what 

the Soviet Union did in becoming a world superpower, besides military power. 

So I think it’s critically important and I don’t know how you get 

to that, but that’s something outside of my lane, something beyond 

my expertise, but the ability for us to be a great innovator to create 

the great new products I think is critically important, so those are 

a couple of other things beyond commerce and WTO. 

Mr. CICILLINE. Thank you. Ms. Lee. 

Ms. LEE. Thank you. The first thing I would say is that we are 

talking ourselves into our own economic grave and time is not on 

our side in this discourse that there has been too much talk, there 

has been too much slowing—what we need is more remedies. We 

need concrete remedies. We need to take our cases to the WTO. We 

77

need to take them to a conclusion where we end up actually imposing trade sanctions where we win, and we win most of the cases 

because China is egregiously in flagrant violation of its WTO obligations on subsidies, on currency, on a whole number of things. I 

would, for one thing, certainly urge the Congress to go ahead, to 

move forward with the currency legislation, the Ryan-Hunter bill 

that has been put forward. I think that is a really important step. 

It’s one big chunk of the economic disadvantage that the United 

States producers have in the Chinese trade. 

But I would respectfully disagree with Mr. Brookes about the 

need to do more free trade agreements. I think that’s part of the 

mindset around the free trade agreements is part of what got us 

into this problem. And I also don’t agree that we need to just innovate more. We innovate plenty. We have the technology. We have 

the education. We have the skills. We’re just losing the economic 

advantage that goes along with that innovation. It’s not a question 

of the United States not being smart enough or technologically advanced enough. Thank you. 

Mr. CICILLINE. Thank you. 

Ms. BUERKLE. Thank you. I yield 5 minutes to the gentleman 

from California, Mr. Rohrabacher. 

Mr. ROHRABACHER. Thank you very much. Let me just ask a 

question of the panel very quickly. We have to go into discussion. 

There are two items, legislative items that might touch on what 

we’re talking about today. Brad Sherman, who is a member of this 

subcommittee, has suggested that we pull most favored nation status from China if it continues in its unfair trade practices with the 

United States. 

Would you favor that, Mr. Levy? 

Mr. LEVY. No, I would not. 

Mr. ROHRABACHER. Mr. Brookes? 

Mr. BROOKES. I’ve not seen the proposal. 

Mr. ROHRABACHER. Ms. Lee? 

Ms. LEE. I think it’s certainly something we should look into. 

Mr. ROHRABACHER. There is a patent bill. For 20 years, there’s 

been a group of us fighting what’s been called patent reform. And 

in reality, it’s a dramatic, how do you say, depletion of our patent 

protection for the American people. We’ve had these multinational 

corporations about 12 of them. We call them the dirty dozen, who 

are basically interested in manufacturing overseas and manufacturing in China in particular, but they have been trying to weaken 

the patent system in our country, saying that we need to harmonize it with the rest of the world, while the rest of the world, 

of course, has very weak patent protection. The United States has 

very strong patent protection. 

There is a new bill working its way through Congress. Those of 

us who are very strong for intellectual property protection are 

against this bill. Mr. Levy, is your organization for—have they 

taken a stand? Are you for or against this patent, so called reform? 

Mr. LEVY. AEI doesn’t take stands as an institution and I’m 

afraid I don’t know enough about that particular bill to give an intelligent comment. 

Mr. ROHRABACHER. Mr. Brookes? 

Mr. BROOKES. I’m in the same situation. 

78

Mr. ROHRABACHER. Okay, I would suggest that the two of you 

have your organizations look at this legislation. It is put out by the 

same people who have been trying to destroy the patent system for 

20 years and we could use your opinion on it. 

Ms. Lee, what about the AFL–CIO? 

Ms. LEE. I haven’t been following that bill closely. I can get you 

an answer. 

Mr. ROHRABACHER. Let me suggest that you do so. It’s very important. We have spent a lot of money. We spend lots of money in 

innovation. We spend lots of money on research, and a lot of it ends 

up in the hands of our competitor. It’s a travesty. It’s a travesty. 

We give a lot of these companies who end up going over to China 

to do manufacturing, a lot of them have been the recipient of major 

R&D grants by the United States Government. This is ridiculous. 

This is us paying to work against the well being of our own working people. I would suggest that we’ve got some really major issues 

at hand here. 

Let me ask about the market. You mentioned, Mr. Brookes, free 

trade. Now I believe I’m a free trader, just to let you know, and 

Ms. Lee, I tell you that. I’m a free trader, but I don’t see how you 

can have free trade unless the people who are trading are both 

free. I say I’m for free trade between free people. 

How can you have free trade, Mr. Brookes, if the other side of 

the equation is controlled trade? So it’s only one free trade system 

and then it leaves it up to being manipulated by the gangsters and 

the thugs who run these other countries. It’s not really free trade, 

is it, if you don’t have freedom on both sides of the equation. 

Mr. BROOKES. I don’t dispute that. 

Mr. ROHRABACHER. Well, that’s what’s been happening to our relationship with Communist China for the last 40 years. They have 

used market access and subsidies and intellectual property theft 

and currency manipulation in order to control what’s going on over 

there, while we have given them access to our markets, tried to 

make sure that we’re even handed in terms of our currencies and 

our subsidies, and our own regulation of our own businesses here. 

So that type of—let me just note, this type of sincerity, I’m sure 

is deeply appreciated by the goons who control the power in Beijing. Those people look at us like we’re fools. And our people are 

paying a big price and there’s a lot of CEOs in this country who 

are going along with it because they can make a quick profit, a 

quick profit in China and put a big bonus in their pocket and then 

leave the scene by the time the real economic repercussions are felt 

from transferring all over the R&D and transferring over the investment and the machinery and the technology that we’ve developed in the United States. 

This is an issue that really needs a close look. I understand 

where Ms. Lee is coming from. I would hope that my friends on the 

conservative side of the spectrum start looking and realizing that 

we have to represent the interests of the people of the United 

States of America and just starting off, free trade, when you’re allowing it to be manipulated on the other side by gangsters is a 

great disservice to our country. So with that, thank you very much, 

Madam Chair. 

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Ms. BUERKLE. Thank you, Mr. Rohrabacher. I now yield 5 minutes to the gentleman from California, the ranking member, Mr. 

Sherman. 

Mr. SHERMAN. Thank you, Madam Chair. I do want to mention 

a word or two about the bill I’ll be re-introducing. 

Mr. ROHRABACHER. Which I mentioned before you came in and 

I support, Mr. Sherman. 

Mr. SHERMAN. Thank you, because, Madam Chair, I’ve been here 

for a while. This is not the first gripe session I’ve been to about 

China. I’ve been to these for 15 years and one option you’ll have 

and the other new Members of Congress will have is to join for another 15 years of gripe sessions. You’ll also have the joy of the signon letters, where you send letters to the Chinese Embassy and sign 

your name and if you think that accomplishes something, more 

power to you. 

But the other approach is for us to force a crisis in this relationship because I think we already have a crisis for the United States. 

For 6 months end MFN for China and tell the Chinese that if they 

want to export $400 billion worth of goods to the United States, 

they’re going to have to import $400 billion of goods from the 

United States. A balanced trade agreement with China will hopefully be the result, but we’re certainly not going to get such an 

agreement from them, as long as they have free access to the U.S. 

market under the conditions partially described by today’s hearings. 

Now it’s unfortunate that our witness from the ITC has left. Not 

seeing any senior staff from ITC here, unless they identify themselves for the record, so I will make sure that our first witness gets 

the transcript of the second half of the hearing and I would hope 

that the Executive Branch would view congressional hearings not 

as a burden, but as an opportunity for learning. 

One of the things we learned from the ITC was that they do surveys of employers to see if we have any problems. 

Ms. Lee, did they ever survey organizations that represent workers? 

Ms. LEE. Not that I know of. 

Mr. SHERMAN. Wouldn’t you be among the organizations that 

represent workers that they would typically—can you think of a 

larger organization than the one you represent that represents 

workers? 

Ms. LEE. No. 

Mr. SHERMAN. And as we’ve seen, there are at least some businesses who think that they can enjoy a profit by offshoring maybe 

just a short-term profit, so we ought to have an ITC that is workeroriented, not just company-oriented. 

Ms. Lee, what would you think of the ITC no longer being an 

independent organization, but instead being part of the Department of Labor? 

Ms. LEE. I think it would certainly be a huge improvement if the 

ITC did take its job seriously as looking at the impact on workers, 

not just on businesses and the profitability of businesses, but they 

took seriously how working people might be impacted by different 

changes in trade policy. And course, you mentioned earlier that 

their economic modeling with respect to the job impact of trade 

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agreements has been notoriously inaccurate over many years and 

yet it is still used as though those numbers are gospel. 

Mr. SHERMAN. They weren’t within a couple trillion dollars over 

the last decade. And you criticize them. Are you always that tough? 

Let me move on to another question, Ms. Lee. One does not regularly associate organized labor with intellectual property concerns, 

perhaps because the creators of intellectual property are for the 

most part not unionized. 

Can you explain why IP protection, especially combating theft 

and compelled transfer of American IP by the Chinese is a significant concern for the AFL–CIO? 

Ms. LEE. I’d be delighted to. And first of all, we do represent a 

lot of both performers and writers and other people who make a 

living from intellectual property rights, musicians, and actors and 

so on, and we often hear from those unions that they are very 

much in favor of strengthening the intellectual property rights protections that we have overseas. They lose billions and billions of 

dollars worth of revenue, some of that is revenue to the performers 

themselves through the violations of intellectual property rights. 

In the music industry, for example, the Chinese music market is worth around $100 million, but it should be more than $1 billion. 

So that’s $900 million worth of revenues that is lost to both American musicians and also companies because of Internet theft and 

because of other physical theft of intellectual property rights. So 

there certainly are a lot of jobs and there is income associated with 

the violation of intellectual property rights. That’s also true, I 

think. Mr. Rohrabacher used the example of the carts, you know 

when the design of the carts is stolen and moved to China. Those 

hundred workers lost their jobs immediately. His friend, at least, 

was able to keep the ownership and do a joint venture for several 

years before he was edged out of the company, but those 150 workers or so lost their jobs immediately. 

Mr. SHERMAN. I’m going to ask unanimous consent to be able to 

ask one more question? 

Ms. BUERKLE. Without objection. 

Mr. SHERMAN. This Korea free trade agreement, it allows goods 

to be 65 percent made in China. For certain classes of goods that 

percentage is different, but 65 percent is what applies to auto, 

ships, electronics, boilers, aluminum, iron, steel. And then those 

goods can go to South Korea where Chinese guest workers living 

in barracks can do the other 35 percent of the work. 

Do you think that American workers will be at a disadvantage 

if they have to compete against goods that are made exclusively 

with Chinese labor and instead of most favored nation status, we 

have free trade agreement treatment of those goods? And do you 

think it’s fair that goods that 100 percent Chinese labor can come 

into the United States with a free trade agreement totally duty free 

while China will have duties on all our goods, in other words, we’d 

have a one-way free trade agreement with China? 

Ms. LEE. We are always in favor of stronger rules of origin because we think that if we’re going to negotiate a trade agreement 

with a country, the benefits should go to the country that makes 

the concessions, whether it’s on intellectual property rights or market access or workers’ rights or environmental protections. And so 

81

we were very concerned about the Korea FTA and the relatively 

weak rule of origin there that allows quite a large quantity of the 

final product to be assembled outside of South Korea, could be in 

China, could be in North Korea, it could be other places. And that 

is very troubling to us. 

It’s also not good for Korean workers. It’s not good for U.S. workers. We have been in contact with our Korean counterparts and 

they were also very concerned that the benefits of the agreement 

will not necessarily go to the two countries that have signed. 

Mr. SHERMAN. Thank you for mentioning the tremendous benefits that North Korea will get under this agreement, which I 

haven’t mentioned up until now because those are the subject in 

part of our hearing tomorrow. 

Ms. BUERKLE. Thank you, Mr. Sherman. Let me begin by saying 

thank you to our panelists and for taking time out of your busy 

schedules to come here today and testify. We appreciate that very 

much. 

Without objection, your full testimonies will be entered into and 

made part of the record. And members will have 5 days to add any 

questions or opening statements to the record. 

This subcommittee hearing is adjourned. 

[Whereupon, at 4:37 p.m., the hearing was concluded.] 

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