U.S. GOVERNMENT PUBLISHING OFFICE

WASHINGTON : 

For sale by the Superintendent of Documents, U.S. Government Publishing Office

Internet: bookstore.gpo.gov Phone: toll free (866) 512–1800; DC area (202) 512–1800

Fax: (202) 512–2104 Mail: Stop IDCC, Washington, DC 20402–0001

25–259PDF 2017

CHINA’S TECHNOLOGICAL RISE: CHALLENGES TO

U.S. INNOVATION AND SECURITY

HEARING

BEFORE THE

SUBCOMMITTEE ON ASIA AND THE PACIFIC

OF THE

COMMITTEE ON FOREIGN AFFAIRS 

HOUSE OF REPRESENTATIVES

ONE HUNDRED FIFTEENTH CONGRESS

FIRST SESSION

APRIL 26, 2017

Serial No. 115–22

Printed for the use of the Committee on Foreign Affairs

(

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

http://www.gpo.gov/fdsys/

(II)

COMMITTEE ON FOREIGN AFFAIRS 

EDWARD R. ROYCE, California, Chairman 

CHRISTOPHER H. SMITH, New Jersey 

ILEANA ROS-LEHTINEN, Florida 

DANA ROHRABACHER, California 

STEVE CHABOT, Ohio 

JOE WILSON, South Carolina 

MICHAEL T. MCCAUL, Texas 

TED POE, Texas 

DARRELL E. ISSA, California 

TOM MARINO, Pennsylvania 

JEFF DUNCAN, South Carolina 

MO BROOKS, Alabama 

PAUL COOK, California 

SCOTT PERRY, Pennsylvania 

RON DESANTIS, Florida 

MARK MEADOWS, North Carolina 

TED S. YOHO, Florida 

ADAM KINZINGER, Illinois 

LEE M. ZELDIN, New York 

DANIEL M. DONOVAN, JR., New York 

F. JAMES SENSENBRENNER, JR., 

Wisconsin 

ANN WAGNER, Missouri 

BRIAN J. MAST, Florida 

FRANCIS ROONEY, Florida 

BRIAN K. FITZPATRICK, Pennsylvania 

THOMAS A. GARRETT, JR., Virginia 

ELIOT L. ENGEL, New York 

BRAD SHERMAN, California 

GREGORY W. MEEKS, New York 

ALBIO SIRES, New Jersey 

GERALD E. CONNOLLY, Virginia 

THEODORE E. DEUTCH, Florida 

KAREN BASS, California 

WILLIAM R. KEATING, Massachusetts 

DAVID N. CICILLINE, Rhode Island 

AMI BERA, California 

LOIS FRANKEL, Florida 

TULSI GABBARD, Hawaii 

JOAQUIN CASTRO, Texas 

ROBIN L. KELLY, Illinois 

BRENDAN F. BOYLE, Pennsylvania 

DINA TITUS, Nevada 

NORMA J. TORRES, California 

BRADLEY SCOTT SCHNEIDER, Illinois 

THOMAS R. SUOZZI, New York 

ADRIANO ESPAILLAT, New York 

TED LIEU, California

AMY PORTER, Chief of Staff THOMAS SHEEHY, Staff Director

JASON STEINBAUM, Democratic Staff Director 

SUBCOMMITTEE ON ASIA AND THE PACIFIC

TED S. YOHO, Florida, Chairman 

DANA ROHRABACHER, California 

STEVE CHABOT, Ohio 

TOM MARINO, Pennsylvania 

MO BROOKS, Alabama 

SCOTT PERRY, Pennsylvania 

ADAM KINZINGER, Illinois 

ANN WAGNER, Missouri 

BRAD SHERMAN, California 

AMI BERA, California 

DINA TITUS, Nevada 

GERALD E. CONNOLLY, Virginia 

THEODORE E. DEUTCH, Florida 

TULSI GABBARD, Hawaii 

(III)

C O N T E N T S 

Page

WITNESSES 

Mr. Dean Cheng, senior research fellow, Asian Studies Center, The Heritage 

Foundation ............................................................................................................ 8

Robert D. Atkinson, Ph.D., president, Information Technology and Innovation 

Foundation ............................................................................................................ 24

Robert E. Scott, Ph.D., senior economist, Director of Trade and Manufacturing 

Policy Research, Economic Policy Institute ....................................................... 53

LETTERS, STATEMENTS, ETC., SUBMITTED FOR THE HEARING 

The Honorable Ted S. Yoho, a Representative in Congress from the State 

of Florida, and chairman, Subcommittee on Asia and the Pacific: Prepared 

statement .............................................................................................................. 3

Mr. Dean Cheng: Prepared statement ................................................................... 10

Robert D. Atkinson, Ph.D.: Prepared statement ................................................... 26

Robert E. Scott, Ph.D.: Prepared statement .......................................................... 55

APPENDIX 

Hearing notice .......................................................................................................... 90

Hearing minutes ...................................................................................................... 91

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

Commonwealth of Virginia: Prepared statement .............................................. 92

Written responses from the witnesses to questions submitted for the record 

by the Honorable Ted S. Yoho, a Representative in Congress from the 

State of Florida, and chairman, Subcommittee on Asia and the Pacific ......... 94

(1)

CHINA’S TECHNOLOGICAL RISE: CHALLENGES 

TO U.S. INNOVATION AND SECURITY 

WEDNESDAY, APRIL 26, 2017

HOUSE OF REPRESENTATIVES,

SUBCOMMITTEE ON ASIA AND THE PACIFIC,

COMMITTEE ON FOREIGN AFFAIRS,

Washington, DC. 

The subcommittee met, pursuant to notice, at 2:32 p.m., in room 

2172, Rayburn House Office Building, Hon. Ted Yoho (chairman of 

the subcommittee) presiding. 

Mr. YOHO. All right. The subcommittee will come to order. Members present will be permitted to submit written statements to be 

included in the official hearing record. Without objection, the hearing record will remain open for 5 calendar days to allow statements, questions, and extraneous materials for record, subject to 

length, limitations, and the rules. 

China’s growth as a technological powerhouse is one of a number 

of momentous changes taking place in the U.S.-China relationship. 

Some changes are driven by pressing threats, like North Korea’s 

belligerence and the resulting close communications between President Trump and President Xi. Others like the President’s executive 

order on steel imports are simply the result of our change in administration. Still more, like the impending launch of China’s first 

indigenous produced aircraft carrier, are symbolic of China’s growing power. 

These changes will demand policy adjustments, which is no easy 

task. Our bilateral relationship is the most consequential in the 

world. We can’t set policy based solely on short-term commitments 

by China to reign in its dangerous North Korean trading partner 

or predatory trade practices. During this time of recalculation, the 

United States must account for the complete picture, taking into 

account broader long-term trends. China’s policies toward high 

technology and its conduct in the high-technology sectors make up 

concerning pieces of this picture. 

China is relentlessly pursuing long-term degradation of U.S. 

strategic and economic interests through its high-tech policies. As 

China has risen, it has not integrated itself into the existing rules 

and structures for global leadership and trade as many have hoped. 

In high-tech sectors and more broadly, China has undertaken mercantilist industrial policies to advance its business interests at the 

expense of others and pursued asymmetric strategic capabilities 

that erode traditional understandings of military operations. 

2

China has undertaken a comprehensive industrial strategy to advance domestic high-tech industry through nonmarket means. Massive state subsidies and zero sum tactics degrade foreign competitiveness, and the systematic and widespread theft of intellectual 

property and forced transfers of technology destroys innovation and 

research investments. Today is World Intellectual Property Day, a 

fitting time for a reminder that protecting U.S. innovation must be 

an inviolable part of our national strategy toward China. 

These predatory industrial policies are in full display in China’s 

ongoing attempts to dominate critical high-technology supply 

chains such as semiconductor production. The economic stakes are 

high. The United States is the world’s leader in semiconductors. 

The industry employs more Americans than the steel industry, and 

semiconductors are our fourth most valuable export. 

But the security concerns are also significant. Semiconductors 

are the enabling technology of all electronics, and a comprised supply chain could contaminate sensitive military technology with secret back doors. 

China’s high-tech policy is also challenging U.S. leadership in 

space. China is expanding its scientific exploration and space-based 

military capabilities at a rate that may credibly make outer space 

into a bipolar domain. This is a significant strategic threat as top 

U.S. military strategists predict that space-based capabilities will 

be the key to all future conflicts. Under the status quo, China will 

own the Earth’s only manned space station and will beat the 

United States back to the Moon in the coming years. 

Future conflicts also highlight the threat posed by China’s cyber 

capabilities. It is believed that the U.S. critical infrastructure has 

already penetrated numerous times, putting it at risk if a conflict 

were to occur. The ability to threaten U.S. energy grids and utilities network mean that the homeland could suffer serious costs 

from conflicts that would otherwise be limited and regional. 

China’s cloud has grown along with its economic power, but 

China has not matched its growing influence with behavior expected of a global leader. This is particularly concerning in hightech fields which will be critical to future economic gains. 

China is the world’s second largest economy, but in pursuing 

dominance in high-tech sectors, it regularly violates or disregards 

the practices that have contributed to global economic growth. The 

emerging strategic commons of cyberspace and outer space are critical for global security. But China’s action in these domains and its 

track record in the South China Sea raises serious doubts that 

China can be trusted to act responsibly and follow international 

law in shared spaces. 

I thank the panel for joining us today to discuss the challenges 

to U.S. innovation and security presented by China’s high-tech policies in these critical areas. I look forward to hearing your recommendations for U.S. policies. 

And without objection, the witnesses’ written statements will be 

entered into the hearing record. I now am going to turn to our 

ranking member for any remarks he may have. 

[The prepared statement of Mr. Yoho follows:]

3


25259f-1.eps

China's Technological Rise: Challenges to U.S. Innovation and Security 

Subcommittee on Asia and the Pacific 

House Committee on Foreign Affairs 

Wednesday, April26, 2017,2:30 p.m. 

Opening Statement of Chairman Ted Yoho 

China's growth as a technological powerhouse is one of a number of momentous changes taking 

place in the U.S.-China relationship.' Some changes are driven by pressing threats, like North 

Korea's belligerence and the resulting close communication betweenPresident Trump and 

President Xi. Others, like the President's executive order on steel imports, are simply the result 

of our change in administration. Still more, like the impending launch of China's first 

indigenously-produced aircraft carrier, are symbolic of China's growing power. 

These changes will demand policy adjustments, which is no easy task. Our bilateral relationship 

is the most consequential in the world. We can't set policy based solely on short term 

commitments by China to rein in its dangerous North Korean client state or predatory trade 

practices. During this time of recalculation, the United States must account for the complete 

picture, taking into account broader long tenn trends. China's policies towards high-technology 

and its conduct in high-tech sectors make up a concerning piece of this picture. 

China is relentlessly pursuing long-term degradation ofU,S. strategic and economic interests 

through its high tech policies. As China has risen, it has not integrated itself into the existing 

rules and structures for global leadership and trade, as many hoped. In high-tech sectors and 

more broadly, China has undertaken mercantilist industrial policies to advance its business 

interests at the expense of others and pursued asymmetric strategic capabilities that erode 

traditional understandings of military operations. 

China has undertaken a comprehensive industrial strategy to advance domestic high-tech 

industries through.non-market means. Massive state subsidies and zero-sum tactics degrade 

foreign competitiveness, and the systematic and widespread theft of intellectual property and 

forced transfer of technology destroys innovation and research investments. Today is World 

Intellectual Prope1ty Day, a fitting time for a reminder that protecting U.S. innovation must be an 

inviolable part of our national strategy towards China. 

These predatory industrial policies are in full display in China's ongoing attempts to dominate 

critical high-tech supply chains such as semiconductor production. The economic stakes are 

high-the United States is the world's leader in semiconductors, the industry employees more 

Americans than the steel industry, and semiconductors are our fourth most valuable export. 

But the security concerns are also significant. Semiconductors are the enabling technology of all 

electronics, and a compromised supply chain could contaminate sensitive military technology 

with secret backdoors. 
4


25259f-2.eps

China's high-tech policy is also challenging U.S. leadership in space. China is expanding its 

scientific exploration and space-based military capabilities at a rate that may credibly make outer 

space into a bipolar domain. This is a significant strategic threat, as top U.S. military strategists 

predict that space-based capabilities will be the key to all future conflicts. Under the status quo, 

China will own the Earth's only manned space station and will beat the United States back to the 

moon in the coming years. 

Future conflicts also highlight the threat posed by China's cyber capabilities. It is believed that 

U.S. critical infi·astructurc has already been penetrated numerous times, putting it at risk if a 

conflict were to occur. The ability to threaten U.S. energy grids and utilities networks means that 

the homeland could suffer serious costs from conflicts that would otherwise be limited and 

regional. 

China's clout has grown along with its economic power, but China has not matched its growing 

influence with the behavior expected of a global leader. This is particularly concerning in hightech fields which will be critical to future economic gains. 

China is the world's second-largest economy, but in pursuing dominance in high-tech sectors, it 

regularly violates or discards the practices that have contributed to global economic growth. The 

emerging strategic conunons of cyberspace and outer space are critical for global security, but 

China's actions in these domains and its track record in the South China Sea raise serious doubts 

that China can be trusted to act responsibly and follow international law in shared spaces. 

I thank the panel for joining us today to discuss the challenges to U.S. innovation and security 

presented by China's high-tech policies in these critical areas, and I look forward to hearing your 

reconunendations for U.S. policy. 

2 
5

Mr. SHERMAN. And believe it or not, I have a few. 

Friends trade with each other on a balanced and fair basis. I am 

glad to have another hearing focused on their trade relationship 

with China. Recently, we saw a phenomenal event at Mar-a-Lago, 

the total capitulation to President Xi on all economic issues. So 

much else was going on in the world that the press didn’t bother 

to cover it, but the fact is that a President that promised to be 

tough on China trade let President Xi go home thinking we would 

do absolutely nothing. 

Now supposedly, this is in return for a promise that China’s 

going to help us with regard to North Korea. First, what kind of 

friend needs to be bought off with American jobs in order to stop 

subsidizing and supporting a lunatic that wants to develop the capacity to incinerate American cities. That is not something that we 

should have to pay for in American jobs. 

But second, China isn’t doing it. Refinement of uranium and creation of plutonium continues in North Korea. The missile tests take 

place every time there is the anniversary of one of the leader’s 

forbearers. And China delays the purchase of one or two trains of 

coal. Of course, the country with perhaps the most polluted urban 

areas in the world when it comes to air might want to cut back on 

its coal imports anyway. This is an utter capitulation to China in 

return for basically nothing and certainly nothing that has made 

us safer. 

We are the global leader in technology and science. The recent 

budgetary proposals to cut back on scientific development aren’t 

going to help that. China’s Made in China 2025 proposal is designed to take—to make the trade balance even more unbalanced 

by replacing those products that they import from us and exporting 

more to us. China’s trade practices include, first and foremost, a rejection of the concept that there should be fair and balanced trade 

with the United States, and include historic currency manipulation, 

propping up state-owned enterprises, intellectual property, theft, 

forced technology transfer, dumping, barriers to importation, nontransparent trade laws and regulations, subsidies leading to overcapacity, et cetera, et cetera. 

Now, the—we had a $310 billion trade deficit with China. This 

is the largest persistent trade deficit in the history of the world. 

In 2015, it was $336 billion. We are told by the Washington/

Walmart/Wall Street axis a variety of things. First, we are told it 

doesn’t matter. Well, it does, because every billion dollar trade deficit translates into losing 10,000 jobs. We are told our unemployment rate is low. Our unemployment rate is not low enough to create the labor shortage necessary so that Wall Street has to raise 

wages. Until we see a massive increase in wages, we need every 

good job we can get, and every billion dollars of unbalanced trade 

is 10,000 jobs. 

We are told that the trade deficit stems from a fair system, and 

that of course is absolutely false. And we now see that with advanced technological products, where China should be importing 

more from the United States, we ran a $114 billion trade deficit 

with China last year, and it’s only going to get worse. 

Now, as to its practices, China’s coproduction agreements—I 

mean, if China were to say, there is a 20-percent tariff on planes 

6

sent from the United States to China, oh, we would say, oh, that 

is a tariff. But if instead they say you can’t sell a single plane until 

you build a fuselage factory here in China, we say, oh, we don’t 

know what to make of that, so we will ignore it. Coproduction 

agreements are the theft of jobs and with regard to China, the 

theft of intellectual property. We allow them because the Wall 

Street/Walmart/Washington axis does not support the American 

working family. 

We can go on and look at the General Motors situation where we 

can’t sell cars there unless we move the factories there. I have 

talked about how Boeing has set to open up its first factory line 

in China, not because of fair economics, but because we are not 

able to sell planes in China unless they extort that from us. So one 

would have to wonder on what basis we claim that China has given 

us most-favored nation status. 

So what is Trump going to do about it? He won the Midwest from 

Pittsburgh to Milwaukee saying he was going to solve this problem. 

Current law allows him to impose, depending, 10 percent, another 

15 percent, another 15 percent tariffs on Chinese imports or to 

threaten to do so. He has done neither. The trade deficit is running 

today as it has run in the past. There was a blip because of Chinese New Years, but that is a blip we would expect every time 

there is a Lunar New Year. 

So he’s got the power, and the most obvious thing he can do is 

designate China a currency manipulator. Now, you can say, well, 

maybe they are not manipulating the currency today. How many 

factories have they built? What competitive advantage have they 

stolen from the currency manipulation in the past? Since when are 

you not a currency? That is like saying, I didn’t murder anybody 

today; therefore, I am not a murderer. They benefit from their past 

currency manipulation. 

So the President told us he would do something. He campaigned—when it came to China, he campaigned with a big mouth 

and he governs with small hands. 

I yield back. 

Mr. YOHO. And you worked that in there. 

We are going to extend a minute to each of the members that 

want to speak, and we will start with Mr. Dana Rohrabacher out 

of California. 

Mr. ROHRABACHER. One of the things I am proudest of is that I, 

early on in my career here in Congress, led the floor fight against 

most-favored nation status for China, and all those folks on the 

other side of the debate were telling us how making sure that 

China prospered by having the right kind of economic relationship 

would bring liberalism in a more peaceful world. Now we now what 

baloney that is and what baloney we have been fed about China 

all these years. 

China is an emerging threat to the United States and an emerging threat to people who want to live at peace in the world. They 

have more land claims and territorial claims than most any other 

country in the world against various other countries, which we ignore. And we now, of course, hear that our President now has not 

been tough enough with this visit of this Chinese leader. Let me 

just wait and see. I said, let’s wait and see. Let’s see if indeed these 

7

Chinese who have not done anything but steal and rob from us, undermining our national security all these years, let’s see if they 

help us at least with this problem in North Korea, which is a horrendous problem. If they do, our President has accomplished a 

great accomplishment. So let’s not just turn this into a totally political brouhaha. 

Mr. YOHO. Thank you. 

Next, we will go to Mr. Chabot from Ohio. 

Mr. CHABOT. I thank the gentleman. 

Having been a past chair of this committee, we have had hearings like this in the past, and China just—and Mr. Sherman is 

nodding—we have been through this before a number of times. And 

now as chair of the Small Business Committee, we have seen 

things that are affecting small businesses all over the country relative to what China’s shenanigans are. 

U.S. security contractors discovered preinstalled software in Android phones belonging to American cities. This software enabled 

them to effectively keep tabs not only on the owners’ whereabouts 

but on their private conversations with friends and family members 

and business partners, et cetera. This unauthorized and private information was then silently transmitted back to a server located in 

China. 

I have only got a minute, so I can’t go on nearly long enough on 

this. But China has been one of the bad actors on the world globe 

for far too long, and I am very, very looking forward to hearing—

we had a couple of witnesses before, when I was chair, and we 

have got some good witnesses here. So I commend the chairman for 

bringing this panel together, and I yield back. 

Mr. YOHO. Thank you, sir. 

And I just want to remind members that votes are going to be 

called between 3 o’clock to 3:10, and we are going to have to take 

a break. If you guys would hold on, if you can, it is going to take 

us probably 20 to 30 minutes to do that and we can finish up. And 

if you can’t, we understand. 

But with us today—and I am very thankful for this. I look to you 

guys as the experts to help us guide—to guide us to get policies 

that we can pass on to the State Department and this new administration to help direct policies on how we deal with an emerging 

China. 

And with us today we have Mr. Dean Cheng, senior research fellow at The Heritage Foundation, Asian Studies Center; Dr. Robert 

Atkinson, president of the Information Technology and Innovation 

Foundation; and Dr. Robert Scott, senior economist and director of 

trade and manufacturing policy research at the Economic Policy Institute. 

We thank the panel for joining us today. I really do look forward 

to hearing your testimonies because this is what—you know, as 

Chairman Chabot brought up, we have been here before. What I 

don’t want to do is come back a year from now or 2 years from now 

and say, man, we talked about this 2 years ago. What did we do 

in the interim? I want to have some action items that we can go 

back and we can create legislation to have action statements. 

Mr. Cheng, we are going to start with you. Press your red button 

to speak, and your timer. I am going to try to hold you guys to 5 

8

minutes. I know that is sometimes tough, but I do appreciate it. 

And so go ahead. Thank you. 

STATEMENT OF MR. DEAN CHENG, SENIOR RESEARCH FELLOW, ASIAN STUDIES CENTER, THE HERITAGE FOUNDATION 

Mr. CHENG. Chairman Yoho, Ranking Member Sherman, members of the House Foreign Affairs Committee, my name is Dean 

Cheng, I am the senior research fellow for Chinese political and security affairs at The Heritage Foundation. Please let me note I am 

not an economist. I am honored to be here and testifying before you 

but must note that my testimony reflects only my opinions and do 

not represent those of The Heritage Foundation. 

Before addressing the specifics of the issues that are laid out before us, I think it is important to recognize a couple of framework 

aspects, one of which is that innovation in particular can often 

come in very different forms. We as Americans tend to focus on 

technological innovation, but there are other examples of innovation, including fundamental scientific breakthroughs, what are 

sometimes termed paradigm shifts; innovations in terms of organization; and innovation in terms of processes, especially production 

or delivery methods. 

This is important because it is also important to recognize that 

others have successfully innovated in the past, often building on 

top of our own breakthroughs. The best example here, of course, is 

Japan, who in the 1980s built on the American invention of VCRs 

by making significant innovations in the production processes so 

that they could manufacture VCRs more cheaply, and yet they 

would be much more reliable than those that were produced by the 

United States at the time. 

In this regards then, when we look at China in innovation, it is 

important to also recognize how much China is focused on information-related technologies. And this is in part because the Chinese 

leadership believes that we are now living in an information age. 

So the very nature of international power, the currency of international power has shifted from traditional industry, per se, the 

shareability to manufacture tanks or steel or generate power, toward the ability to gather information, analyze information, and 

exploit information. 

As a result, China believes that in a sense the global balance of 

power has been reset back to zero where everyone is starting from 

the same starting point and China can therefore catch up much 

more easily. At the same time, China has also recognized that this 

has implications for regime stability as well as national security. 

We see, for example, significant Chinese efforts at innovation in 

their space effort. Too often we are working off the very wrong perception the China space program is entirely rooted upon copying 

from others when, in fact, to begin with, China’s space program 

really took off when it was isolated from all other players. It entered the space age in the 1960s when it had no relations with either the United States or the Soviet Union. Often, Chinese equipment, while externally similar, is in fact significantly different from 

the ostensible source. The Shenzhou manned spacecraft is bigger. 

Its power-generating capacity is significantly larger than the Soyuz 

to which it bears a superficial resemblance. 

9

And finally, we are seeing genuine Chinese innovation in space. 

They deployed the first quantum communication satellite, which 

is—probably enjoys unbreakable encryption. They have developed a 

direct descent antisatellite capability to threaten targets in the geosynchronous belt. No other country has developed that. They are 

deploying a communications satellite at Lagrange point 2 to support a mission to the far side of the Moon, which no other nation 

has done. And finally, their BeiDou Navigation Satellite has a 

backup communications capability. Again, a setup that no other 

country has done. 

We see the same actual innovation in terms of Chinese cyber. 

The great firewall of China is a form of innovation. It is something 

that obviously strikes at values like the free flow of information, 

but that is a values issue, not an innovation issue. PRC telecoms 

have demonstrated the ability to selectively shut down things like 

text messaging while—without shutting down mobile phone service. And the great canon allows China to selectively target different 

entities for DDOS, for distributed denial of service attacks, which 

no other country, frankly, has developed. 

China has also developed an organization involving hundreds of 

thousands of human censors to censor the internet within China. 

Again, not something that we would support, but it is a form of innovation. 

None of this is to argue that China does not engage in cyber espionage or that China does not engage in unfair trade practices. 

Rather, it is to suggest that it is important to recognize that they 

do those things, but that they also promote innovation within 

China. They are trying to catch up, including in terms of innovation in key areas such as space and cyber. One of the key areas 

that they are likely to follow up on is to push for access through 

venture capital and other entities in the United States that they 

will have had a hand in setting up. 

And I would strongly recommend to this committee thinking 

about a follow-on to the CFIUS process where we are not just simply limiting Chinese entry into our markets but what happens 

after they have already entered. 

Thank you very much. 

[The prepared statement of Mr. Cheng follows:]

10


25259a-1.eps

INFORMATION DOMINANCE: 

THE IMPORTANCE OF INFORMATION AND OUTER SPACE IN CHINESE THINKING 

Chairman Yoho, Ranking Member Shennan, and Members of the House Foreign Affairs 

Committee. Thank you for the opportunity to testify to you this afternoon. 

My name is Dean Cheng and I am Senior Research Fellow in the Asian Studies Center of the 

Davis Institute for National Security and Foreign Policy at The Heritage Foundation. My 

comments today are purely my own and should not be construed as representing any official 

position of The Heritage Foundation. 

My comments today focus on the evolving views of the People's Republic of China (PRC) 

regarding the role and importance ofinfonnation. Note that this is not only a matter of the role of 

information in open warfare, but also its place in the strategic competition in which the United 

States and the PRC already find themselves. 

Growing Role of Information in War and Peace 

From the Chinese perspective, these changes in the role of information are based on the 

fundamental shift in global socioeconomic conditions. The 20th Century was characterized by 

the Industrial Age. The very fundamentals of power were rooted in industrial capacity. Nations 

were measured and compared by their industrial capacity. Wars were won, not only by masses of 

tanks, ships, and aircraft, but the possession of the industrial base necessary to produce those 

weapons. 

By contrast, in the Chinese view, the 21st Century is marked by the Information Age. Where 

national power was once a function of gigawatts of generating capacity and tons of iron smelted, 

it is now more a function of the ability to gather, analyze, and exploit information. The rise of 

telecommunications, the global Internet, and massive advances in computing power now provide 

unprecedented global access to infonnation-and therefore the ability to infonn but also to 

influence. This increasing centrality of information is termed "informationization" (xinxihua; {§ 

,~,{-t). 

1 
11


25259a-2.eps

Just as informationization has affected global economy and society, it has also influenced the 

nature of war. War, from the PRC's perspective, is a function of not just military forces and 

politics, but also reflects larger social, economic, and technological trends. The rise of the 

Information Age, marked by the widespread integration of information and infonnation 

technology into all aspects of modem society and economics, also affects the nature of conflict, 

leading to "informationized warfare" (xinxihua zhanzheng; {;';,1\!,{t~t'l+). 

What is essential to recognize is that, for the Chinese, both information extraction and 

information exploitation, which are central to establishing infonnation dominance: 

Are essential to modem warfare; 

• Must occur in peacetime, in order to be useful in wartime; and 

• Go far beyond purely military-related information, and includes economic and political 

information. 

The PLA and Information 

A key player in Chinese efforts to compete in an informationized world is the People's 

Liberation Anny (PLA). The PLA is not a national military, but is first and foremost a Party 

army. Indeed, the PLA is the armed wing of the Chinese Communist Party (CCP). Therefore, it 

does the Party's bidding, including keeping the Party in power. 

Its actions are therefore not those of a "rogue" military. As important, they are undertaken in 

support of broader national goals and polices, as set forth by the CCP, in support of expanding 

the power of both the Chinese state and the Party itself Thus, it is entirely consistent with the 

roles and missions of the PLA for it to be tasked with obtaining industrial and economic 

information, as well as military codes and war plans. 

Furthennore, this is not "your father's PLA." This is no longer a PLA that is focused primarily 

on quantity. lt is, instead, a learning organization that has paid close attention to other peoples' 

wars, in part because it has not fought one itself since 1979. As a learning organization, it has 

been adapting to the changing circumstances of modem warfare, adopting fundamentally new 

approaches to conflict. 

2 
12


25259a-3.eps

Consequently, the PLA has been increasingly focusing on high technology and high-tech wars, 

dating back to at least the first Gulf War. From that conflict, and the Balkan wars of the 1990s, 

the PLA concluded that future wars would be joint, not only involving the ground forces, navy, 

and air force, but involving operations across the domains of land, sea, air, outer space, and 

information space (which includes cyberspace). 

As the PLA observed in subsequent conflicts including those in Afghanistan and Iraq, however, 

their views of tuture warfare further evolved. In order to operate effectively across the various 

domains, the PLA would need to establish common situational awareness. Jointness was no 

longer a matter of getting air, land, and sea forces in the same operational volume, but it involved 

allowing ground forces to get targeting information from air units, and naval forces to support air 

and land forces. For the PLA, this meant that not all high technology was created equal-the 

most important technologies were those associated with information, including 

telecommunications, computing, and space. 

This shift reflected the informationization of warfare, where infonnation was applied to all 

aspects of warfare. This includes not just weapons, but logistics, personnel selection and 

management, and decision making. 

Tnformationization of Conflict 

According to the PLA's volume on terminology, informationized warfare is warfare where there 

is widespread use of informationized weapons and equipment and networked information 

systems, employing suitable tactics, in joint operations in the land, sea, air, outer space, and 

electromagnetic domains, as well as the cognitive arena. lnfonnationized warfare in tum 

involves informationized militaries, which will operate through networked combat systems, 

command-and-control systems, and logistics and support systems, as part of the systems-ofsystems construct. 

The focus of informationized warfare is establishing "information dominance'' (::hi xinxi quem; i[,rj 

ia.t!.t:X.). This is the ability to establish control of infonnation and infonnation flow at a particular 

3 
13


25259a-4.eps

time and within a particular space. 1 It entails the ability to collect more information, manage and 

analyze it faster, and employ it more precisely than the adversary2 In doing so, in the Chinese 

view, the side that enjoys infonnation dominance can seize and retain the initiative, and force the 

adversary into a reactive mode. This exploits a key difference between mechanized warfare of 

the Industrial Age, and infonnationized warfare of the Infonnation Age. "Mechanized warfare 

focuses on physically and materially destroying an opponent, whereas informationized warfare 

focuses on inducing the collapse of the opponent's psychology and willd 

Establishing information dominance entails efforts that span the strategic to the tactical level Tt 

is not simply a wartime requirement, but involves intelligence gathering throughout peacetime. 

Because of the rapid, decisive nature of "local wars under informationized conditions," it is not 

possible to wait until the formal commencement of hostilities to begin preparations. At a 

minimum, identifying opposition capabilities and weaknesses must be undertaken in peacetime. 

Nor can this be solely a military function. As the world has informationized, the Chinese 

economy has had to infonnationize; similarly, as warfare has infonnationized, the Chinese 

military has had to evolve to prepare to fight such conflicts. Although the PLA plays a major role, 

though, such preparations involve all the various elements of the Chinese government and 

broader society and economy. Because of the interconnected nature of modern information 

networks, and their extensive permeation, infonnation dominance involves gaining access not 

only to the adversary's military networks but to decision makers and the broader population, 

while defending against their efforts to do the same. As important, since information itself can be 

used as a weapon (beyond the incorporation of viruses and malware) by influencing its 

consumers, it is essential that information itself be monitored and information flow be tightly 

controlled, from a defensive perspective. 

1 All Army Military Terminology Management Commission, Chinese People's T.iheration .'1rmy Terminology 

(Unabridged Volume) (Beijing, PRC: Military Science Publishing House. 2011). p. 79. 

~Chinese Military Encyclopedia 2nd Edition Editorial Committee, PL ·1 Pncyclopedia. 2nd Edition, ..\Iilitar_v S'trategr 

(Be(jing. PRC: China Encyclopedia Publishing House. 2007). p. 68. 

'Fan Gaoming. "Public Opinion Warfare, Psychological Warfare. and Legal Warfare. !he Three Major Combat 

Methods to Rapidly Achieving Victory in War," (i/ohal Taaes (March 8. 2005). 

http://big.5.xinhuand.com/gatc/big5/11C\\ & .• \inhuanct.corn/mil.'2005 -03/08/comcnt 2666-1-75. htm (accessed April21. 

2017). 

4 
14


25259a-5.eps

Similarly, establishing information dominance involves a multi-pronged effort, addressing all 

aspects ofinfonnation. Not only is it necessary to target an adversary's data, but also the systems 

involved in data collection and management, as well as the users and analysts of data. Similarly, 

it requires defending all three aspects of one's own information architecture, i.e., data, systems, 

and users. 

The human element is especially important in informationized warfare. Chinese analysts note 

that the advent of more advanced weapons technologies did not necessarily lead to a change in 

the basic nature of war. Instead, the core of informationized warfare is the expanded range of 

abilities to influence and control an opponent's judgment and will to fight..\ The ability to 

influence people, in terms of their politics, their thinking, their morale and spirit, and their 

psychology can be as decisive and effective as the ability to interfere with databases or computer 

networks. The ability to influence an adversary through the proper application of suitable 

information is embodied in the Chinese concept of political warfare. 

Thus, at the strategic level, informationized conflict means using information to influence 

perceptions of the PRC and the United States. Is China engaging in aggression in the South 

China Sea, or is it defending its long-standing historic claims? The answer is based upon one's 

perceptions of China and China's actions, and influencing those perceptions is the focus of 

Chinese political warfare efforts. 

In particular, political warfare for the PRC includes the "three warfares" These are the hardest 

forms of soft power, used to affect the thinking and psychology of the domestic Chinese 

audience, the adversary's leadership and population, and the views of third parties. Each of the 

three "warfares" employs infonnation in a ditTerent manner to achieve these goals, but reinforces 

the other two. 

Psychological warfare exploits information by drawing upon the political, economic, and cultural, 

as well as military elements of power. Information of each type can serve as a powerful weapon, 

4

Chang Long. "Tightly Grasping the Trends of the 

Gulf War lo lhc Iraq War." PLl Daily. October 28, 2003, 11ill!E\U':.!L~~'!'.!L!!l!!!!l!J.£!!J,:,g;~=== 

.Jj176.h.1_fTI (accessed April 21, 20 17). 

5 
15


25259a-6.eps

influencing values, concepts, emotions, and context. 5 Legal warfare can build psychological 

support and sympathy among bystanders, and erode an opponent's will by constraining their 

preferred courses of action for fear of legal repercussions. Public opinion warfare can direct! y 

build support, persuading domestic and foreign audiences of the justice of one's own cause and 

the success of one's own efforts, while undennining an adversary's attempts to do the same. In 

particular, the growth and expanded reach of media of various sorts makes public opinion 

warfare especially important, as it can have global effects. Broad domestic and international 

support, in tum, will generate psychological benefits for oneself and adversely affect the enemy. 

Chinese analysts see "public opinion warfare" (yulun zhan; Jj\( i£ ~;,.) as a special part of 

informationized warfare. Because of the wide permeation of information technology, public 

opinion warfare has global reach, extends to every part of society, and has an especially wide 

impact. The goal of public opinion warfare is to shape public and decision-maker perceptions 

and opinion, so as to shift the perception of overall balance of strength between oneself and 

one's opponent6 To this end, it is especially important that communications efforts associated 

with public opinion warfare be mutual! y reconciled and coordinated, so that specific messages 

are clearly transmitted, in support of specific goals. While the news media plays an important 

role in the Chinese conception of public opinion warfare, it is only a subset of the larger set of 

means available for influencing public opinion 7 

Public opinion warfare supports psychological warfare. This pressures an opponent by 

employing information to affect their thinking, to create damaging or deleterious habits and ways 

of thinking, to reduce their will to resist. 8 At the same time, it seeks to limit the effect of enemy 

psychological warfare operations on one's own troops, population, and leadership, building 

morale, encouraging greater resistance and effort, and strengthening will. 

5

Tan Wenfang. "The Impact of lnfonrmlion Technology on Modem Psychological Warfare." NalionallJ<fense 

Science and Technology No.5, 2009, p. 73. 

6 Academy of rvlliitary Sciences Operations Theory and Regulations Research Department and lnfonnationaliLed 

Operations Theory Research Office, Jr~formationalized Operations Theory S'tudy Cuide (Beijing, PRC: AMS Press, 

November, 2005). p. ~05. and Liu Gaoping, Studv Volume on Public Opinion Warfare (Beijing. PRC: NDU Press. 

2005). pp. 16-17. 

'Lin. Study J·o/ume on Public Opinion Warfare. p. 5. 

8

Tan Vv'enfang, .. The Impact of Information Technology on Modern Psychological \Varfare:· p. 76. 

6 
16


25259a-7.eps

Psychological operations are seen as an essential part of future conflicts, affecting and 

influencing, at a basic level, the very perceptions that inform decision making, from the context 

to tbe biases. Successful psychological operations in infonnationized warfare will therefore have 

repercussions at strategic, operational, and tactical levels of operations, influencing both military 

and civilian leaders as well as the masses, and thereby affecting the course of the conflict. 

Legal warfare questions the basic legitimacy of adversary actions. It involves "controlling the 

enemy through the law, or using the law to constrain the enemy (yifa zhidi huo yong jet zhi di; 1J, 

/i:;:[Jijl(i( I\1( J+lit:::IJIJ/&) "9 

Legal warfare depicts "one's own side is obeying the law, criticizing the other side for violating 

the law (weiji1; iii;&), and making arguments for one's own side in cases where there are also 

violations of the law" 10 The ultimate goal is to secure the initiative in time of cont1ict, by 

gaining the legal high ground, portraying oneself as the side more firmly grounded in legal 

standing, and implicitly as being more virtuous and just. 

Information warfare is the operational application and realization of informationized warfare. Tt 

is the conduct of warfare through the application of information and information technology in 

modem warfare. The priorities are on "network warfare," which is not just cyber, but all types of 

networks, and electronic warfare, which goes beyond jamming radars and radios. Indeed, the 

Chinese see the two as fundamentally linked, in the form of "integrated network and electronic 

warfare'' 

This is supplemented by psychological warfare. Here, it is an effort to influence the adversary's 

thoughts, emotions, knowledge, perspectives, and attitudes. 11 Through the application of various 

forms of information, psychological wart'are strives to alter the adversary's interpretations of 

9

Zong Wenshen, [,ega! War:fiwe: TJiscussion of /00 Fxample:•1 and Solutions (Beijing, PRC: PLA Publishing House, 

200~)- P- 5_ 

1

"Han Yanrong, "Legal Warfare: Military Legal Work's High Ground: An Interview with Chinese Politics and Law 

University l\r!ilitary Legal Research Center Special Researcher Xlm Dandoug_" Legal Dailv (PRC)_ Febmary 12. 

2006. 

11 All Army Military Terminology Management Commission. Chmese People's Liberation Arm_v Terminology 

(Unabridged Volume). (Beijing, PRC: Military Science Pnblishing House. 2011). p. ~56, and Ye Zheng, Science of 

information Operations 1'eaching Materials (Beijiug. PRC: Military Science Publishing House, 2013), pp. 25-26. 

7 
17


25259a-8.eps

information, including their context and frame of reference, as well as to undermine their will. 12 

The purpose of psychological warfare at the operational level is to buckle the adversary's will 

and martial spirit, induce confusion in their command and decision-making processes, especially 

for military functions, and shal<e their confidence in their capabilities and ability to win, so as to 

reduce their combat effectiveness. 13 

In addition to electronic warfare, network warfare, and psychological warfare, there has been a 

growing discussion in the Chinese literature of"command and control warfare'' and "intelligence 

warfare'' The idea is that the key electronics, networks, and decision makers are those that are 

part of the intelligence network and the command-and-control structure. 

At the tactical level, the Chinese conduct information operations. This includes the combination 

of hard-kill and soft-kill techniques. Just as information warfare sees "integrated networkelectronic warfare," Chinese views of information operations include "integrated firepowerinformation attacks." The physical infrastructure is seen as important, alongside the computers 

and data. Some targets may be jammed, others hacked or infected with viruses, but in some cases, 

it might involve physical destruction of a server farm or a command-and-control center. This 

might involve special operations forces or it might involve precision-guided munitions. 

This places China's increasing role in the construction of the physical part of the Internet in a 

different light. The ability of China to build information systems in Mrica, South America, 

Central Asia, and Europe means that, in the future, China will have insight, and possibly access, 

to much of the physical infrastructure over which information passes. At the same time, 

including Chinese laptops and smart phones in critical communications networks means that the 

point of connecting to the network is also more and more often "made in China." 

China's Growing Space Capabilities 

An important part of the physical infrastructure for information-space is outer space. Space is a 

central means of obtaining information, including not only support to military operations, but for 

12Wu Rcnhc. Theory ofl~fimnalionized Conjlicl (Beijing. PRC: Military Science Publishing House. 2004). p. 192. 

13Chincsc Military Encyclopedia 2nd Edition Editorial Committee. PLl Encyclopedia. 2nd Editiotl Mililan· 

Psychologv (Beijing. PRC: China Encyclopedia Publishing House, 2007). p. 67. 

8 
18


25259a-9.eps

agricultural, industrial, and commercial purposes. Indeed, it has been suggested that 95 percent 

of space technology is dual-use in nature. 14 Space plays an essential role in the Information Age 

for military and civilian functions. 

Along these lines, PLA analyses suggest that it views space in a very holistic fashion Chinese 

writings note that the overall space system encompasses not only satellites in orbit, but also 

terrestrial launch, mission control, and tracking, telemetry and control (TT &C) facilities, as well 

as the data links that tie the space and Earth-bound portions together. Consequently, etJorts 

aimed at establishing space dominance must incorporate offensive and defensive measures 

covering this full range of targets (orbiting systems, ground-based systems, data) "Space 

dominance" (zhitian quem; ij;IJ)(t'() is defined as "the ability by one side in a conflict to control 

[or dominate] a certain portion of outer space at a given time." The goal is to secure the 

advantage in space, ensuring that one's own side has freedom of action in space, while 

constraining the other side's comparable freedom of action in space. 15 

The Chinese interest in space dominance has been noted in the assessments of American 

intelligence agencies. General Vincent Stewart of the Defense Intelligence Agency testified in 

2015 that several nations, including China, are developing counter-space capabilities. 

The threat to U.S. space systems and services will increase as potential 

adversaries pursue disruptive and destructive counterspace capabilities.. Chinese 

and Russian military leaders understand the unique information advantages 

atJorded by space systems and are developing capabilities to deny U.S. use of 

space in the event of a conflict. Chinese military writings specifically highlight 

the need to interfere with, damage, and destroy reconnaissance, navigation, and 

communication satellites. 16 

The importance of being able to guarantee Chinese interests in the space domain was 

underscored in the "new historic missions" that Hu Jintao charged the PLA. In his 2004 speech, 

14Rogcr Cliff, The i'vfilitary Potential ofr'hina 's Commercial Technology (Santa Monica, CA: RAND Corporation, 

2001). p. 27. httvs:/hnY\Y.raiJd.on~:!colltent/dam./raud/pubs/mouogrdph reports/200lf0.1R1292.pdf (accessed April 

21. 2017). 

1 

~Chinese Military Encyclopedia 2nd Edition Editorial Conm1ittee, ;_Hilitary Strategy, C'hinese Jfilitary Encyclopedia 

(Beijing. PRC: China Encyclopedia Publishing House. 2007). p. 211. 

11'Ltg Vincent R. Ste'\vart ·'\Vorld\vide Threat Assessment 2015.-- testimony before the Armed SetYices Committee, 

U.S. House of Representatives. Feb mary 3. 2015, 

.IJ.ttp: //vrY\.JI:.illfl, mil/Ne'ivs/Sneec hes<'lndT esti monies/tab id/701 ! 1 Ali icle/1 ~ 225h:mrldtvide-thrcat -assess me !!l..aSD.?S: 

(accessed April21. 2017). 

9 
19


25259a-10.eps

Hu stated that one of the new missions for the PLA is to provide strong strategic support for 

maintaining national interests. In light of national development and broader global trends, Hu 

observed tbat China's national interests and security had gone beyond the traditional land, sea, 

and air and shifted towards the oceans, space, and the electromagnetic domain. "Maritime 

security, space security, electromagnetic spectrum security," he noted, "are already vital regions 

for national security," where a small number of major powers are seeking to secure the 

advantage. Hu elevates space security, along witb maritime security and electromagnetic security, 

to the equivalent of the security of land, sea, and air territories. 17 

Subsequent Chinese writings have reflected this growing importance of space. The 2013 volume 

1i1e Science of Militwy Strategy, published by the Chinese Academy of Military Science, for 

example, includes a chapter devoted to discussing military conflict in the space and cyber (as 

well as nuclear) domains. In this extensive revision of the 2001 version, it is noted that the 

importance of space has grown significantly for both military and broader national purposes. 18 

The competition to dominate space is steadily intensifying, involving not only major powers, but 

even mid-size powers. Successful military strategy therefore demands the ability to successfully 

conduct space information support, space deterrent activities, and both offensive and defensive 

operations in space. Moreover, space deterrence, to be credible, must include offensive 

capabilities. Similarly, fielding otTensive, as well as defensive, capabilities in space strefib>lhens 

space deterrence. 

Similarly, the new 2007 edition of the PTA Fncyclopedia also discusses space dominance. It 

notes that space dominance is "a vital factor in securing air dominance, maritime dominance, and 

electromagnetic dominance, and will directly affect the course and outcome ofwars." 19 

Military space operations, including the need to secure space dominance, are also discussed in 

otber Chinese materials. In a volume jointly authored by the Academy of Military Science 

Operations Theory and Regulations Research Department and the Informationized Operations 

1

'Hu Jintao, "Understanding Our Military's New Historic Missions in the Nc\v Phase of the New Century:· 

December 24. 2004. http i/gf]y.jxnews.com.cn/sntem/2010/04/1610ll353408.shtml (accessed April2L 2017). 

18 AMS Mililary Stmtcgy Research Department, The Scwnce of;\filitarv Strategy (Bctiing, PRC: Milital) Science 

Publishing House. 2013). pp. 178-188 

E'Chinese Military Encyclopedia 2nd Edition Editorial Committee. ,\Iilitary .. \,'trategy, Chinese .tfilitar.v Fncyclopedia 

(Beijing. PRC: ClrinaEncyclopediaPublishingHouse. 2007). p. 211. 

10 
20


25259a-11.eps

Theory Research Office, it is noted that "in future inforrnationized wars, securing the space 

advantage, obtaining space dominance, will be the prerequisite for securing the initiative in the 

war.oo2° Similarly, PLA teaching materials on joint campaigns observe that "without space 

dominance, it is difficult to assure the smooth operation of space information systems, which will 

make it hard to assure the smooth operation of military infonnation systems, which in the end 

will mean that it is difficult to secure battlefield information dominance " 21 

Chinese Space Weapons Developments. China's interest in military space activities are not 

limited to hypothetical analyses. China has conducted a number of weapons tests and other 

activities that suggest an ongoing array of weapons development efforts. These include a number 

of di±Ierent anti-satellite vehicles, as well as possible directed energy weapons (e.g., lasers). 

Chinese cyber capabilities may also have anti-satellite ±unctions (among others); similarly, 

Chinese conventional modernization may allow them to hold some of the terrestrial elements of 

the American (and allied) space infrastructure at risk. 

Ground-Launched Ami-Sa1e11ite Systems. In January 2007, China tested a direct-ascent kinetic 

kill vehicle against a defunct FY-IC weather satellite, resulting in one of the worst debrisgenerating events in space history. This test, according to Paula DeSutter, then Assistant 

Secretary of State for Verification, Compliance, and Implementation, was not the first test, 

however, but followed two earlier non-destructive tests of the same system. 22 This ongoing 

development program does not appear to have ended, although there have not been any 

comparable tests since 2007. 

Since then, however, China has conducted three tests of a ballistic missile defense system that 

might also have anti-satellite applications. fu 2010, the Chinese "conducted a test on groundbased midcourse missile interception technology within its territory." 23 As American defense 

11

Acadcmy of Military Science Operations Theory and Regulations Research Department and Tnformationizcd 

Operdtions Theory Research Office_ 111/0rmationized Operations Theory ,)'fud_v Guide~OO Questions on 

Jnfimnaliunized Operations (Beijing. PRC: Militar~ Science Publishing House, 2005), p. 278. 

"Li Yousheng, Joint Campaign Teaching Materials (Be(jing, PRC: Military Science Publishing House, 2012), p. 69. 

"Lon Rains and Colin Clark. "Profile: Keeping a Watch on U.S. Interests," Space News. March 1. 20117. 

llttr://s~ene"\vs.com/QI.Qfile-keepin~ch-us-interests/ (accessed April 21_ 2017). 

"China Reaffirms Its Missile Test DefensiYe,'' .Yinhua, January 12, 2010, .b.I1Q..:.Line\I_~.xinhnan~JsQln/engll';h[lO IOOl/l2/conteut l2797459.htm (accessed April2L 2017). 

11 
21


25259a-12.eps

officials noted, "We detected two geographically separated missile launch events with an exoatmospheric collision also being observed by space-based sensors." 24 The Chinese conducted 

another missile defense test in January 2013, and used almost the exact same language to 

describe it, i.e., a midcourse missile interception. In July 2014, the Chinese conducted another 

test, which it has tenned a missile defense test, but which the United States characterized as a 

non-destructive anti-satellite test25 It should be noted that these tests resemble the American 

interception of the satellite US 193 with an AEGIS missile. 

While these earlier tests were engaging targets in low-earth orbit (160-2,000 kilometers altitude), 

in 2013, China has also tested a ground-launched anti-satellite system that would appear to be 

able to threaten satellites in geosynchronous orbit (36,000 kilometers altitude)26 This constitutes 

a substantial expansion of the potential threat posed by Chinese anti-satellite capabilities. As 

important, it would hold at risk a range of key satellites, including communications and missile 

early warning systems. 

Co-Orbital Anti-Satellite Systems. The ability of satellites to maneuver together has both 

peaceful and military potential. Docking maneuvers are integral to such actions as resupply of 

the International Space Station and were fundamental to the American Moon landings. At the 

same time, however, any satellite, if it has sufficient tuel and can be finely controlled while 

b'llided by a sufficiently discerning tracking system, can serve as a co-orbital anti-satellite system; 

in etl'ect, it would be a space kamikaze. Recent Chinese developments in small satellites and 

space robots, as well as manned space missions, have demonstrated an ability to maneuver 

satellites together. 

In 20I 0, two Chinese small satellites, SJ-06F and SJ-I 2, engaged in a series of maneuvers that 

suggest a controlled conjunction, in which the two satellites "bumped." 27 The ability to 

lill:rrJ!.IDiJ[ill]!QLillJ12ilJ!.ill!t!.YJ;QJJJill;'ill;Dyilli.\!/2(llQ.:QJc:JJl:QJlllil::.!!li:illJ!k=<Mrns!Uillilll (accessed April 21, 20 17). 

''Mike Gruss. '·U.S. State Department: China Tested Anti-Satellite Weapon." Space ;\'ews. Julv 28. 2014. 

b.UQJL~aceue\YS.cill.lif±Lll)_us-still_~-Q.epartment ~hina-tested-anti-sateilite-wearm!L (accessed April 21, 20 17). 

"'Brian Weeden, "Through a Glass. Darkly,'' Secure World Foundation. March 17.2014. 

http://s"iound.orv/media/16n74/Through a Gl"ss Dar]dv '11'l!f]10.0 14 nd[ (accessed April 21. 2017). 

''Brian Weeden. "Dancing in the Dark: The Orbital Rendezvous of SJ ~l6F and SJ-12," The Space Revim. August 

30. 2010. http://www.thespacereview.cmn/arlicle/l<i89/l (accessed April21, 2017). 

12 
22


25259a-13.eps

undertake controlled approaches reflects a nascent ability to steer a satellite, and to bring it into 

contact with another space system. Similarly, China's controlled docking maneuvers by the 

Shenzhou-VIII, Shenzhou-IX, and Shenzhou-X space capsules with the Tiangong space lab 

demonstrate China's ability to closely monitor spacecraft operations, including approach and 

contact. That Shenzhou-Vlll was remotely docked via ground control also reflects Chinese 

ability to bring spacecraft into carefully controlled contact with each other. 

In Aub'llSt 2013, China again demonstrated an ability to maneuver satellites in close proximity, as 

several Chinese satellites apparently maneuvered in a manner that again suggests that they may 

have physically contacted each other. One of the satellites may have been equipped with a 

robotic arm, adding an additional capability for servicing satellites-or damaging them while in 

orbit28 

Directed 1\nergy Weapons. Chinese kinetic kill vehicles (KKV) tests have garnered significant 

commentary and discussion; less is known about Beijing's development of directed energy 

weapons (DEW). In 2006, China apparently fired lasers at American satellites passing overhead. 

Contemporary reporting indicated that this was one of a series of events involving Chinese lasers 

and American military or intelligence satellites. 29 While the United States expressed concern 

over what was then described as an anti-satellite system, subsequent reporting suggested that it 

was not clear whether these were, in fact, weapons, or laser ranging devices30 Other reports 

suggest an ongoing research effort into developing lasers for a variety of defense purposes, 

including anti-satellite functions 31 

Cyber Capabilities. As noted earlier, the Chinese interest in counter-space is not limited to 

developing systems to attack orbiting satellites, but also extends to the ability to degrade or 

'~KeYinPollpeter, "China· s Space Robotic Anus Programs." Study of lm10vation and Technology in China Project. 

October 2013, h\!Rli'~ucsd.cdu/asscts/Ulll/5115il2l.pdi (accessed April21, 2017). 

"Vago Mumdian, "Clrina Attempted to Blind U.S. Satellites \\ith Laser, .. Defense News. September 25. 2006. 

and 

!l!l!Uil!S]]llili!~illJilll'!llil~;QlJlliflliJJ£;JJii,d"JIQ:.I'.\!.:'!2:::l.il.<£:.!.!.!!£::lilli'IUJill!l (accessed April 21. 2017). 

"Wendell Mimrick, ''China Pursues Systems to Keep US Forces at Bay," Defense News. September 17. 2013. 

http://archive.detensene\vs.com/~nicle/20 J :10917 JDRFREU0:1/J0916002l/Chin.a-Pmsues-Systems-Keep-lJSForces-Bav (accessed April21, 2017). 

13 
23


25259a-14.eps

damage datalinks that connect satellites to ground stations. Space dominance can be achieved if a 

key satellite is shut down, its mission payload is pointed in the wrong direction, or it is unable to 

communicate at critical moments, as if it had been destroyed by an anti -satellite system. Indeed, 

this may be a preferable outcome, since attribution may be difficult and such approaches are 

unlikely to generate space debris (and attendant political and diplomatic criticism). Consequently, 

Chinese cyber capabilities should be considered an integral part of China's "counterspace 

capabilities." 

Several cyber incidents involving space systems have been attributed to the PRC, suggesting that 

they are actively exploring vulnerability in space information systems. Hacking incidents in 2007 

and 2008 against the LANDSAT-7 and Terra AM-I EOS (Earth Observation System) satellites 

reportedly allowed cyber-intruders to gain control over all functions of these satellites for several 

minutes. 32 The attacks have been attributed to the PRC. Other reports suggest that China is 

responsible for hacking into the National Oceanic and Atmospheric Administration's weather 

satellite system33 

These cyber activities are a reminder that the Chinese see cyber operations as a part of 

information operations, and that space networks are part of the broader information networks that 

the Chinese seek to disrupt. The focus is on information, not just cyber or space. 

The integrated manner in which China thinks of infonnation operations and space activities is 

reflected in Chinese military developments of the past several years, which are themselves the 

culmination of nearly a quarter century of thought regarding the shape and requirements oftuture 

warlare The recently announced Chinese military reforms, including the creation of the PLA 

Strategic Support Force (PLASSF), highlights this. The PLASSF includes China's space, cyber, 

and network wartare forces. It is tair to argue that it is better described as China's ··information 

wartare ., force. 

12Tony Capaccio and Jeff Bliss. "Chinese Military Suspected in Hacker Attacks on U.S. Satellites:· Bloomberg 

News. October 27, 20ll, llllJg;i,:ll:\lllilli!JllliiQQ~2J!1iiJl;'\l2/ltlU::.ill:ll!..illi.~.\:.:!!lliliWD::>.!!5lll~:.d:.i.!.tl;!iJ£l= 

l\1ary Pat Flaherty, Jason Samenow. and Lisa Rein, ""Chinese Hack Weather 

Wa.-.hington Post, November 12, 201-L 

14 
24

Mr. YOHO. Thank you. 

Dr. Atkinson. 

And they have just called votes, so we have got about 12 minutes 

before we have to leave, then we will come back. 

STATEMENT OF ROBERT D. ATKINSON, PH.D., PRESIDENT, 

INFORMATION TECHNOLOGY AND INNOVATION FOUNDATION 

Mr. ATKINSON. Thank you Chairman Yoho, Ranking Member 

Sherman, and other members of the committee. It is a pleasure to 

be here. 

ITIF is a think tank here in Washington. We have focused on 

what we term Chinese innovation mercantilism for a number of 

years. 

I want to postulate that the challenge today is a little different 

than it has been for the last 15 years with regard to China. That 

challenge was largely about U.S. low- and mid-tech manufacturing 

on a commodity based goods, where they were able to hollow out 

U.S. manufacturing in a serious way, largely by currency, subsidies, other kinds of measures. And that does matter. I agree that 

the trade deficit does matter to our Nation’s prosperity. But I 

would argue that the emerging challenge is somewhat different. 

The emerging challenge now is about the Chinese Government 

enacting a suite of policies to go after the U.S. leadership in our 

core advanced technologies. It is one thing to lose textiles, I feel 

bad for the textile workers and the textile communities, but the 

U.S. real core advantages in advanced industries, that is what the 

Chinese are going after. I think we should look at a world or at 

least consider a world where in 15 years, U.S. technology jobs in 

industries like aerospace, chemicals, computers, motor vehicles, 

medical equipment, pharmaceuticals, software, semiconductors, are 

dramatically reduced from where they are today. I think that is the 

risk we have to look at. 

More importantly—or as importantly, once those are gone, the 

dollar could fall dramatically and we are not going to get them 

back. We can get a lot of commodity things back if the dollar falls 

enough, because it is not that hard to recreate them. Once you’ve 

lost an industry like semiconductors or aerospace, it is really, really 

hard to get it back. 

So the Chinese have a goal of mastering their own technologies, 

a very different goal than most countries which is around comparative advantage, and they are doing that in a wide variety of areas. 

Other members have mentioned some of the tactics. I have that in 

my testimony so I won’t go into that. 

But let me talk briefly about the case of semiconductors. This is 

a leading U.S. industry. We enjoy a $420 billion trade surplus, 

more—or equally importantly, we specialize in the higher value 

added segments in industry, R&D design and advanced manufacturing. So that is a real core strength for us. 

The Chinese have a strategy now to eliminate semiconductor imports completely within 20 years and to grow their own national 

champions to come out and take market share away from U.S. companies. A key tactic in their 2014 strategy for national guidelines 

for development of promotion of integrated circuit industry is a 

$160 billion fund to basically subsidize their companies. For examVerDate 0ct 09 2002 09:43 Jun 05, 2017 Jkt 000000 PO 00000 Frm 00028 Fmt 6633 Sfmt 6633 Z:\WORK\_AP\042617\25259 SHIRL
25

ple, there is a company called XMC, which is a contract chip producer. It is owned by a Chinese provincial government. It has received fairly significant subsidies to build a massive 1 square kilometer plant to produce up to 300,000 RAM flash memory units per 

month. If they are able to do that, and they are already a third of 

the way through building that plant, they will flood the memory 

market, and they will significantly disrupt that, probably leading 

to some bankruptcies in foreign countries. 

So what do we need to do? I think first of all we need to do two 

things when it comes to trade. One is we need to limit the Chinese 

access to our crown jewels. The main way they try to get that is 

either through forced tech transfer or through acquisitions, and I 

will talk in a moment about CFIUS. And then secondly, to attempt 

to roll back. We are not going to eliminate, but we can and should 

roll back some of their innovation mercantilist practices. 

I think what that means, when it comes to trade policy for Congress and the administration, is that, I know it sounds simple, but 

to focus on China. That really is the biggest challenge in our trade 

policy. It is not other countries who are our allies where we might 

experience minor irritants over certain kinds of products; it is really China. And to the extent we get engaged in other kinds of trade 

sites, we reduce the ability of our allies to join with us to push back 

against China. A good example of that, both the Japanese and the 

Korean Governments are quite concerned with the same kinds of 

policies that I have talked about here, and they should be natural 

allies with us to do that. 

Secondly, with regard to our China policy, I would argue we really need to focus on advanced industries. That is the biggest threat. 

That is where the puck is going towards. While other industries 

are, you know, important certainly to their users, this is an important area. 

Third, we need to develop stronger organizational capabilities in 

the Federal Government. We still haven’t translated some of the 

Chinese documents for their industry strategy. We don’t even know 

what they say because we don’t have enough Chinese translators 

or money to just translate these simple documents. I would argue 

also that within the National Intelligence Council, we need a dedicated unit that we have termed the national industrial intelligence 

unit; somebody in the Federal Government who tracks exactly 

what China is doing, what are the technologies they are going 

after. 

Two last quick things. I know my time is up. One, given that you 

have oversight of the State Department, I think the State Department is a challenge here in these negotiations. State is oftentimes 

the placater. The USTR is the one that tries to push hard. State 

is often the one that is trying to get USTR to back off or back 

down. I think that is a serious problem. 

And lastly, CFIUS. We need to update CFIUS. The Chinese Government essentially does not let U.S. firms go in and buy Chinese 

firms. I would argue that we need a similar level of reciprocity, 

particularly around advanced technology firms. 

Thank you. 

[The prepared statement of Mr. Atkinson follows:]

26


25259b-1.eps

IT IF INfORMATION TEt::HNOlOGY & INNO\IIITION FOUI\II.lAT!!JN 

Testimony of 

Robert D. Atkinson 

President 

Information Technology and Innovation Foundation 

Before the 

House Committee on Foreign Affairs 

Subcommittee on Asia and the Pacific 

Hearing on 

China's Technological Rise: 

Challenges to U.S. Innovation and Security 

April 26, 2017 

Washington, DC 
27


25259b-2.eps

Good morning Chairman Yoho., Ranking 1Vkmber Sherman., and members of the Committee; thank you for 

inviting me to share the views of the Information Technology and Innovation Foundation (I TIF) on the 

challenge from China to America's innovation and security. The Information Technology and Innovation 

Foundation is a non-panisan think tank \vhose mission is to formulate and promote public policies to 

advance tcchnological innovadon and productivity internationally, in Wa.;;hingron, and in the states. 

Recognizing the vital role of technology in ensuring prosperity, lTlF focuses on innovation, productivity, and 

digital economy issues. ITF has long been involved in the issue ofU.S.-China trade policy, writing extensively 

about "innovation mercantilist"" policies China uses to unfairly compete economically \Vith the United States. 

T very much appreciate the opportunity to comment on these issues today. 

The Challenge from Chinese Innovation Mercantilism 

There is a growing understanding that China is an outlier when it comes to the global norms and rules 

governing trade, investment, and economic policy. and that the "innovation mercantilist'' behavior on the 

part of the Chinese government represents a threat not only to the U.S. economy, and increasingly to its 

advanced-technology industries, bur also to the global economy. 

Previous U.S. administrations .sought engagement and dialogue with Chinese leaders in the hope that this 

would lead the Chinese government to retreat from its mercantilist path. But rather than reform, China has 

doubled down on its unfair, mercantilist strategies and is now seeking global dominance in a \vide array of 

advanced industries that are key to U.S. economic and national security interests. And it should be clear 'vhat 

the end game is: Chinese-owned companies in a wide array of advanced industries gaining significant global 

market share at the expense of American (and European and Japanese) firms' market share. If successful, the 

end game could be significantly less U.S. technological capabilities in a range of advanced industries from 

information technology (semiconductors all the \vay to devices), aerospace, instruments, life sciences, 

and software 

As such, unless U.S. policymakers want to accept such an outcome as beyond their control, it's time for a ne'v 

approach to Chinese innovation mercantilism that moves beyond the push for continw . .:d dialogue, and 

instead makes it clear to Chinese leaders that such unb.ir. harmful policies cannot be practiced with impunity. 

Yet this llght cannot be about individual tactics. for the Chinese government has shown itself to be quite 

adept at abandoning certain tactics when they become discredited globally. only to adopt ne,~.r ones in service 

of it.;; overall mercantilist strategy. Any new China trade focus needs to be nor just on tactical wins, but more 

broadly on rolling back the entire Chinese innovation mercantilist strategy and getting China to finally 

become a responsible player in the global trading system. 

The Trump administration has now a key opportunity to press Chinese leaders for a fundamental economic 

policy reset that will move the world economy back toward the rule of law and market-based policies. 

Hmvever, to succeed, such a new policy\vill need to be pursued 'vith great care and sophistication. The 

Chinese government is not 'virhour retaliatory weapons and it has shmvn a \villingness to use them to fight 

back against ltgirimate effiHts to stop China's manipulation of the global trading system. And because of the 

lack of the rule of la'v in China. Chinese officials could very well use their pmvers to retaliate against U.S. 

2 
28


25259b-3.eps

firms doing business in China. L . .:t therc bc no doubt: such an outcome would be bad for the U.S. economy 

and U.S. jobs. 

As such, Congress should encourage the Trump administration to make clear that any ne\V China trade 

strategy is based not on punishing China or seddng to hold it down; but rather on restoring the global trading 

system to a rules-based one. ln essence, the Trump administration should make it clear that it is acting more 

"in sorro,v. than in anger," and that any punitive actions directed toward China are only in place until the 

Chinese government makes needed rd()rms. 

While tougher action on the part of the U.S. government will be needed. the rime when U.S. unilateral action 

could suf!lce has passed. The last time that was possible was perhaps during the tlrsr term of the Obama 

administration \Vhen the United States possessed enough leverage to press China on its own. But after at least 

t\vo decades of mercantilist policies., China is no longer as dependent on the United States economically and 

has considerably more degrees of freedom. As such, any action toward China on trade needs to be through a 

strong and unitled coalition. particularly with nations like Australia. Canada. Germany, Japan, and the 

United Kingdom. All of these nations' economies have been hurt by Chinese mercantilism and are even more 

likely to be hurt going forward as China ramps up a robust innovation mercantilism designed to obtain global 

technology leadership. Ily working together, China will have many fewer options to avoid modifying its 

mercantilist strategy. 

Finally., the most important strategic factor that should guide the Trump administration's policy toward 

China is ro differentiate benveen protectionism and prosecurion. ln other 'vords, trade enforcement, 

including tariffs. should be a tool designed to tlghr foreign protectionism. nor a tool to reduce competitive 

pressures on tlrms in the United States. This may sound like a semantic difference. and indeed, most in the 

Washington trade establishment refuse to accept the difference (seeing any stepping up against Chinese trade 

practices as U.S. protectionism). But there is a critical ditierence. The goal for America should nor be to 

withdraw ti·01n the global trading system and emulate the mercantilists. High and permanent tariffs would do 

that and would constitute protectionism. Rather, the goal should be hJr the United States to be willing to 

tlght for the soul of the global trading system by taking needed steps to pressure China into significantly 

reducing irs use of mercantilist policies. That '\Vould be prosecution in the service of free trade. 

Why Chinese Innovation Mercantilism Matters 

Chincse trade imbalanccs have generated a signifkam deleterious impact on U.S. ernploymerH and outpll[, 

particularly in manufacturing. For example, Justin Pierce of the Federal Reserve Iloard of Governors and 

Peter Schott of the Yale School of Management link PNTR (permanent trade relations) with China in 2000 

with ''the sharp decline in U.S. manut8..cturing ernploymerH beginning in 2001. '' 1 ~.1TT economists David 

Au tor, David Dorn, and Gordon Hanson estimate that thc United States lost 982,000 manufacturing jobs 

between 2000 and 2007 because of Chinese import competition . .c ITIF has found that when U.S. 

manufacturing output grmvth is accurately measured, it becomes clear that the gnnving overall U.S. trade 

deficit 'vas responsible for almost two-thirds ofjobs lost in the 2000s (e.g .. , approximately 3.8 million jobs). 

with a significant share of this thc result of unbalanced trade with China.J 

3 
29


25259b-4.eps

But th\..: challeng\..: r\..:garding Chines\.: nKrcanrili.sm going fonvard i.s differ\..:nt than it wa<> ovn the last 15 y\..:ar.s. 

That challenge was largely to U.S. low- and mid-tech manufacturing. where Chinese policies hollowed out 

traditional U.S. manufacturing. The current and emerging challenge will be around advanced industries that 

the United States currently leads or holds .strong global positions in .. because those are the industries China is 

now targding for dominanc\..:. T urge you to con.sidn what a world would look lik\..: in 15 years wh\..:r\..: U.S. 

technology jobs in industries as diverse as aerospace, chemicals, computers. instruments. motor vehicles, 

medical equipment, pharmaceuticals, semiconductors, and sofnvare and Internet are significantly reduced due 

to Chinese policies focused on gaining global market .share in those industries. 

It is important to understand that the challenge to America's leadership in technology-based industries is 

much different than the process of losing more commodity-based, low-skilled industries to China in the 

2000s. If, lor example, the value of the dollar were to !all significantly related to the yuan. it is certainly 

possible that America could regain a not-insignificant .share of the production lost to China in the 2000.s in 

industries like textiles and appareL furniture, metal parts. and other similar lmv- and medium-value added 

products. Companies could simply buy machines, set up factories. and restart production in the United 

Stat<:s. But if America's technology base was substantially lost, no adjustment of currency decline could bring 

it back because national strength in technology industries is based less on cost and more on a complex array of 

competencies at the firm- and ecosystem-level. For example. a firm could nor simply buy some semiconductor 

equipment and start cranking out chips. To do that would require not just machines but deep and complex 

tacit knowledge embedded in the firm in workers !tom the shop !loot to research and development (R&D) 

scientist<> coupled with an innovation ecosystem (universities training the right talent, a network of suppliers 

of materials, ere.). Once those capabilities are lost, they are essentially gone, and are very difficult to resurrect. 

There is an additional reason why losing advanced tech industries is more problematic. Most technologybased industries have high barriers to entry. In contra-;t to the t-shirt industry where entry largely requires just 

capital to buy sewing machines and build a tJ.crory, entry into innovation-based industries requires nor just 

physical capital but also intellectual capitaL In an industty like semiconductors, lor example, llrms spend 

hundn:ds of millions, if not billions of dollars, developing technical capabilities to enable production. 

Producing the first chip of a particular generation is incredibly expensive because of the amount of R&D 

involved. Producing the second chip is much cheaper because only the material and labor costs are involved. 

In this sense, tlxed costs are extremely high, but marginal costs are lmv; dose to zero in the case of sofuvare. In 

these kind of innovation industries losing market share to unfairly competing firms supported by their 

innovation mercantilist governments means two things. First, sales fall. This is true because global sales arc 

largely fn;::ed (there is only so much demand for semiconductors or jet airplanes), and if a mercantilistsupported competitor gains global market share, the market-based competitor loses market share. Moreover, 

that firm's revenues go down much more than its costs. Second, because profits decline more than sales. it is 

now more difficult for the marker-based innovator to reinvest revenues in the next generation of products or 

services, meaning rhar the mercantilist-supported entrant has an advantage in the next generation of products. 

This can lead to a death spiral whereby the market-based leader can lose complete market share. 

Thus, the loss of advanced tech industries has two major negative impacts on the U.S. economy. The first is 

on prosperity, as the average \vage in these industries is approximately 75 percent higher than overall U.S. 

4 
30


25259b-5.eps

wages. The second is on national security and the defense industrial base. U.S. global defense leadership is 

based not principally on the size of our nation or on the amount of money America spends on dettnse; it is 

based tlrst and foremost on U.S. technology leadership. Our service men and '\Vomen go into any conflict 

with the advamage of tlelding technologically superior weapons systems. But that advantage depends on the 

U.S. economy having global technological superiority, not just in defense-specific technologies but also in a 

wide array of dual-use technologies. To the extent the United States continues to lose technological 

capabilities to China. U.S. technological advantage in defense over China will diminish, if not evaporate. as 

U.S. capabilities '\-Thither and Chinese ones strengthen. 

The Goals of Chinese Innovation Mercantilism 

In 21115, Chinese President Xi Jinping unabashedly trumpeted a goal of making China the "master ofits own 

technologies.'''! China's arrival at that point resulted from the evolution of Chinese economic policy over the 

past two decades. Up to the mid-2000s, China's economic development strategy sought principally to attract 

foreign direct investment (FDl) and to induce foreign multinational corporations to shift production to 

China.' lr used an array of unfl.ir tactics to achieve that goal, including systemic currency manipulation, 

massive subsidies to firms to move production to China. and limits on imports. 

That strategy changed in 200() as China moved to a "China lnc." development model of indigenous 

innovation which focused on helping Chinese firms, especially those in advanced, innovation-based 

industries, often at the expense of foreign firms. Marking the shift \Vas a seminal document called the 

"National I\1edium- and Long-term Program fin Science and Technology Development (2006-2020):'' the 

so-called "l\1LP ,'' which called on China to master 402 core technologies, everything from intelligent 

automobiles to integrated circuits and high-performance computers. 

The ;\1LP esscntially announced tlut modern Chinese economic strategy sought ab:w!ute advantage across 

virtually all advanced technology industries. It fimdamentally rejected the notion of romparatil!f' advantagf'-

vvhich holds that nations should specialize in the production of products or services at \vhich they are the 

most efHcietH and trade for the rest. T nstead, China wishe..<> to dominate in production of both advanced 

technology products such as airplanes, semiconductors, and pharmaceuticals and commodity manufacturing. 

Chinese policymakers wish to autarkically supply Chinese markets fi)r advanced technology products with 

their mvn production while still benefitting from unfettered access to global markets for their technology 

exports and K)reign direct investment. 

In recent years, Chinese President Xi Jinping has doubled down on this approach, through new 

promulgations such as the "Made in China 2025 Strategy, the 13'h Five-Year Plan !(,r Science and 

Technology", the "13rh Five-Year Plan K)r National T nformatization," and "The National Cybersecurity 

Strategy.," among other policies. The "I\1ade in China 2025 Strategy/' for instance., calls fi)r 70 percent local 

content in manufacturing components in China, while policies enumerated in documents such as the "13m 

Five-Year Plan f()r Nationallnformatization and The National Cybersecurity Strategy" effectively deny access 

to U.S. enterprises seeking to compete in emerging TCT industries such as cloud computing in China. The 

"National Cybersecuricy Strategy'' furrha outlincs a goal fi)r China to become a strong cyber power by 2020, 

and that includes mastering core technologies, many of which the United States is currently the international 
31


25259b-6.eps

lcad\..:r in, such a.;; operating syst\..:ms, inccgratcd circuits, big data, cloud compucing .. large scale software 

services. the lnternet of Things, 5G wireless systems, etc, as the country increasingly pursues a strategy of 

shutting out foreign competitors in the interest of advantaging domestic industries. As the Mercator Institute 

for China Studies in Germany \vrites in its report, '·~-1ade in China 2025: The Making of a High-Tech 

Superpower and Consequences forT ndustrial Countries,'' ";\1ade in China 2025 in its curr\..:tlt form [m\..:ans 

that I China's leadership systematically intervenes in domestic markets so as to benefit and facilitate the 

economic dominance of Chinese enterprises and to disadvantage foreign competitors." 6 And as discussed 

below, the Chinese governmem is also targeting semiconductors. 

Thus, it's no exaggeration to suggest that. without aggressive action, the United States may face a v•.rorld 

within two decades years where U.S. jobs in industries as diverse as semiconductors. computers, 

biopharmaceuticals. aerospace. Internet, digital media .. and automobiles are signitkantly reduced due to 

Chinese policies unabashedly targeting domesdc and global market share in those industries. This not only 

has potentially serious implications for America's future economic security. it has perhaps even more serious 

implications for America's national security and military superiority 

Chinese Innovation Mercantilism Tactics 

As the information Technology and lnnovation Foundation has documented across a series of reportsincluding '(False Promises: The Yawning Gap Between China's WTO Commitments and Practices,'' 

"Enough is Enough: Conti·onting Chinese innovation Mercantilism,'' and ''The \X.'orst lnnovation 

;\{ercantilist Policies of 201 G''-China ha<> deployed a vast panoply of innovation mercantilist practices that 

seck to unfairly advantage Chinese advanced-industry producers over fineign competitors./ These practices 

have included forced technology transfer and t{nTed local production as a condition of market access; theft of 

foreign imellectual property (TP); curtailment and even outright denial of access to Chinese markets in certain 

sectors; manipulation of technology standards; special bcn\..:fits for state-owned \..:llterprises; capricious ca.;;es to 

force fim.":ign companies to license technology at a discount; and government-subsidized acquisitions of 

foreign enterprises. U.S. and foreign enterprises across virtually every advanced technology sector-from 

aerospace and biotechnology to infixmation and communications technology (TCT) product\, Internet, clean 

cn\..:rgy., and digital media-have been harmed byChina·'s aggressive usc of these types of innovation 

mercantilist policies. 

1\{ost of these policies and practices are oriented around one overriding goal: acquiring foreign technology 

know-how. For Chinese government leaders arc wdl awar\..: that they cannot meet thdr indigenous innovation 

objectives on the time scale they have set without aggressively acquiring foreign expertise and knowledge. 

A principal vvay Chinese officials attempt to meet this goal is through forced technology transfer. Although 

China's \X'orld Trade Organization (\XlTO) accession agreement contains rules forbidding the country from 

tying fi)rcign direct investment or market access to requirements to transfer t\..:chnology to the country., it 

remains commonplace that China requires firms to transfer technology in exchange fi)r being granted the 

ability to invest, operate, or sell in China. 8 fu Harvard Business School professors Thomas Hour and Pankaj 

Ghemawat document in their report "China vs the \Xlorld: \Whose Technology Is Tt?." Chinese technology 

transfer r\..:quiremcnts a.;; a condition of market access hav\..: affected scores of companies in industries as diverse 

as aviation, automotive, chemicals, renewable energy, and high-speed raiL9 To be sure, because such 

6 
32


25259b-7.eps

conditions contrav\..:n\..: China·'s ~0 commitments .. officials arc careful not to put such r\..:quir\..:muus in 

writing, often resorting to oral communications to pressure fOreign firms to transfer technology. 1L' In 2011, 

then-U.S. Treasury Secretary Timothy Geithner laid such concerns about China's technology transfer 

requirements in the open, stating dut '\ve're seeing China continue to be very. very aggressive in a strategy 

they started S\..:Veral decades ago. which goes lik\..: this: you want to sdl to our courury., we want you to come 

produce here. If you want to come produce here, you need to transfer your technology to us. "ll Indeed, the 

U.S.-China Business Council's ''2014 China Business Environment Survey'' reports that 62 percent of 

companies had concerns about transferring technology to China. \vhile 20 percent reponed that they had 

been requested to transfer technology to China within the past three years. 11 Likewise, a 2012 American 

Chamber of Commerce in China survey reported that 33 percent of its respondents stated that technology 

transfer requirements were negatively a±Iectlng their businesses. 1

" Put simply, technology transfer 

requirements as a condition of doing business in China remain a key pillar of China's innovation mercamilist 

strategy. (vforeover, over the last Ave years .. China has ratcheced up its demands. Now for many foreign 

advanced industry companies. doing business in China requires transferring ever-more valtldble technology to 

Chinese joint venture ''partners.,. 

In addition .. China\ anti-monopoly law ha~ been designed in a way so the government can use it to force 

foreign companies to license technology at t3vorable rates to Chinese firms. Article 55 states. ''This Lnv is not 

applicable to undertakings' conduct in exercise of intellectual property rights pursuant to provisions oflaws 

and administracive regulations relating to intellecwal property rights; bll[ this La'v is applicable to 

undenakings' conduct tlut eliminates or restricts competition by abusing their intellecwal propeny rights:" 14 

Yet, for the Chinese government, ''abuse" means charging market-based lP licensing fees ro Chinese 

companies. This provision has been used to take legal action against companies whose only ''crime" is to be 

innovacive and hold paterus. Indeed .. the Chinese la\v allmvs compulsory licensing ofiP by a ''dominant'' 

company that refuses w license its TP if access to it is "essential fix others to effectively compete and 

innovate." 1

"' And with Chinese courts largely rubber-stamping the government's dictates, fOreign companies 

have little choice but to comply. All too often, complying means changing their terms of business so that they 

sell to the Chinese for less and/or transt~r even more IP and technology to Chinese-mvned companies .. often 

after paying substantial tines. 16 

Another way China acquires technology and intellectual property is to steal it. As a recent MIT S/011n 

Management review article, "Protecting Intellecwal Property in China,., noted, "Intellectual property 

prott:ction is the No.1 challenge for multinational corporations operating in China.'' 17 According to the U.S. 

International Trade Commission (lTC), in 2009, U.S. IP-intensive enterprises conducting business in China 

reported losses of approximately $48.2 billion in sales, royalties. or license lees due to Chinese IPR 

infringement. 1

" That tlgure has continued to increase. Subsequendy, The IP Cornrnh-sion Report on the Theft of 

U.S. lnteilectua! Property fi)und that China accounted for nearly 80 percent of all TP thefi:s from U.S.-

headquarrered organizations in 2013, amounting to an estimated $300 billion in lost business annually. 1

') 

Like,vise, a recent European Union-commissioned study fOund that. among European manufacturers. the loss 

ofiP in China reduces their potential profits by 20 percent annually. 1

'l Meanwhile. China still has one of the 

highest rates of unlicensed software usage in the world, with 74 percent of the software in use unlicensed and 

the market valu~ of unlicensed software usage ~xceeding $8.7 billion in 2013. 21 In a recent survey of the 

7 
33


25259b-8.eps

bu.sitH.:.s.s cnvironment in China conducted by the U.S.-China Bu.sine.s.s Council., 98 percem of companies 

surveyed report that intellectual property rights enforcement in China remains a concern for them . ..:-: 

Around three years ago, the Chinese government added a ne\V tactic directly attacking fi)reign companies. 

One basis of the attacks is that U.S. technology products were a<;.scrted to not he sccure and thereforc the 

Chinese government had the right to intervene. One tool of these attacks is a propaganda campaign carried 

out in the state-controlled media. \Vith multiple articles claiming that U.S. tech company products 'vere not 

.secure. \Vith one government bing threatening "to severely punish the pawns of the villain.'' These attacks 

happened at the same time Chinese President Xi Jinping took over the reins of a new Communist Party-led 

committee on cybersecurlty. It's hard to underestimate the role of Ed,vard Snmvden's National Security 

Administration (NSA) revelations in this change of tactic. Before Snowden. the Chinese government 'vas 

reticent to play this intimidation card. But Snmvden gave the Chinese government the cover it needed to 

claim the moral high ground and go after U.S. tech companies on trumped-up charges of!ack of security. In 

2014, the Chinese central government ruled that government offices 'vere prohibited from running Windmvs 

8 (although many, if not most. Chinese government offices steal, rather than purchase Windows an;~vay). 

Soon after .. investigators from China's State Administration for Industry and Commerce raided Microsoft 

facilities in four Chinese cities .. claiming it wa'> investigating whether 1vficro.soft violated China\ antimonopoly la\vs. The 11lcrosoft case \Vas not the first attack on U.S. technology companies. Over the last 

several years, virtually every leading American ICT company has found itselfin the Chinese cross hairs. Apple 

CEO Tim Cook was forced to publicly apologize lor purported problems with iPhone warranties. Next up 

wa'> Qualcomm and Cisco, with the National Developmem and Reform Commission claiming that both were 

monopolists. Around the same rime, the Chinese government announced a "De-IOE'' campaign designed to 

pressure Chinese companies into replacing their IBM, Oracle, and EMC products with Chinese-made ones. 

The harassment ofi\1icrosoft appeared to be a tit-for-tat response to the Justice Department indictment in 

2014 of five Chinese military offices for hacking imo U.S. companies' computers to steal trade secrets. 

Indeed, the Chinese government has shown time after time that it doesn't just act to even the score when the 

United States takes action against China; it responds with ovenvhelming force. 

An increasingly important way f(n Chint":se firms to gain access to nt":eded tt":chnology is to simply buy up U.S. 

technology companies. Indeed, a not-insignificant share of Chinese FDI into the United Stares is nmv in 

technology industries. According to Select USA, the top lour industrial categories in terms of numbers for 

Chines~..": FDI projects from 2003 to 2015 were clectronio;, industrial machinery, sofnvart": and information 

technology services, and communications.·':! The Rhodium Croup reports that over the last 16 years there 

were roughly $1X billion of Chinese FD! into !CT and electronics industries deals, with most of that in just 

the last few years. Of the $4.9 billion invested in electronics, $4.2 billion was invested in 2016, with 99.99 

percent of that going to buy U.S. llrms.'' Of d1e $14.2 billion invested in ICT, 74 percent was made !rom 

2014 to 2016 .. \Vith more than 95 percent going to acquisitions.'~ These numbers would have been 

considerably larger if the federal government had nor informally or formally blocked some deals through the 

Committee on Foreign Investment in the United States (CFIUS). 

Much Chinese FDT comes from state-owned enterprises that often have diff-erent motives than simply 

maximizing profits. R1tha, their inv~stments ar~ oft~n to save stat~ goals. According to th~ Rhodium Group, 
34


25259b-9.eps

from 2002 to 2016, of th\..: 582 acquisition d\..:als, about 20 pncuu (116) W\..:r\..: mad\..: by govcrnmctH-owtKd 

corporations, accounting for about 30 percent of the total monetary value. 16 Information and 

communications technology and electronics industries deals totaled roughly $18 billion, with governmenthacked deals accounting fi)r roughly $5 billion of this amount. i\-1oreover .. the lines between public and 

private in ChitKsc firms is opaque, with many "privatc·'' firms having d\..:cp financial and othn tics to th\..: 

Chinese government. 

The role of Chinese government money in U.S. deals is underreported in part because of the opaque nature of 

this support. As Wang and Wang note, many Chinese firms lack transparency, making it difficult for host 

countries to knmv enough about the investing finn. 1

i This was evident for example in the attempted purchase 

of German semiconductor equipment firm Alxtron by a Chinese investor where there "\Vere '·a web of relations 

among the customt:r, the buyer, and the Chinese state.··.-~ Moreover .. the Chinese government channels funds 

to supposedly private investment bodies .. making it look as if these deals are commercial. One Center for 

Strategic and International Studies report admits that "in order to successfully lobby the .i\-1inisrry and receive 

adequate financial resources, the private enterprises have to link corporate goals "\Vith national government 

initiatives, othe11vise the Ministry,vill be reluctant to endorse the companies' OFDI initiatives."c9 

Thus, the main purpose of most Chinese technology companies buying U.S. technology companies is not to 

make a profit, but to take U.S. technology in order to upgrade their own technology capabilities. The 

Rhodium Croup notes that in the aviation sector. ''The dominant player is aviation conglomerate AVIC, 

which is looking to the US market to upgrade its technology and other capabilities. Likewise, in the 

electronics and electrical equipment sector, "Chinese investors are drawn to the US electronics and electrical 

equipment sector lor building their brands. expanding their sales and distribution channels, and upgrading 

their innovative capacity and technology portf0lios." 31 Investments in pharmaceuticals and biotechnology are 

"often driven by upgrading technology (such as \Xluxi"s acquisition of AppTec .. a laboratory services Arm). 

As one study of Chinese FD! estimated, 30 percent of the private firm deals and 4(, percent of the SOE deals 

are motivated by technology acquisition.'' The authors go on to state that Chinese acquisition of overseas 

firms "has become the most "\videly used methods [of investing overseas] fOr Chinese firms, largely because it 

provides rapid access to proprietary technology ... "34 

And as the German Mercator Center for Chinese Studies notes: 

Chinese high-tech investments need to be interpreted as building blocks of an overarching political 

programme. lt aims to systematically acquire cutting-edge technology and generate large-scale 

technology transfer. In the long term, China "\Vants to obtain control over the most profitable 

segments of global supply chains and production networks. If successful, Made in China 2025 could 

accelerate the erosion of industrial countries' current technological leadership across industrial 

sectors.-;<; 

The report goes on to note that, "There are strong indications that the absorption of advanced technology is 

an increa..;;ingly prevalent motive f(H the state·'s push t()r outbound FDT. From this perspective, 1\1ade in China 

202'5 can be read as a grand strategy for technology-seeking investment."'i6As the report continues: 
35


25259b-10.eps

The Chinese state promotes investment in leading foreign technology enterprises with the aim of 

systematically acquiring cutting-edge technology and generating large-scale technology transfer. Since 

state-led FDT in high-tech sectors is a ne\V phenomenon .. irs full extent and precise dlects are not yet 

entirely ckar. But it is a rcalisdc scenario that th\..: wid\..:sprcad technology absorption by China will 

contribute to the erosion of industrial countries' technological leadership in specific industries. 1 

Tn other '~.rords, Chinese tech-hased FDT acquisitions are just one tactic in a comprehensive strategy of global 

knowledge acquisition in order to catch and ultimately surpass current technology leaders, including the 

United States. As one study of Chinese acquisitions of German firms noted, ''Cherry picking strategic assets of 

hidden champions, knO\vledge absorption, and gaining access to high-end markets are major strategic 

intentions behind the 1\1&As." ~ The report goes on to note that ''[what] most acquirers were targt:ting was 

the inherent knmvledgt: of the target Arms held by the employees in the fi>rm of engineering capabilities or 

process knmv-hmv. the knowledge embodied in irs technological assets like products, machines and plants, 

the brand in terms of reputation and customer relationships as 'vell as the \vorld,vide distribution and service 

assets." J9 The report concludes that this is ditierent than most FDI from other nations where the acquirer 

seeks integration, synt:rgy., and efficiencies. 

China uses other tactics as well to gain global market share in technology industries. The Chinese government 

enforces a 'vide array of domestic content requirements in advanced industry products as a 'vay to favor 

domestic technology companies. For example, in the high-end equipment manufacturing sector, China 

maintains a program that conditions the receipt of a subsidy on an enterprise's use of at least()() percent 

Chinese-made components 'vhen producing intelligent manufacturing equipment. 10 And despite the fact that 

China "clarified and underscored ... that it agreed that enterprises are free to base technology transfer 

decisions on business and marker consideradons" at a December 2014 meeting of the United States-China 

Joint Commission on Commerce and Trade (ICCT), USTR notes that China has ''announced two measures 

relating to [local procurement ofl information technology equipment used in the banking services sector and 

in providing Internet- or telecommunications-based services more generally." 41 

China has also made the development of indigenous technology standards, particularly for infOrmation and 

communications technology products, a core component of irs industrial development and economic growth 

strategy. China has committed to developing unique national standards for dozens of high technology and 

TCT products-in many ca<>es where international standards already exist-devdoping homegrown standards 

for everything from mobile telecommunications services and \Vireless local area nenvorks to encryption 

technologies and the Internet of Things." In some cases, such as with WAPI (the Wireless Local Area 

NeP,vorkApplication and Privacy Infrastructure standard that China developed as an alternative to the WiFi 

standard), China attempted to require that all wireless networking products sold in China \Vould have to he 

WAPl-cmnplianr and use irs encryption method, in contravention of irs commitment to let foreign 

enterprises use desired technologies in the provision of telecommunication services."15 As USTR notes, "China 

has continued to pursue unique national standards in a number of high technology areas where international 

standards already exist. such as 3C and 4C telecommunications standards, Wi-Fi standards and information 

security standard.s." 44 Jdore commonly, hmvever, Chinese officials ''pressure foreign companies seeking to 

10 
36


25259b-11.eps

participate in the standards-s\..:ning process to license thdr technology or intellectual property on unfavorable 

terms. ''"i"i Clearly, China has not met its commitments in the telecommunications sector. either in terms of 

market access or in refraining from promulgating technology standards that allow companies "to use any 

technology they choose to provide telecommunications services.""';; 

Chinese technology firms also have an advantage over U.S. firms in their ability to sutTer losses in fOreign 

markets, both lor their investments and sales. As Wang and Wang write, "China itself is a huge market. which 

means that firms losing profits in overseas markers can he compensated hy selling their goods in the domestic 

marker. For instance, Chinese consumer electronics producer TCL ha~ been losing profit~ in overseas markets., 

but it survives with the profits ti-om selling in the domestic market. This then explains the fundamental 

difference benveen state-backed and purely commercial FDI acquisitions. \Xlhen a corporation tfom Canada, 

Germany. or any other market-based economy looks to acquire a U.S. technology firm they have to balance 

the purcha.'>e price 'virh the benefit to them., and in many ca.~es acquisitions do nor make financial sense. Bur 

when the principal goal is nor profit, but national economic advancement and attaining military capabilities, 

many more deals make sense, especially when the Chinese government is looting at least part of the bill. 

Finally, the Chinese government has limited exports of rare earth elements (REE) 'vhich are a group of 

seventeen minerals that are 'videly used in high-technology products such as hybrid cars, tablet computers, 

high performance magnets. and light-emitting diodes. Realizing that they controlled signillcant sources of 

REE global production and that this could be used as a leverage point, in July 2010, the Chinese government 

significantly reduced its export quota.~ on rare earth elements, causing world prices to grearly increa.<;e 

compared ro domestic Chinese prices. For example, in April2010 the price for cerium oxide was $5/kg, but 

after the export controls the price skyrocketed to $151 Kg in May 2011. At the same time domestic prices 

\Vere just $29/kg. Moreover .. the Chinese government made it dear to industrial consumers ofREE's that they 

could have all they \Vanted at a cheap price if they just moved their factories to China. Both as the central 

source of extraction and by restrictively controlling the exports of many rare earth elements viral to the 

production of high-tech products, China tries to force the manufacturing of those products to center in 

China. As further inducement .. it makes those elements available at a far cheaper price to in-country 

manufacturers. At lea~t as recently as 2015, China was estimated to control 89 percent of global rare 

earth producrion. ~ 

The Case of Semiconductors 

S\..:tniconductors arc the "steel'' of the digital economy; the core building blocks of innovation in a wide array 

of other industries and applications. As such, continued innovation in semiconductors is critical for 

continued global innovation in the digital economy. And strong domestic capacity is critical to U.S. national 

security. The United States invented semiconductors and related technologies and government support .. 

including through funding for research universities and def\..:nse procurement, played a k\..:y role in enabling 

U.S. leadership. However, starting in the 1970s, aggressive government policies, including large government 

subsidies, from the '(Asian Tigers of .Japan, Korea, and Taiwan enabled the creation of robust competitors to 

the United Stares. And in some cases, these subsidies led to signiHcant overcapacity in the industry. driving 

down margins and hurting investment in the next generation of innovation. ;\{oreov\..:r, in all nations the 

industry is substantially globalized with different parts of the supply chain in dilterent nations. But 

11 
37


25259b-12.eps

norwithsranding both facwrs .. according the U.S. Commerce Department. the industry is the top U.S. 

exporting industry. and ran a $42 billion trade surplus in 2012. 4

'' Equally importantly, the United States 

specializes in higher value added segments of the semiconductor industry (R&D, design, advanced 

manufacturing). 

Now China has taking a page out of the Tigers' play book and attempting to build its own domestic 

semiconductor industry. \X'hile China has long seen the semiconductor industry as a key industly for 

development it '~.ras not until recently that it made a serious play to gro\v the industry. China's government 

ha<> set ambitious, long-term national guidelines fi)r the development of irs semiconductor industry., including 

specific revenue targets of20 percent compound annual growth and increasing the industry's size to $140 

billion by 2020. 10 The strategy also calls lor China to reduce imports ofU.S. semiconductors by half in 10 

years and to eliminate them entirely within 20 years and make China the world·'s leader in IC manufacturing 

by 2030. As part of this plan, China wants 70 percent of the semiconductor chips used by companies 

operating in China to be domestically produced by the year 2025. ')J China justifies this strategy on the basis 

that integrated circuits are the nation's largest import. Bur as ITIF has shmvn, the only reason for this is 

because China runs a massive trade surplus in products that include semiconductors. Indeed, over half of the 

semiconductors imported to China are reexporredY 

A key tactic in their 2014 strategy ''National Guidelines lor Development and Promotion of the Integrated 

Circuit (I C) Industry'' \Vas to charter a National Integrated Circuits Industry Investment Corporation that 

intends [0 invest more than $100 billion in China's semiconductor industry over the next decade with the 

goal of creating a completely dosed-loop semiconductor ecosystem, from design and prororyping to 

manufacturing, assembly, packaging and test, materials, and equipment. )j Benveen national and provincial 

government funds .. the industry is expected to be supported \Vith as much as $160 billion of governmentbacked funds. 'A The direction is clear .. a..;; in statements such a<> "J\1ake up our mind .. push forward persistently; 

Focus on the bottleneck, innovation is the route; Stress the focal point, coordinate in development; 

Companies are the players, market is the direction; and Concentrate resources to make 'vorld-dass 

companies., and ''Set up state leading group for development of integrated circuit industry, push fonvard the 

coordination of \Vorks with an empha<>is on top planning. "')5 

To defend against charges of inappropriate government subsidies, the Chinese government claims that its 

China Integrated Circuit Industry Investment Fund Co. Ltd., is actually a private sector entity operating 

according to marker principles. Tn reality it is a fund established by J\1TTT, staffi:d in large parr by former 

MilT ottlcials, and funded by the Minisuy of Finance and Chinese SOEs-including China Mobile, China 

Tobacco, and the China Development Bank-presumably because the latter were "asked" to do so by MilT 

and the State CounciL" MilT presumably established the llmd this way, as opposed to simply funneling 

subsidies through J\1TTT .. in order to avoid any potential \X!TO challenge against unfair government subsidies. 

llur this laundered money does nor make it any less of a subsidy. Chinese central government officials also 

supported the creation of a number of local semiconductor subsidy funds which also are used to subsidize 

foreign acquisitions. Thus, \Vhen Chinese oHkials assert that this is a new kind ofiC strategy based not on 

government subsidies, bur rather on market principles .. they are obscuring the fact that the new strategy is still 

based on government subsidies, but in this case usually in the form of equity investments that may or not get 

12 
38


25259b-13.eps

cver paid back. T ndecd., many of thcsc Chincsc firms would be unabk to acquire foreign TC firms without 

such subsidies, as their balance sheets would be inadequate. 

For example, Jiangsu Changjiang Electronics Technology Co. used $300 million from the national TC fund 

to hdp pay fix the $780 million acquisition of Singapore\ STATs Chip Pac Ltd., a leading provider of 

semiconductor packaging design assembly and test solutions-' The IC fund backed the buyout firm seeking 

to buy U.S.-based Lattice Semiconductor Corp-'8 And they were purportedly behind the purchase of 

Germany·'s Aixtron. 9 T n some ca<;es, these deals are truly perverse, a<; in the case of Chinese Hrm Apex 

1Vficroelectronics buying the U.S. printer company Lexmark. Prior to the acquisition, Apex had been accused 

of producing counterftir printer cartridges and infringing the parents of U.S. printer companies, including 

Lexmark. 6

r' And despite having revenues about one-tenth those of Lexmark, Apex 'vas able to purchase 

Lexmark at a 17 percent premium over listed stock price. in parr because it received funding ffom the Chinese 

national TC fund. 61 Tndeed, the company is now 5 percent owned by the TC fund. 6 ' 

China's government intends to pull a 'vide array of industry policy levers in its pursuit of building up irs 

semiconductor sector. For example, the IC Promotion Guidelines call for public and state-mvned enterprise 

(SOE) procurement decisions in sectors such a<; telecommunications and Tnternet senrice providers to be 

''based on projects aimed at expanding domestic demand'' and "based on secure and reliable" soft,vare and 

hardware products. China's integrated circuit industry will also benefit li·om preferential research and 

development subsidy programs, including "nationalmegaprojects'' that subsidize the commercial R&D and 

product development undertaken by Chinese semiconductor companies and special grants from government 

agencies that allmv Chinese semiconductor tlnns to fund and operate their R&D programs with direct 

government support through a "national enterprise technology center program. "6

" 

The Chinese government is also orchestrating efforts to acquire foreign technology. Chinese government 

leaders, including at the Ministry of lndusny and Information Technology (MilT), are well aware rhar they 

cannot meet the IC plan's objectives without buying up the expertise and knowledge they need through 

foreign acquisitions. Indeed. as a report ffom Bain Consulting counseling Chinese IC companies stated, 

"Since reaching scale through organic growth would be an almost insurmountable challenge, domestic 

Chinese players should look for partnerships (often with followers with strong IP that could benefit from 

funding and access to China's market) and takeover opportunities of companies looking to leave the industry 

or divest. both inside and outside of China. Like\vise, as a report ffom a major integrated circuit conference 

in Shanghai noted., "clearly there will be a focus on [foreign] 1\1&A [mergers and acquisitions] to achieve the 

rapid technological scale up necessary to realize the vision of the ne'v national policy." 6

'5 

That is why China has been on a global buying spree to try buy up companies all along the IC value chain 

including Spreadtrum Communications, RDA 1\1icroelectronics, and 1\1icron.66 As the 1\1ercator Center for 

Chinese Studies notes: 

Since 2014, ne\Y policies by the Chinese government to promote the development of China's 

semiconductor industry have fueled a boom in acquisitions in this segment. The tlrst major deals 

\Vere completed in 2015, including the purchase of Integrated Silicon Solutions for about $73<l 

13 
39


25259b-14.eps

million. Total inv-.:sun-.:rH in s-.:miconducwrs has reach-.:d more than $1 billion., but semiconducwr 

deals have received considerable scrutiny from the Committee on Foreign Investment in the United 

States (CFIUS), dampening the prospects lor several announced acguisitions. 67 

For example, China tried w buy its way into a leading U.S. semiconductor company. 'VVestern Digital. Th-.: 

Western Digital deal 'vas one of a string of numerous acquisitions that Chinese firms have attempted along 

the semiconductor v<tlue chJln. 68 Notably, China's Tsinghua Unigroup-a state-owned enterprise once 

headed by the son of f!.mner Chinese President H u Jintao-hid $23 billion f-()r Idaho-based 1Vficron 

Technologies. That deal fell apart after Senators Orrin Hatch (R-UT) and Chuck Schumer (D-NY) raised 

national security concerns. So Unigroup pivoted. working through its Unisplendour subsidiary to try to 

acquire a 15 percent stake in ~'estern DigitaL Interestingly, before China's h-1lnisuy of Commerce then 

suddenly approved Western Digital's 2012 acquisition ofHitatchi. Ltd.'s hard drive business-a deal that 

competirion authoricies in the United States, Europe, Australia., and Japan all had studied and approved, but 

China had slmv walked, thereby preventing \'\!estern Digital from achieving $400 million in savings. Western 

Digital is nmv the third globalintOrm<ttion technology company to accept investments from Chinese statemvned corporations in order to "\Vin such antitrusc regulatory blessing. Hmvever, the investment was later 

withdrawn after it became clear chat CFTUS would not approve the deal. 

In the short run, China's effOrts in semiconductors are not likely to have a signitkant negative impact on 

other players. including US firms. This is in large pan because unlike other industries. such as solar panels .. 

LED lighting and liquid crystal displays (LCD) That are much simpler to produce (largely based on buying 

complex and expensive equipment and running it), mastery of semiconductor technology is more complex. 

Yet, the long-term implications have the potential to be signilkantly negative lor the United States. With 

technologies like solar, LED lights and LCDs, massive Chinese subsidies led to significant global oversupply 

with the result being that many firms not backed by their government'> 'vere either forced out of the business 

or lost significant market share. This not only hurt marker-based developed nations, it significantly hurt 

global innovation in these areas since Chinese firms "\Vere less innovative and spent less on R&D than firms in 

dLvclopcd nations. (,g 

There is a very real risk that this dynamic \Vill happen in semiconductors, particularly in memory (DRA1'v1 

and NAND), which is more of a commodity and where price (and quality) determine market share. The 

semiconductor industry is somewhat unique in thac capital and energy costs account tOr as much as 60 

percent of total production costs, and therefore Chinese subsidies t!.)r capital and energy, can provide a major 

advantage, amounting to a large, nontariffbarrler. For example, ~\1C, a contract chip producer owned by 

the Chinese Hubei provincial government, who had partnered ivith U.S. tlash-n1-.;mory maker Spanslon ln 

2015. 70 is building a massive plant (almost I square kilometer of production space). The plant, funded by the 

Chinese rc fund and the provincial government, ViTi II produce up to 300,000 64 layer 3D NAND (the latest 

version of flash memory chips) units per month. But experts suggest that success is not assured and ifXlv1C is 

successful that this 'vill not happen overnight; it might be five years before real overcapacity occurs. Overall, 

the Chinese still lag in technology behind the leaders. Bm one advantage they have, besides massive subsidies 

and the ability of their firms to burn ca...;;h (e.g .. , sustain losses) t!.)r many years in order to gain market share, is 

that they Chinese government is forcing consolidation around a fe\v national champions, particularly 

14 
40


25259b-15.eps

Tsinghua Unigroup, that will be able to gain the scale needcd to effectively challenge the global leaders. 

China's path the signifkant global market share would be signitlcantly accelerated if they could acquire or 

form a joint venture '\Vith a leading fOreign semiconductor Hrm. hence their fOcus on acquisitions and fOrced 

technology transfer. T n short, China's going to do whatever it takes to build a 'vorld-class domestic 

semiconductor industry, and if they arc successfuL this will not only takc market share away from U.S. firms, 

it 1.vill harm global semiconductor innovation by leading to lower margins and less R&D investment. 

What Congress and the Trump Administration Can Do 

Limiting China's ability to harm U.S. advanced technology industries, including the semiconductor industry, 

will require two main kinds of actions. The first is to limit's ability to access the most important U.S. and 

other foreign technologies (e.g., rhe ''crmvn je1.vels"), '\vhlle also rolling back their broader unfair innovation 

mercantilist practices, including subsidies. The second is to develop and implement a U.S. advanced 

technology development strategy. Twill focus mostly on the fiHmcr but offer a few thoughts on the latter. 

Policies Toward China: !T!F recently issued a report, "Stopping China's Mercantilism: A Doctrine of 

Constructive, Alliance-Backed Confrontation,'' with a detailed set of recommendations. 71 Based on that let 

me suggest several steps here. First, neither U.S. domestic law, or our free trade agreements (FTAs) and 

bilateral investment treaties (BlTs) as currently conflgurcd, nor multilateral WTO approaches arc working; 

China will not systematically ameliorate its mercantilist strategies and policies unless it is proactively 

compelled to do so by outside pressure that goes beyond the narrow. legalistic limits of the WTO. That 

means this contest will be won, first and foremost, not in the tribunals of Geneva, but in the court of global 

opinion. Accordingly, Congn:ss should charge USTR and the State Department with building a "bill of 

particulars" clearly and comprehensively enumerating the vast extent of Chinese innovation-mercantilist 

policies. This should not bt: about recycling the China chapter from the annual USTR National Trade 

Estimate report. Rathcr, this hill of particulars should comprehensively detail the array of unfair, mercantilist 

practices China engages in and concretely demonstrate how those practices harm the United States and the 

entire world economy, rich and poor nations alike. At the same time, Congress should require the State 

Department_, USA TO, and other relevant federal agencies and departmt:tlts with producing re..<>earch that 

documcnts how Chinese mercantilism has hurt dcvcloping nations' economic growth. 

We also need stronger organizational capabilities within the federal government. One reason why is that the 

United States largely continues to consider specific instanct:s ofChint:se innovation mercantilism-such as 

the challcngc of Chinese acquisition of U.S. tcchnology enterprises-on an ad hoc. case-by-case basis. There 

is no entity in government charged with considering the challenge from a holistic, strategic perspective across 

agencies to analyze, understand, anticipate, and respond. In particular, no entity analyzes China's capacity to 

absorb knmvlt:dge. to understand its determination to do something with it_, or to understand che sources of 

ics technology. A glaring example of this is that it took the U.S. government four years to rccognize that 

China had articulated, and then to get translated into English, its ''National Medium- and Long-Term 

Program lor Science and Technology Development," and begin to understand what its implications might be 

for U.S. industry. And it has been nearly t'.~.ro years since China announced its I\1anutacturing 2025 plan and 

yet wc'vc noc seen concrcte steps by the Unitcd Statcs to effcctivcly counter this devdopment. 

15 
41


25259b-16.eps

To remedy this def!cietK}', the president should establish and staff a new National Industrial I ncdligence Unit 

(which could be housed within the existing National Intelligence Council) charged with developing a better 

process and structure to understand the specitlcs and long-term implications of other nations' economic 

development strategies, particularly China's, so that the United States can respond more effectively. T n 

particular, this group would develop a better process and structure to understand the long-term implications 

of China's economic development strategy on U.S. competitiveness. lr would also develop approaches to 

better leverage intelligence assets to boost the competitiveness of U.S. companies. This '\vould not constitute 

industrial espionage, hut rather sharing knowledge in the public domain (such as the (\{LP) about the 

competitiveness strategies of Chinese encerprises and industries a.<; well as developing better intelligence on the 

true source of Chinese government involvement in and financing of Chinese companies and the front 

organizations they set up in the United Stares, as was the case in the attempted Canyon Bridge acquisition of 

Laccice Semiconductor. 7.- And as part of the Council's mission, it should be charged 'vith sharing commercial 

intelligence on China with our allies, particularly those in Europe .. as they have much less developed 

capabilities vis-a-vis China. The National Industrial Intelligence Unit should also prepare a report examining 

the extent to 'vhich Chinese innovation-mercantilist policies-such as forced joint ventures. forced tech and 

IP transfer .. and completed or attempted Chinese acquisitions of U.S. advanced-technology enterprises-have 

contributed to the outsourcing of manufacturing and other activities to China and is leading to the hollmving 

out of the U.S. dettnse industrial base. A5 suggested in the U.S.-Chintl Economir tlnd Stcurity Revitw 

CommissionS 2016 Report to Congress, such a report ''should derail the national security implications of a 

diminished domestic industrial base (including assessing any impact on U.S. military readiness) .. compromised 

U.S. military supply chains, and reduced capability to manufacture state-of-the-art military systems 

and equipment." 

Congress should also call on the Department of Commerce to publish reports on strategic economic and trade 

issues regarding China .. including comprehensive review of China's "1\1ade in China 2025" and T nternet Plus 

initiatives, including their forced localization of R&D and manufacturing requirements, to determine their 

potential impact on domestic U.S. production and market access for U.S. firms. 

The federal government also needs stronger processes to contest Chinese innovation mercantilism. This 

should start by elevating trade enforcement across the interagency process. U.S. trade agencies are often 

unable to respond to cases where China has broken trade rules because other government agencies, including 

the State Department-many 'vith their mvn engagement with Chinese counterparts and agency-specific 

interests-veto stronger action. The growing range of issues discussed in bilateral engagemenc and the 

intersection of trade 'vith many of these interests means that there are many agencies involved in the bilateral 

relationship. Each agency has its own speciflc interests in China, which are often either ignorant of China's 

economic strategy or have a desire not to rock the boat. Those agencies devoted to engaging with foreign 

nations on diplomatic, security, and financial concerns (such as the Departments of State, Judiciary, and 

Treasury) should be relegated to an advisory capacity in the interagency trade process. Enforcement should be 

left to those agencies that are equipped to do it best and have the largest stake in a strong and globally 

competitive U.S. economy, in particular, the Department of Commerce, USTR, and the new W'hite House 

Trade Council./" 

16 
42


25259b-17.eps

The administration also needs to strengthen the rules of engagement in negotiations with ChitH.:se negotiators. 

The increasingly diverse set of bilateral issues the United States has with China means that many agencies and 

ofHcials have been dra,vn into the framework over time, making it difHcult to have a single and consistent 

message and approach on key issues. Tf the bilateral framework f(H managing the relationship is not f!xused 

on getting outcomes on core issues .. China will continue to rdy on the disorganization of the U.S. 

government to use the complexity of the bilateral relationship to obfuscate and make minor trade-otis, all the 

'\vhile failing to fOcus on or respond to core U.S. interests. The Trump administration should therefOre 

prioritize issues, attention. and resources and weigh the value of each engagement hased on progress toward 

outcomes. The ever-growing range of issues involved in the bilateral relationship is diluting and diverting 

attention from achieving outcomes on the most significant trade and economic issues at stake. The current 

bilateral frame,vork tOr trade and economic issues-the U.S.-ChinaJoint Commission on Commerce and 

Trade and the U.S.-China Strategic and Economic Dialogue. as well as the high-level q•bersecurity 

dialogue-needs streamlining and strict management to ensure that only core issues get addressed in the short 

periods in which senior officials are directly involved. 

1\1oreover, China all too often uses these fOrums as 'vay to play a rope-a-dope, delaying strategy. Either there 

is real tangible progress from the Chinese government from these dialogues or the Trump administration 

should pur them on hold until there is. And all agencies involved-from State to Treasury-should receive 

strict marching orders from the W'hite House on strategy and tactics. so they are all working to'\vard common 

goals .. just as is the case with Chinese government agencies when they are involved in these dialogues. 

Furthermore, the prevailing focus on presidential summits-though useful-threatens the ability to efflciently 

deal '\Vith the broad array of issues in the relationship. Too often, issues are passed up to respective leaders to 

resolve, as lower-level discussions prove unproductive. Such emphasis beneflts the opaque Chinese system and 

China's strategy to delay and defer action. as the upward referral of issues is intended principally to stall and 

to prevent progress. For the relationship to function.- these lower-level dialogues should be expected to achieve 

results at a speed that rellects the maturity and capabilities of each side and which rellecrs the need for 

efflciency in addressing trade and economic issues that can have a signiflcant impact during long-, dra'\vn-out 

processes that depend on the principals. 

Congress should also press the administration to focus on improved monitoring and transparency. The 

Chinese government has consistently failed to provide the ~'TO and its trading partners with required 

information, translated into English (or another official W'TO language), regarding policies related to trade in 

goods, savices, intellectual property, subsidies, and f(Jteign investment. Such transparency requirements may 

appear mundane and bureaucratic, bur they are critically important ro judging whether a country is abiding 

by its ~0 commitments and whether grounds exist for a trade dispute. In fact. USTR should bring a 

\\:!TO case regarding this enduring lack of transparency. Moreover, the lack of transparency is part of the 

reason why USTR needs more people on the ground: to better monitor Chinese government actions. The 

lack of transparency is parr of the reason why USTR needs more people on the ground-to better monitor 

Chinese government actions. China's governance system is notoriously opaque, complex, and multi-layered 

with overlapping and often inconsistent national. provincial, and municipal government policies. 'W'hik such 

an approach is unnecessary for most trade partners, there is an ongoing need for more USTR oHlcials in 

China, as USTR has repeatedly reported that many aspects of Chinese policy are hidden away in unpublished 

17 
43


25259b-18.eps

measures (including kgally unrecognized normative or regulatory documents) .. oral directives, and 

Communist Party secret red letter documents. These transparency concerns extend to the provincial and 

municipal governments which also regularly tail to publish their measures. ' 3 Furthermore. China regularly 

fails to provide at least a 30-day period for puhlic comment on drafts of trade- and economic-related 

regulations and rules as it agreed to at the U.S.-China Strategic and Economic Dialogue in 2008 and 2011. 

And Chinese agencies frequently adopt measures that take effect immediately when China's WTO obligations 

require it to allmv comments by other agencies and then to translate the measures into a "'\X!TO official 

language and ofllcially puhlish them before implementation. except in certain cases (such a<; emergency). 

Multiple USTR reports show that China's repeated failures to be transparent are parr of a consistent pattern 

to avoid scrutiny tOr discriminatory and trade-distorting regulations rules and other measures involving 

subsidies .. preferences .. anti-competitive government practices .. etc. A specific example is China·'s extensive use 

of subsidies and its blatant disregard for "WIO required transparency regarding such measures, as well as irs 

fiilure to release detailed infOrmation in the government's budget, the state capital operating budget (SCOB). 

Despite \X'TO commitments to submit regular notitkations on what subsidies it provides. China did not tlle 

its llrst notil!cation alter ~ITO accession (in 2001) until2006. Five years later. in 2011 .. it submitted a 

second notiflcation for subsidies provided during the period 2005 to 2008. Tn 2015, it provided a third 

notitlcation for the period 200~ to 2014. Ileyond the delay. all three notitlcations were signillcantly 

incomplete and excluded numerous subsidies that the United States knows the Chinese central government 

provides .. and none of these notifications included any of the extensive subsidies provided by provincial or 

local governments. '

6 Since 2011 .. the United States has made formal requests (e.g ... counter-notiflcarions) fiH 

information from China regarding over 350 unreported Chinese subsidy measures. China has tdiled to 

provide a complete and comprehensive response. This speaks to the need for a strengthened and emboldened 

USTR that can quickly respond to China's failure to abide by ~0 transparency obligations and bilateral 

commitments. A revamped and properly resourced USTR, supported by strong interagency and U.S. embassy 

and consulate teams, should have the capability to identifY, analyze, and publicly respond each and every 

single time China fails to play by the rules it has agreed to uphold. In this way, USTR can play a role in 

increasing transparency regarding China's innovation mercantilism. \vhich the country purposely tries to 

obscure through the use of unaccountable fi:deral or provincial government bodies issuing administrative 

orders or policies, sometimes infOrmally, to foreign companies on a 'vhole host of issues. This transparency 

focus should lonn part of a broader eHort to build support among likeminded countries lor a tougher 

response. The objective should be to not just rely on naming-and-shaming, but on identif)ring actionable 

ca..;;es. Literally, USTR should pur out a statement each and every time China fails to deliver proper 

notitlcation. And, as noted above, USTR should go even further, by compiling a comprehensive ''bill of 

particulars" listing all of the mercantilist actions China takes, including all the ways in which it is not 

complying with the ktter or spirit of its "WIO obligations, and then working to make U.S. allies, the media, 

and the world aware of just how out of line Chinese policies arc. 

To complement larger USTR and Department of Commerce teams in China, the U.S. government should 

increase funding .specifically for English-language translations of relevant documents, including key Chinese 

industrial-strategy publications. The language barrier adds another level of opacity around Chinese trade and 

~conomic policy. WTO r~ports on China's trad~-policy r~gim~ have rep~atedly stat~d that it \Vas not possibl~ 

18 
44


25259b-19.eps

to explain a Chinese policy or to conflrm a statement made by the Chinese authorities because the underlying 

documents were only available in the Chinese language.· Yet China has an obligation to publish in a WTO 

language. and such a translation undertaking is not unique: the European Union translates all of its official 

document<>., including those related to trade .. into 24 languages, and other countries also have similar 

translation burdens (e.g ... Canada, Belgium, and Switzerland). 

Also. I urge Congress to update CFIUS to reflect the nature of Chinese government influence. A core 

component ofliheralized trade is liberalized foreign direct investment, yet it is clear that U.S. FDT into China 

faces significantly different conditions than Chinese FDT faces in the United Stares. As noted, in many ca<>es, 

U.S. firms seeking market access in China. particularly ones with sophisticated technology, must engage in a 

joint venture with a Chinese finn. As one industry article advising U.S. companies wrote. ''To participate in 

China's industry ecosystem, it is essential to establish connections with the stakeholders in China, such as 

government. customers .. suppliers .. and even competitors, and to seek opportunities in cooperation and 

development through mutual understanding and engagement. \Xlith regard to the life-sciences marker in 

China, an industry analyst writes that, "To enter the Chinese market, you may come in by licensing an a.sset, 

\vhich 've have done .. or you can create a joint venture, which we have also done. But you cannot go in by 

yourself''i;J And a<; the U.S. Congressional Research Service reports, "The OECD·'s 2014 FDT Regulatory 

Restrictiveness lndex. which measures statutory restrictions on foreign direct investment in 57 countries 

(including all OECD and G20 countries. and covering 22 sectors), ranked China's FDI regime as the most 

restrictive .. based on foreign equity limitations. screening or approval mechanisms, restrictions on the 

employment of foreigners as key personnel, and operational restrictions (such a<> restrictions on branching, 

capital repatriation, and land mvnership).''.~n Chinese investment in the United States bees vastly fe\ver 

restrictions. Because of this steep divergence, Congress and the Trump administration should insist on a level 

playing fldd. and mutual access should be a core principle. As a report on Chinese acquisitions of German 

Arms noted, the "EU should emphasize ... the need for mutuality: if Chinese firms are given free access to 

more and more 'crown 7 je1.vels' of Gennan industry, China ... 1.vould have to further open up their FDl 

regime and the possibilities for l\1&A in their territories." 81 In other words. as long a.s China restricts U.S. 

investment in China, largely to take technology. the federal government should feel tew constraints to use 

stricter investment review as a tool to insist upon better behavior from the Chinese government. 

Since Chinese eflOrrs to intentionally target U.S. advanced-industry enterprises across a range of high-valueadded sectors only continues to intensif}7, the procedures of the Committee on Foreign Investment in the 

United States (CFTUS) need to be strengthened to ensure that Chinese entities .. particularly those guided or 

backed by Chinese-government int1uence or funding, are nor able to acquire U.S. companies or technology 

that could damage America's economic or national security. According to the Foreign Investment and 

National Security Act (FIN SA) of2007 (P.L. 110-149), CFIUS may conduct an investigation on the effect of 

an investment transaction on national security if the covered transaction is a foreign government-controlled 

transaction (in addition to if the transaction threatens to impair national security, or results in the control of a 

critical piece of U.S. infrastructure by a foreign person). CFl US has worked fairly effectively in some 

technology area<;, especially semiconductors, a<> attempted acquisitions of Fairchild, 1vficron, GCS, Lumileds, 

Western Digital, and Aixtron have been stopped either formally or informally.'~) However .. it has nor 

prevented all acquisitions. For example, a Chinese investor group bought Silicon Valley semiconductor firm 

19 
45


25259b-20.eps

TSST in 2015. Moreover, Chinese firms arc getdng more sophisdcated about attempted acquisidons, including 

hiring the best U.S.legal, financial, and public relations talent to advocate for their U.S. technology 

acqulslcions, and obscuring their involvement in U.S. shell companies, as they did with the attempted 

acquisition ofLactice Semiconductor.s3 

As such, there is a need for CFIUS reform. Congress should, at a minimum, update the charter of CFIUS to 

address the realities of modern-age state capitalism. 84 Other nations, and particularly China, have put in place 

coordinated strategies to systemically target key defense and industrial technologies resident in U.S. 

enterprises and attempt to acquire them by having state-o\vned or -financed enterprises purchase the U.S. 

entity, using the veneer that these are ''market-based" transactions. llecause the threat to both the U.S. 

defense industrial base and the U.S. industrial base is systemic, the charter of CFIUS needs to be updated to 

allow revle,vers to move beyond case-by-case examinations co assess and gauge systemic threats and examine 

covered transactions in a broader context. They have arguably done this with semiconductors, but they should 

expand that scope. CFIUS also needs greater capacity to revie1.v attempted acquisitions by Chinese firms of 

small and young U.S. technology llnns that might retlect promising future technology capabilities lor 

the nation. 

Moreover, CFIUS reviewers often do not have adequate rime to complete a serious analysis. having only 30 

calendar days to approve transactions or move them to a second-stage investigation (although there is an 

ability to extend an investigation for 45 days on top of the original30). Therefore, Congress should increase 

the time period permitted for the initial CFTUS review and also better equip CFTUS with additional 

personnel and financial resources to support more thorough revie1.vs. Congress should also require mandatory 

norltkation for deals involving stare-owned or state-flnanced entitles by countries of concern such as China 

and Russia. Attempted acquisitions made by Chinese state-owned or state subsidized enterprises should be 

blocked outright, as recommended by the U.S.-China Economic and Security Review Commission.~>'i 

Congress should also reform CFI US so rhar ir can block acquisitions from nations like China and Russia of 

any U.S. technology companies, including ones that are only indirectly defense-related. 

It's also important that a<; CFTUS committees consider whether the entity in question will come under 

''foreign control" that they consider "nontraditional" forms of control, such as joint ventures or novel 

licensing transactions that seek to achieve the same effect as the outright acquisition of a U.S. company. For 

instance. Chinese acquirers may be exploiting a loophole in CFIUS by designing licensing transactions that, 

when combined \vith the a<;sociated fi)llow-on agreements that utilize U.S.-ha<>ed a<;sets to operationalize the 

licensed intellectual property, are substantively the same outcome as if the Chinese company had simply 

purchased the U.S. business that holds the intellectual property. CFIUS reform should make clear that these 

types of deals are "covered transactions., that could be investigated. 

The CFIUS chair should also be transferred from rhe Treasllly Department ro another department, perhaps 

the Department of Commerce. Treasury has an important role in tracking investment and other financial 

flows, bur Trea<>ury largely hews closely to the lines of the Washington trade consensus, seeing all or most 

inward FDI as an unalloyed good. Commerce is better suited to focus on the implications of a given foreign 

investment on th~ industrial ~conomy and America's innovation syst~m. :Gut while CFIUS rd{)rm is a 

20 
46


25259b-21.eps

minimum .. Congress .should mov\..: beyond th\..: rcladvdy narrow CFTUS process to cr\..:atc a mor\..: 

comprehensive fOreign investment review process, as many other nations, including Australia, Canada. and 

the United Kingdom. have instituted. Indeed. a number of other nations have taken much more proactive 

measures to prevem the hollowing out of their key industries. For example, both South Korea and Tahvan 

have \..:S.semially banned Chinese acquisition of their domestic .semiconductor firms. Under curn..:nt law, 

CFlUS can only restrict investments that could adversely affect the United States' national security. As the 

civilian industrial base has become an ever-more central part of the defense industrial base. hm.vever. the 

current limitations on CFTUS need to he reexamined and a broader national-interest standard established. To 

be clear, the goal of any foreign investment review scheme should not be to give in to domestic protectionist 

interests, but to effectively differentiate benveen foreign direct investment that operates according to marketdriven principles and that which operates according to state-directed, mercantilist principles. In other "\Vords, 

"\Vhen a Chinese company. backed and directed by the Chinese government. attempts to buy an American 

technology company with the main goal of expropriating its intellectual property and moving it (or the 

company's operations) to China, that is clearly not in the interest of the United States. lt 'vould be important 

for any such expanded regime not to apply to investments tfom allies who are designated by the U.S. 

government as operating largely according to market principles (e.g., nations such as Canada. Germany, 

1Vfexico, etc.). Those would continue to operate under the currem criteria of effect on national security. 

Rather, the more stringent revie"\v regime 'vould be for nations that operate according to mercantilist 

principles. In these cases, all inward FDI would at least be reviewed and potentially rejected if deemed 

harmful to U.S. innovation and competitiveness. If such a regime had been in place .. for example. CFIUS 

would not have approved the Apex acquisition of the U.S. printer company Lexmark, given that Apex was 

accused of lP theft by U.S. printer companies and was backed by Chinese government money. Some will 

argue that instituting such a regime "\vould just be emulating the Chinese and thereby dosing our economy. 

On the contrary. it's doing exactly the opposite. It is about "\vorking to ensure that China rolls back its 

mercantilist policies. T ndeed .. ifimplememed properly., it would be a measure to improve the imegrity of the 

global trade and investment climate. 

Domestic Actions: With regard to domestic actions. it is important to understand that in the ne"\v world of 

imense "race for global innovation advantage'' ,vhere our competitors are putting in place a host of fair and 

untJ.ir policies ro win in advanced industries, including semiconductors, that the notion that the United 

States can 'vin by simply having government getting out of the 'vay is an anachronistic notion.'36 U.S. 

technology firms nmv compete against other flrms backed by their governments, either directly or indirectly. 

This does not mean, nor should it mean some kind of heavy handed, statist picking of particular winning 

firms. llur it does mean Congress taking the global innovation competitiveness challenge seriously. The f1ct 

that the at least 26 other nations Held a more generous R&D ta.x incentive or that 21 other nations fund more 

university-based R&D or that many more nations invest more in industrially-relevant R&D should be a 

wake-up call to Congress. e: 

The status quo will no longer cut it. A liberal redistribution strategy that ignores global competition in favor 

of compensating U.S. 'vorkers directly and indirectly,vill not improve U.S. competitiveness. If U.S. advanced 

industry firms can·'t be competitive they will employ fewer high wage workers in the U.S. A conservative 

supply side strategy that focuses on individual tax cuts and broad-based rollback of regulations \vill not 

21 
47


25259b-22.eps

improve U.S. competitiveness. Individual tax rates have almost nothing to do with U.S. technology firm 

compeciciveness and while smarter regulations are ahvays needed, poor U.S. regulacions are not the principal 

cause of U.S. compecitiveness challenges in advanced technology industries. And a ne\v economic nationalism 

that closes our markets and pressures companies to bring back work '~.rill not improve U.S. competitiveness. 

Forcing companies to bring back all or most work in thdr supply chains, cspecially low valuc addcd work, 

would at the end of the day reduce. not increase, U.S. jobs by making U.S. companies less 

competitive internationally. 

Rather., it is time fi)r both parties to \Vork together to embrace a national innovation-based competitiveness 

strategy. E~ For the semiconductor industry specifically, this 1.vould likely include measures such as a 

signiflcant increase in the R&D credit and expanding the coverage to include development, not just research; 

signitlcant expansion of scientific funding in areas related to semiconductors. such as nano-technology and 

quantum computing; significant expansion of funding for industry-led R&D partnerships, like the 

Semiconductor Technology Advanced Research Network (STARner). a partnership between DARPA and 

semiconductor tlrms; and liberalizing immigration of advanced STEM workers. 

Conclusion: 

in summary, now is the time f(Jt Congress and the administration to act to not only challenge the Chinese 

government's innovation mercantilist practices but to put in place a true national innovation-based 

competiveness strategy. implementing a China strategy a strategic. measured, and above all respectful 'vay, 

will not only level the playing flcld .so American companies can effectively compete in China and with 

Chinese companies outside of China, it will help restore faith in the integrity of the global trading system. 

implementing a. national innovation strategy will help ensure that U.S. technology firms \vill maintain global 

market share, securing not just good U.S. jobs, but U.S. defense capabilities. hank for you inviting me to 

testify bcforc the Committee today. 

REFERENCES: 

1. Justin Pkrc..:- and Peter Schott, "The Surprisingly S\vift Decline of U.S. Manufacturing Employment" (Finane..:- and Economics 

Dhcm;,ion Serie!>, Federal Reserve Board, April 2014), https://www.federalreser~e-rov/pub!>/fed!>/2014/201404/201404pap.pdf. 

2. David H. Autot, David Durn, and Gurdon H. Hanson, "The China Syndronu.:: Lucal Labot Market Effects oflmpott 

Competition in the United State;," American Economic Review 1 03, no. 6 (201 3): 21 21-2168, 

htw:/ I dx.dui.otg/1 U .12"57/ a..:t.1 03.6 .2121. 

3. Adams Nager, "Calling Out China's Mercantilism," The lnternational.Economy, Spring 201(), http://"'"''""''.international-

..:conumy.cum/TIE Sp16 Nagu.pdf. 

4. Robert D. Atkinson, "China's Strategy For Global Technology Dominance by Any Means Necessary," Porhf's, November 12, 

2U 1 5, http:/ /wvv w .forbes. com/ ~>ites/ reahpin/ 2015/11/12/ chinas-~.traten-for-rlobal-technolory-dominance-by-any- meansnecessanr/# 1 I b91 b207242. 

22 
48


25259b-23.eps

'5. Robert D. Atkinwn, Enough is Enough: Confronting Chinese Innovation ivfercantili~>m" (Information Technology and 

lnnovarhm Foundation, Fdnuaty 20 12), http:/ hvvi'"'iv2.irif.oro-/20 12-cnlntgll-eiHJUo-h-chin'-·se-m...:tcantilism.pdf. 

6. Just \Yi."tbbeke et al., "~1ade in China 202'5: The Making uf a High-Tech SupetpO\,-et and Consequences fot Industrial 

Countries" (Mncat!lr lnstituk fot China Studies, Dl·cemb...:t 20111), 

httpd/www.mcrio.orr/fil~:admin/mcr upload/download,.,/MPOC/;\·1POC Made in China 202'5/MPOC No.2 MaddnChi 

na 2025.pdf. 

7. Robert D. Atkimon and Stephen Ezell, "False Promise,<,: The "'{a~ovning Gap Bet>A·een China's \V'TO Commitment,<, and 

Practices" (Information Technology and Innovation Foundation, S...:ptunb...:r 201 '5), 

https:/ /itif.orr/publ ications/20 1 ')/09/ 1 7 /false-prom i,<,e,<,-ya w ning-ggp-between-ch ina()OE2%80l}099>'>-wto-com m itment,<,-andvractices; Atkinson "Enough is Enough"; Nigd Cory, "The \Yorst Innovation Mercantilist Policies of 2016" (Information 

T'-dmology and Innovation FoundatilH1, January 2017), http://v.'w\v2.ltif.otg/2017-"\vorst-inno-...-atilJn-mucantilist-policics.pdf. 

8. Congtessional-Executive Commission on China, "China's Working Patty Report," (Nov...:mb...:t 2011), 4<;>, 

http://-.,.-<;v,'"'iv.cecx:.o-ov/pao-es/selectLa-..vs/WTOimpact/wkptrptPRCWTO.php; Atkinson, Enough is Enough, 13. 

9. Thoma,<, M. Hout and Pankaj Ghemawat, "China V>'> the '~7orld: \Vho,<,e Technology h Tt?," Harvard Bminess Review, 

December 201 0, http:/ /hbr.org/20 1 0/12/ china-vs-the-world--..vhose-technolo~y-is- it/ a.r/ 1. 

10. \Xfayne M. ~forrison, "China-U.S. Trade hsues" (\\?ashinb'ton, DC: Congre~>sional Research Service, February<;>, 2017), 38, 

https:/ /fas.otg/ sgp/ nsf ww/RL3 3 5 ·311. pdf. 

11. Tim Mak, "Gdthner: China 'Stealing' U.S. Idea~>," Politico, September 23, 2011, 

http:/ /wv.•v .politio 1.0 JJn/ n'-ws/ st1 niLS/ 0911 I 6427 5.hnnl. 

12. The US-China Bmines,<, Council (USCBC), "USCBC 2014 China Busines,<, Em-ironment Sur~ey Remit,<,: Growth Continues 

Amidst Rising Competition, Policy Uncertainty" (USCBC, 2014), 

http~:/ I www .mch ina.01y/ ,<,ite~/defaul t/fil e,<,/USCBC!·02020 1 4'!·020Ch ina()·-D20Bmi nt:~,<,% 20 En vi ron m~:nti!--020Survey')'020 Rc,ult~ 

o/o20'}028Engli~>h<!-·02SJ O.pdf. 

13. 2012 China Busine,<,s Climate Survey Report (Am Cham China, l\·hrch 2012), 10. 

14. Ministty of Com mew..: ofP...:opk's Republic of China, "At1ti-.:-...1onopoly La"\V of the P...:opk's Republic of China," August :3, 

200R, http:/ /english.mofcom.gov.cn/ art ide/ polkyrdease/Businessregubtions/20 1 )0 3/20 130300045202.shtml. 

15. Jam...:s McGr'-·gm, "China's Drive fllf 'lndlgcJwus lnnovarl()n' A \Xicb of lndusttial P()licies" (wotking papu-, APCO 

Wlorldwide), I 5, https:/ /wv;rv-.'.uschamber.com/sites/default/files/legacy/reports/ I ()()728ch inareport O.pdf 

16. Hearing on Foreign lnve~>tmem Climate, 8. 

17. Andreas Schotter and Mary Teab'"J.rden, "Protecting Intellectual Property in China" l\1IT Sloan ;\-hnagement Review, June 17, 

2014, http:/ I sloameview. mit.edLtlattide/ protccting-intdlectual-ptopcrty-in-china/. 

1F:. K.'ltherine Linton, Alexander Hammer, and jeremy \Vise, China: lntdlecntal Property Infringement, Indigenous Innovation 

Policil:s, and Fram...:-..vorks forl\.1...:;:tsuring tho.: Effects on the U.S. Economy (U.S. lntenutional Trad...: Commission, November 

201 0), http:/ /wv.'"\v.usitc .gov/publkations/ )32/pub4199.pclf. 

19 The Commission on the Theft of American Intellectual Property, The IP Commission Report, 11. 

20. Joachim Ihrcke and Krystina Becker, "Study on the Future Opportunities and Challenges ofEU-China Trade and Investment 

Relations: EU-China Trade and Investment Relation~>-Study 1 of 12: Machinery" (Droege & Company, 2007), 

http:/ /tradc . ...:c.cutopa.eu/docllb/d!JC.s/2007/f--·bruatylttadoc 133-)0 1.pdf. 

23 
49


25259b-24.eps

21. Busine~>s Software Alliance (BSA), "The Compliance Gap: BSA Global Software Survey" (BSA, June 2014), 4, 

http:/ /globalstudy.bsa.llfC'/20 1.')/do\vnloads/studks/20 13Gl(JbalSurVlT Study c11.pdf. 

22. The US-China Business Council (USCBC), "USCBC 20U China Business Enviwnment Survey Results: Tempered Optimism 

Conrimk·s amid M()d...:rating Gwwth, Rising Costs, and Pctslstent Market Battkrs," (USCBC, 2013), 

http~://www.mchina.OJy!~ite~/default/File~/USCBC!-OE2(!-08(Y)-"0942013Memb~:r%20Survt:v 1.pdf 

23. Select USA, "Foreign Direct Investment (FDI) China," http://selectusa.commerce.¥0v/country-fact-

;,heets/Ch ina Fact Sheet. pdf, acce~sed January 1 0, 2017. 

24. Rhodium Gtuup, "Chin...:s!.: lnvestnKnt Monitor," acc.._:ssed January 4, 2017, 

http:/ I rhr .com/interactive/china-in vestment-monitor. 

25. Ibid. 

2(J. Ibid. 

27. Bijiun \X-'ang and Huiyao \\lang, "Chinese Manufacturing Firms' Overseas Direct Investment (ODI): Patterns, .:Viotivations and 

Challenges," in Rising China: Global Challenges and Opportunities, p. 99, Jane Colley and Lib.-a_ng Song, ed~., Augu~t 9, 2011, 

p. 104, http://ssrn.com/abstract-19U7170. 

28. Paul Mozur and Jack Ewing, "Rush of Chinese Inve;,tment in Europe's High-Tech Firm;, Is Rai;,ing Eyebrows," Tht' .-Vn11 York 

Time;, S!.:pt...:mbu 16, 2016, http:/ /v·l'W'\Y.nytim!.:s.com/20 16/0'J/ 17/busin...:ss/ deal. book! china-gumany-tak...:ov...:r-m...:rgcrtechnology.html? r-0. 

2'J. Chadcs \VJ. Fr...:eman III and \X! en Jin Yuan, "China's Invcstm...:nt in the Unit...:d States ---National Initiatives, Curporatc Goals, 

and Public Opinion" (briefing, Center for Strategic & International Studies, Freeman Chair in Science Studies, pg. 11), 

h ttps:/ I c;,is-prod .d.amazona ws.com I ;,3f,_ 

public/legacy fHes/fHes/publication/111107 Freeman Briefing China Investment in US.pdf. 

30. Thilo Hanemann, Daniel H. Ro~>en, and Ca~>sie Gao, "Two-\'Xlay Street: 25 Years of US-China Direct lnve~>tment" (report, USChina FDI Pwjcct, Rhodium Gwup and the National Gnnmitt ... ·c on U.S.-China Rdations, in partnushlpvdth the Amuican 

Chamber of Commerce in Shanghai and the China General Chamber of Commerce, 2016), http:l/rhr.com/wpcontent/uploads/2016/11/T\voWayStte...:t FullR...:port En.pd£ 

31 Bijiun \'VTang and Huiyao 'i)..7 ang, "Chinese 1\.-hnufacturing Firms' Overseas Direct Investment (ODD: Patterns, ;'\-1otivations and 

dulkngcs," in Rising China: Gl()bal Chalkn.g ... ·s and Opportunitks, p. 99, Jane Gollcy and Ugang Song, eds, August 9, 2011, 

p. 99, http://ssrn.com/abstract-1907170. 

32. Ibid, 103. 

33. Ibid, 110. 

34. Ibid, 111. 

35. Jost Wiibbeke, Mirjam Meissner, MaxJ. Zenglein, Jaqueline Ives and BjOrn Conrad, "Made in China 2025: The making of a 

high-kch supcrpow ... ·r and C!lns ... ·qucnces for industrial C!luntrks" (l\1nics Papct on China, N(). 2, Dec,:mb ... ·r 201h, pg. 8), 

https://""'''"'-merics.org/Fileadmin/user upload/downloads/MPOC/MPOC Made in China 2021/MPOC No.2 MadeinChi 

na 202S.pdf 

3(). Ibid. 

37. Ibid, pg. 51. 

24 
50


25259b-25.eps

38. Gert Bruche and Bernhard \'7allner, "Dragom and Tiger;, Hunting in Germany: Chine1;e and Indian acqui1;itions of German 

Huns 2002- 2012," (\votking paper, 13GM Assodat...:s, 2013, pg. 3), 

http://v.wvv.bgma1;sociate~.net/upload;,/6/8/'J/2/6892'504llbgm a~>sociates - dr3{,.'Dm and tik''tTS hunting in germanv.pdf. 

39. Ibid, 10. 

40. USTR, Report China\ \VIO Compliance, 12. 

41 Michael B. C. Froman, 2015 National Trade Estimate Report on Foreign Trade Barriers {United States Trade Representative's 

OFFice, April 2015), 72, httpd/ustr.rovhites/default!Ales/2015%20NTE!}020Combined.pdf 

42. Steph...:n Ezdl and R()berr D. Atkinson, "The Middle Kingdom Galapagos Island SyndwmL: The Cul-De-Sac ()f Chitk·se 

Technology Standard1;" (Information Technology and Innovation Foundation, December 2014), l, http:/ /www2.itif.orr/2U14-

o-alapagos-chirk·se-ict.pdf? o-a-1.467 08)24.211397 )9R.l44!l08"1)1. 

43. Jb;d, 17. 

44. Froman, 2015 National Trade Estimate, l3. 

45. Ibid, 75. 

46. Panitchpakdi and Cliffotd, China and rh...: \X1TO, 225. 

47. Bijiun \X1ang and Huiyao \'lang, "Chine;,e .tvianufacturing Firms' Over;,eas Direct lme1;tment (ODI): Patterns, .:viotivatiom and 

Challenges," in Rising China: Gl()bal Chalkn.g'-·s and Oppottunirks, p. 99, Jane Gollcy and Ligang Song, eds., August 9, 2011, 

p. 1 07, http:/ /ssrn.com/abstract-1 907170. 

4R. Lee Simmons, "Rare Earth Market," Forr'ign Poliq,July 12, 201h, http://forcignpolicy.com/201h/07/12/dccoder-rarc-earthm a rket -tee h -d efe n ~e-el ean-e ncrgy -ch in a-trade/ 

49. Select USA, https://-..,,v•rw.selectusa.gov/semiconductors-industrv-united-states acc.:-ssedjanuary 10, 2017. 

50 Bill \'XThyman and ;\·1ichael Swierczek, "China \\7ants Its Own Semiconductor Indmtry," (Pre;,entation, \'Vashington, DC, 

Scptcmb...:t 3, 201 '5). 

'51. Ian Talley, "U.S. Gear1; Up to Restrict Chine;,e in Chip Industry," The Wtt/1 Strat }ounutl, January 2, 2017, 

http:/ /ww"\v .'\vsj.com/ atrkks/chin~·se-access- to-u-s-s'-·mkond uct1 1r-ind ust1y-may-bc-cu1bcd -14R-) 397 70 1. 

52. Nigel Cory, "China's Exaggerated Semiconductor Trade Deficit No Justification for Mercantilist Policies," Tnnol/ation T'iln, 

Oct1 Jber 28, 20 15, htm:/ /v•,'\YW .innontionfiks.o1 o-/ chinas-exa o-gciated-scmiconductot-trade-deficit- no-j ustifi.cation -fOImercantil ist-pol icies/. 

'53. Dt. Adam He, "\'7ill New Polley In China Trigger :Gig Changes?" Solid SirJ!e Technology, 

http:/ I dectroiq.com/blor/201 S/0 1 I will-new-policy-in-china-trigger-big-change,.,/. 

%. Ibid. 

55 "State Cuideline to the Development of Integrated Circuit Industry" State Council, China, June 2014 

56. Ling D()ngmd, "China Intl·gurcd Circuit Industty Investment Fund Leads $47M Round In Centec Nctwotks," China Jt1onry 

Nl'fu,orl<, September 22, 2016, https://vi''iN\v.chinamoncynet'iNork.com/2016/09/22/china-integrated-circuit-industryinvestment-fund-lead;,-47m-round-in-centec-networlt1;. 

57. Jonathan Davi!>, "Indu!>try Luminarie!> Outline China'~ Semiconductor Growth Prmpect,<,," Saniconductor, ;\-hy 14, 2015, 

http:/ I m. blo;r.naver.com/ mkpark1122/220 3 590'57 588. 

25 
51


25259b-26.eps

'58. Liana B. Baker, "Lattice Semiconductor to be bought by China-backed Canyon Bridge," Reutm, November 4, 2016, 

http:/ /-..,-,;v;•v .tcutcrs.com/ artkk/ us-lattkc-us-m-a -canp Hl-btidgc-id U SKI3N 12 Y 1 K5. 

'5'9. Geotg Faluion, "Aiztwn-Chinas Staatssttdch," Ctpitt!l, October, 24, 201 '5, http:l/w---,,'\\·.capital.de/dasmagazin/aixtton-chinasstaatssrtTkh.htmL 

60. Recharge Asia, "HP Sue; Apex, Ninestar,'' news release, October 8, 2014, http://www.recharreasia.com/index.php!Tndustry 

News/hp-sues-apex-ninestar.html?ltemid-; Tom R.c·mdall, "Tesla Flips the Switch on Cigafactory," Bloomberg Technology, 

January 4, 2017, http;,:/ /www.bloomberr.com/ news/articles/2017 -01-04/te;,la-flip;,-the-switch-on-the-rirafactonr. 

61. Tom Randall, "T...:sla Flips th-.: Switch on Gigafactoty," Bloomberg Tecl:mobgy, January 4, 2017, 

h ttps:/ I www .bloom herr .com/ ne\\ sf artides/20 17 -01 -04/tesla-fl ips-the-~witch-on-the-vif1'3.factory. 

62. http://wv.'"'iv.hupogu.oJJn/S/SZ!l02180/info-shar-.:holdcr, acc...:sscd.January 1!l, 2017. 

(J3. Chen Ling and Barry Naughton, "The Emergence of Chinese Techo-Industrial Policy: Fmml\.1egaprojects to Strategic 

Em'-·tging lndusttks, 2003-2011" (Januaty 201:3), 

http://inctpped.ie.ufrLbr/spidenveb/pdf/Chen Ling and Bany Naughton.pdf. 

64. Kevin Meehan, Flotian Hoppe, Jihyo Lee and Steven Lu, "China Chases Chip Leadetship,'' Bain and Comptlfl), August 24, 

201 6, http:! /www. bai n.com/pub 1 icatiom/artide~/ chi na-ch a~e~-ch ip-leader~h ip.a~p:x. 

6'5. Jonathan Davis, "Industry Luminatks Outlith.: China's ScmicundLtctor Gtowth Pwsp...:cts," Semtcondudor, May 14,2015, 

http:/ I m.blog.naver.com/ mkpark1122/22035 9057588. 

66. Paul Mozut, "Using Cash and Ptcssur...:, China Builds Its Chip lndustty," The New York Times, Octob...:t 26, 2014, 

http:/ /v.;v.,'w .nytimes.com/20 14/1 0/27 /technology/ using-cash-and-pressure-chim-huilds-its-d1ip-industr:y.html? r-1. 

67. Lin Beilfu~>s, "Uphill Tops Cypre~>s Semi's Latest Bid for Integrated Silicon.," The fila// Strut }oumaL. June 23, 2015, 

http:/ /v;vn.v .wsj.com/ articles/uphill-tops-cypress-semis-latest -hid-for-integrated-silicon- I 4 3 50(J24 3 5. 

68. Hanemann, Rosen, and Gao, "Two-\XTay Street," http:/!rhf'.com/wpconrcnr/uploads/2016111/TwoWaySttcd FullRqmtr En.pdf, 77. 

6'9. Mathew Stepp, "Green .Metcantilism: Thteat to the Clean Enetgy Economy, (\'7ashington, DC: Information Technology and 

Innovation Foundation, 20 12), https:/ /itif.org/ publications/20 12/06/14/ green-mercantilism-threat -dean-cn...:-rgy-... :-conomy. 

70. Eva Dou and Don Clark, "China ;\·1oves to Contend in Chip Making," The Wit!/ Strwt }ourmtl, ;\1arch 24, 2016, 

https:/ /-.,v,;<rw .wsj.com/ attkles/ china-moves-to-contend-in-chip- makin~-1458R 51538. 

71 ITIF detailed an J{,renda in http~:/ /itif.onr/publ ications/201 7 /03/16/~toppinr-chinas-mercantilism-doctrine-constructiveallianc-.:-back-.:d. 

72. Reuter~>, "Chine~>e Government ~1oney Helped Canyon Bridge Acquire U.S. Chip Maker," ForhJHe, November 28, 2016, 

http:/ /fot tunc.com/20 16/ 11/28/ chincs'-·-o-ov...:tnm'-·nt -canyon-brido-l·-chip-mak...:t/. 

73. U.S.-China Economic and Security Review Commission, "2016 Report to Congress of the U.S.-China Economic and Security 

Rcvk\V Commissi()n" (\X.'ashingron, DC: U.S.-China Economic and Sccutity R...:vicw C()mmission, Novcmbn 2016), 9, 

https:/ /-.,.,,v;rv-.'.uscc.gov/ sites/ defaultffiles/an nual reports/Executive%20Surn rna.nr%2020 1 (J.pdf. 

74. Heating on Fotdgn Investment Climate in China 13efote the U.S.-China Economic and Security Review Commission Oanuary 

28, 2015) (~~ritten testimony of Dr. Robert D. Atkinson, Ph.D., President, Information Technology and Innovation 

Foundation), 3, h ttj,?:/ /-.,.,""'v 2.itif.org/ 20 15-usccinvestment-dimate.pdf. 

26 
52


25259b-27.eps

7'5. Office of the United State1; Trade Representative, "United State~ Statement at the \'\?orld Trade Orbranization Trade Policy 

Revk\v (l th~· Pe()pk's Republic of China," tk"\VS rekase, July 1, 2014; hrtps://ustr.o-ov/about-us/policy-offices/pressoffice/ ~>peeche1;/tramcript~/20 14/1 uly/ US-Statement-\XTTOT rade-Policv-Review-Peoples-Republic-of-China; Office of the 

Unikd States Trade R~·presmtativc (USTR), 20111 Rl..:pott to Congress On China's \VTO Cnmpliance, (Washington, D.C.: 

USTR, Janua1y 201 7), https://ustr.gov/sites/default/files/20 I 6-China-Report-to-Congress.pdf. 

76. The Office (l rh~· Unh~·d Stat...:s Trade RqHesmtativt· (USTR) and the Unh~·d Stat...:s Dqxurment of Conun~·rce (DOC), 

"Subsidies Enforcement Annual Report to the Congress" (\\7 ashington, DC: USTR and DOC, Fehrttaly 201 6), 

http:// enforcement.tradeYov/ esel/ reportd seo2U 16/ ~eo-annual-report- 2U 16.pd£ 

77. Deputy Chief of;\·1h;,ion Chris \VTihon, Office of the U.S. Trade Repre;,entath·e in Geneva, Switzerland, "USTR Official at 

\XTTO Trade Polk")' Review of China," news release, July l, 2014, 

http:/ /iipd lgital.us~·mbassy.g( Nl st! en o-] ish/t...:xttrans/20 14/07 /2014070 1303099.html#ixzz4NT IP8E,vN. 

78. Hl:, "Will N-.:w Policy in China Ttigg-.:t Dig Changl:s?" http://ckcttuiq.com/blog/2015/01/will-nl:\V-pollcv-in-china-ttigger-bigchan.o-es/. 

79 Richard Daverman, "China Puts Priority on Biotech," Orhut Rio Tocl~y, Apri114, 2016, 

http:/ j..., .. ;;v,'\Y .chinabiotoday.com/ artides/20 160414. 

80. Morrhon, "China-U.S. Trade hsues," 38. 

R1. G~·rr Dtuche and Dnnhard \\.'allnct, "Dragons and Tigcts Hunting in G~·unany: Chin-.:se and Indian Acquisitions ()f G~·rman 

Firm~> 2002-2012" (work..ing paper, BGM .Aswciates, 201.3), 15, 

http:/ /wv,,v .bo-mass( lCiates. n<.:r/ uploads/ 6/8/9/2/118925041 /ba-m associates drao-()ns and tLo-~·ts hunting in gnmany.pdf. 

82. Michael Gersh berg and Justin Schenck, "CFTUS Takeaway;, from Blocked Aixtron Deal," !Jtu' 36.0, December 16, 2016, 

https:/ ht\VW .law 3()0 .com/ articks/R7 3348/ cfius-takcawavs-from- blocked-aixtrondcal. 

83. Liana B. Baker, "Lattice Semiconductor to be Bought by China-Bad;:ed Canyon Bridge," Rmten, November 4, 2016, 

http://w,mv.teuters.com/artid-.:/us-latticc-us-m-a-canyun-btidge-idUSKBN12Y1 K5; J unko Yoshida, "Lurking B-.:hind Ewry 

M&A Ts China," FF Tinu'.<, December 13, 2016, http://\\w\\.eetimes.com/document.asp?doc id-1330969. 

84. Stl:ph-.:n J. Ezell and Robert D. Atkinson, "Fifty \XTays to Ll:ave Yuur Cumpetiti....--.:n-.:ss \''fu-.:s Behind: A National Traded Sl:ctur 

Competitiveness Strategy" {Information Technology and Innovation Foundation, September 2012), http://v.rV.'\v2.itif.org/2012-

fiftv-wavs-compl:titivctKSS-\Vocs-behind.pdf. 

85. U.S.-China Economic and Security Review Commission, 20 I G Report to Congress, 26. 

86. Robert D. Atkinwn and Stephen Ezell, lnnol'f1tion Economm: The Raafor Global Adzrtmtage (New Haven: Yale University 

Press, 2012). 

87. Luke A. Stewart, Jacek \'V'atda and Robert D. Atkinson, "\X'e're #27: The United States Lags Fat Behind in R&D Tax Incentive 

Genermity" (Information Technolo~'Y and Innovation Foundation, July 2012), 

https:/ I itif.utr/ publications/20 12/07 /1 9/we\'loE2CJ·b80%'J'J re-27 -united-statcs-lags-far-behind-rd-tax-incentive-generosity and 

R()bnt D. Atkins()n and Luh· A. Stewart, "Univctsity Res~·atch Funding: Th-.: United States ls Behind and Falling" 

(Information Technology and Innovation Foundation, May 2011), https://itif.org/publications/2011/0'5/19/univenitytTSGuch-funding-unitcd-statt·s-behind-and-fallino-. 

88. Transition .:-...1unu to Pr-.:sident Trump: Huw to Spur lnnuvatiun, Productivity, and Cump-.:titivencss (Information Technology 

and Innovation Foundation, November 201(1), https://itif.org/publications/2016/11/16/transition-mcmo-prcsidcnt-ckcttrump-ho~~-;,pur-innovation-productivity-and. 

27 
53

Mr. YOHO. Thank you, sir. 

And, Dr. Scott, if you would, please. 

STATEMENT OF ROBERT E. SCOTT, PH.D., SENIOR ECONOMIST, 

DIRECTOR OF TRADE AND MANUFACTURING POLICY RESEARCH, ECONOMIC POLICY INSTITUTE 

Mr. SCOTT. Thank you very much, Chairman Yoho, Ranking 

Member Sherman, and all the members of the committee. I am 

honored to testify here today. My name is Robert Scott, I am a senior economist with the Economic Policy Institute. We are a think 

tank focused on the impact of the economy and government policies 

and low- and middle-income workers in America. 

In my testimony today I am going to focus on the impact of the 

trade deficit with China and how it has affected the U.S. economy 

and on the issues raised in the hearing today. In particular, China’s rapidly growing technical capabilities, fueled by hundreds of 

billions of dollars of public investment and channeled through its 

increasingly sophisticated industrial planning systems represents a 

tremendous challenge to U.S. high-tech industries and to the security of the United States. 

I want to call your attention to the following points: Starting 

with the economics, the rapid growth of U.S. trade deficits with 

China after that country’s entry into the WTO eliminated 3.4 million U.S. jobs between 2001 and 2015. Nearly three-quarters of 

those—2.6 million—were in manufacturing. 

The largest growth in the trade deficits by industry was in computers, and electronic parts, where we lost 1.2 million jobs in that 

same period. As already noted, China has a massive trade surplus 

in advanced technology products, which in 2015, reached $120 billion with the United States. 

Now, these job losses that I have been talking about are just the 

tip of the iceberg when it comes to the negative impact of trade 

with China on the United States. 

Wage losses have hurt—much more. They have hurt many, many 

more people; in fact, all workers who don’t have a college degree. 

There are roughly 100 million such workers in the United States. 

Growing competition with imports from China and other low wage 

countries has reduced the wages of all of these noncollege graduates by, in total, about $180 billion a year in 2011 alone, or about 

$1,800 per worker, the median. 

Now, the reasons for China’s large and growing surpluses with 

the U.S. go far beyond the free market, as you know and as you 

have expressed here today. China subsidizes and dumps mass 

quantities of exports. It blocks imports, pirates software and technology, invests in massive amounts of excess production capacity in 

a range of basic industries, often through state-owned enterprises, 

which leads to massive dumping. China has engaged in extensive 

and sustained currency manipulation over the past two decades, 

which has resulted in persistent currency misalignments. I emphasize that is a different concept, misalignment versus manipulation. 

We need to distinguish the two. 

I want to make two points here not raised in my written statement. First, the rapid growth of U.S. computer imports represents 

a threat to national security because it is connected to the 

54

outsourcing of U.S. defense products, as has been explained in a 

book and articles by Brigadier General John Adams. This 

outsourcing has eroded our capability for producing products for 

the defense base and has reduced our ability to engage in cost innovation, knowledge generation, and domestic employment. 

Secondly, China’s support for its domestic champion firms and 

industries does threaten the U.S. industrial base, as we have already heard here today. China engages in forced technology transfer with foreign terms and theft of intellectual property. It also 

blocks or discourages imports, and it has of course become much 

less welcoming to foreign investors in recent years. 

Now, turning to policy solutions. China’s actions do call for direct 

policy responses. We certainly need to begin by aggressively enforcing all fair trade laws and treaty obligations. We should self-initiate dumping and countervailing duty cases. We should make 

elimination of China’s excess production capacity a priority in bilateral negotiations. 

In addition, the United States should continue to treat China as 

a nonmarket economy in fair trade enforcement, because if we stop 

doing that, it will allow China to flood this country with dumped 

imports. China should not be rewarded for market distortions with 

a bilateral investment treaty. 

And lastly, the United States must maintain currency vigilance. 

We must consider negotiating a new Plaza Accord to rebalance 

global trade and currencies. I would like to talk about how we 

might do that perhaps when we have time after the break. 

[The prepared statement of Mr. Scott follows:]

55


25259c-1.eps

Economic 

Policy 

Institute 

China's Technological Rise-Chal to 

Innovation and Security 

Testimony • By r~obort Scott • Aprii 26, 201/' 

Economic Polk'Y Institute • Washington, DC View t!1is testimony ot 
56


25259c-2.eps

!'d like to thf1nk Chuirmar: Royce flnd Ranking Member Shemwn for their ir:vit:"ltion to 

tesTify, ana t:ll Members of t!1e CommittE:e. It is a pieasure to nppeAr before yoL; todc1Y to 

discuss the-se !rnportzwt 1ssues. My name Is Dr. Robert E Scott and I nm n Senior 

Econornist 'Nitil t10 Ecor:omic Policy lnstitLtG. whG~ro! am also the D:r0ctor of Trade and 

Mflnufact~.Fing Polley Rese<.irdl. The Economic Poi1cy !nsti'cute {EPi) is non-p:ofit, nonbesed in Was~1inglon D.C. ihat stud:0::. the ecor'OiTly and goVE'tnn10nt 

policies. emd pJrticu:ar!y anGiyzes the impact on low- and middle-Income workers in 

My testimony todey wi!~ focus or the impAct of the Ire de deficit with Clina rmC how it ~ns 

1r~:J0cled Uw US economy, includir,!J ir' induslri0s lhp U.S. has typically held a 

cornpetitive advanta9e. G;·owing trade witl c~1ina. fo.low!ng :ts entry into t'1e \Nord Trade 

Organizi:llion in :1001 ha~.; dir>llnt:-Jh~c ITlillion~, of good U.S. Jobs anrl d(_.::was~~<..:;d lh~e1 we go~ 

ot roughly one hundreo million no:•-college f.:ducated v\torkers i:, the United States. 

rupidly 0rowing technologicul cspahilitles, fueled by hundreds of billions of dollars nf 

p~b!fc Investment, dlAnne:ed through its i'lc.·eas·ng:y sophisticated industrial i:.1tlt~ing 

syste1ns. represents r; tremer~dous c!l::'"J;,enge to U.S. l1fg!1 tedllndustries ;:Jr;d to ttie 

n:JtlonA: sec:.Yity oft!1e LJ:'Hed States. I would like to c.ali your attention to tt1c followir~g 

points: 

~ Rapid growth of the U.S. trade deficlt with China aft~r that country's entry into th~ 

WTO e!lmlnated 3.4 mill!on U.S. jobs between 2001 and 2015 alone. Nec""Jr:y threefourtt1s {743 percer:) of the jobs lost were 1:1 manufacturing (2.5 million). The l1fWdes! 

hit states v.i.:.r& O,.sgon. California, Ne·N !-larnpsr,ire, Mmnesotn rFJC: North Cmolinr:;. 

"' The trade deficit In the computer and electronic parts Industry grew the most i'liiC 

1,238,300 jobs were lost or diS;J![]ccd, 36.0 percent of t'1e 2001 -2015 total. 

., Global trade ln advanced technology products-often discussed as a source of 

compamtlve advantage for the Unlted States-Is Instead domlnated by Chlna.!n 

/015, thE: Unit0d Sta1Ps "1t1d $170.7 billion dPfic;l. ffl nci>tanced technology products 

wltn China, and tflis df?flcit was responsibiG for 32.9 percent ot Ult;! totsl U.S.-01ina 

goods tr,Jde deficit. In contr2st, the United States h::Jd E1 $/8.9 billion surplus in 

advzHKed ted1nology p:·od:...~cts witll the rest of tile vvorld ir~ 2015. 

~ .iob los::.05 are jus~ Lhc tip of l~1e iccbu~g wnen il COIT1es to the rH.:9ativr.: 1m pacts of US 

with CrJi::u. 'Wage losses have hurt not just manufacturing workers but al! 

workers who don't have a college degree. Bdvveen 2001 and 2011 alone, gmvvlng 

trade deticlts rem;ced the incomes ot d:~ectly irn;Jacted wo!·kers by $37 bil!lon per 

yec"Jr, Rnd growing competition with 'mpo:ts fro11 Ctlina and ether low wege countries 

redLced the wnges d all non-college graduates by $130 o;ii,on per yem. 

There are reasons for Chlna's large and growing trade surpluses with the United 

States and the world thnt go far beyond the free market. China bott1 subs1d1zes nnd 

dum:Js nl:)Ssive quuntlties of exports. Sp&c[f[ccllly It blocks :rnports, pirates soft\vme 

zmd tedviok,gy from foreign ~xodur::ers, invests :r mn<;sfve a::~ounts of excess 

p10duction capacity in a range of basic Industries, cfteil through state owned 

enterprise-s (inve::;trno:~ts thnt to rlumpi·1g), und op0ratos as A rpfusr~ lot for 

Economic Policy Institute 
57


25259c-3.eps

G"lrbc:l (lt~d otr1er industri21 pollutants. Cl'lna ru1s also engaged 1n extensive 

sustained currency manioul?ltion ovor th12 past two docadc·s, rosultir:g in porsist0nt 

curT•rxy :11:snlignmon~s. 

~ China's actions call for dlrect polky responses. To sdequately rosponc1 to t!1osG 

IllreE'Jts, I propose t:-lfi! !fle SL,bcomn;ittee make ~he followlllg reco;-nmend(-1tior:s: 

Congress and tile Pres!de,lt e:lf')f!nce enforcement cf all froir t:-ade I.RWS i-lnd treaty 

obiigc~Liuns (through :1nli-du,nping, countmvai'ing Cuty, i:ind WTO case filings) and 

lmpiement better t?<:lrly warning systems ond mecllnnisms fOI" responding to 

lmpo~t su·-ges. 

il1 Tht: UritrKl Sial!-:~ shm)ld also rrc1kc Chirwsf~ r:::xcp~;s producUo~1 cardcil.y t-1 

priority to add:·ess In oli?:-;:eml nego~lat1or;s as i! is this excess capacity that fuels 

durn~l·lg nf oxpori_~-. rr1 Uw Uni1nd Siut(-:'S.In particulnr, OVC'rcapacr,y ;.;f-lOuld b(~ 

r:lddressed by reforming state-ow'if\(:! enterp~ises, b;;.;rrlng China from a!l U.S< 

government procwemPI~t contracts. ::mrl prohib:-:-ing SOt=s nnd rr;ost Ch:nr:sP. 

compAtlies from foreign dino:ct investment in US. rranufacturing or higl1 tec:1 

comprFw:>s, 1ncludin9 tl1rougl1 enllF:i:Jced Committee on the 

Ttw Urited Sta:cs s"'louid also consider iillposing a border-edjGstnble cwbon fee 

on imports produced by ellergy-lntenslve lrJdust~·ies. 

In adrl'~lon, ti-le United Stmes should coiltinue to treRt Cl11na as n nonmmket 

economy fnir trade enforcement, beci'lusc dec~des of subsidies rrnrl<et 

d!stonlons render Cl1i~ese market prices menning1ess, and been use granting 

China nmrkt-:t-uconomy stall1~; wou:d curb th<-' ability io 1mposr~ 

goods and thus allow Chinese companies to undercut domt:stlc procuction by 

f!ooding \.VTO ni1Uon mmkPls w1th d~t~ap goods. 

Chinn shodld not be revm~oed rOi ib mmket dislort!ons with a bi:atEHi:1l 

1nvcstme:1t tmaty. I approclm!? Ranking Merr:ber S!""r0rman's pas I fY·vpossls t:::> 

rGvokc Most Favored Nat1on status for Chinn, and to refocus on a ~r.3ding 

relat;onst1ip (1t>slg~cd to elimi~atc' t:1e t~aC€· irrlbiJiarce. 

* Lastly, the United States must n~r:<intein currency vigfl~llce and consider 

ncgctiati'lg nE'W Plaza Ao:ord to rebalance currencic·s and ~lob,:~ I trade< 

China's hlghmtech and industrial polkles pose grave threats to the future of U.S. 

technological leadership. economic growth. and national securlty. Accordi'lg to the 

(PCAST), Cl1inn is tlO\V 

exerting a ''concerted pu3!l ... to reshape the semiconductor merket in its favor, using 

industrinl policies bnc~ed 'JY ove1 one t:undred billion doii<YS in govc:mment di1·ectcd 

funds. [which] t~~·e.Jten3 tl1e co·1~petitive11ess of U.S. Industry." /\t tl1e ssme t1111e, China 

1s c.dvancmg :1 ~:1 Ch1n:; 2025" plnn to flcce:sm!e tcc1noiog:callnnoviltlon and 

dornest!c conte~t i:-, 10 !xoad 1ndustr:es whici1 Will be supported bv pL:ms to 

billion for low-,nterest ;oans, "!SSista•1ce in b.Jyi~g competitors Cl:ld resenrch 

subs~ dies. Ovmall, tho US. has fal:en behind China 'r; total, law-stage developme:1t 

rese':lrch, acc:rdfng to a 8o:-;ion Group. Ry ?018, 

Economic Policy Institute 
58


25259c-4.eps

Chinn could spe~1d up ro twice n'3 much as the U.S. on develop:-rH?I~t rese.:lrd\ 

thro.sten1ng U.S. leadersllip ;r; c: ,_v,de array of manufacturing ind~stnes. 

Growing foreign Investment ln U.S. manufacturing firms, especially by Chinese 

mu!tlnatlonals, threatens U.S, natlona! secm!ty, contmi of sensitive fh-umda! data 

and control of key technologies, and is likely to !ead to increases in US. imports 

and the trade deficit because foreign multlnatlona~s hZive been responsible for 

growing U.S. trade deficits, and at least forty percent of the total U.S. trade deficit 

in every year since 2007. f-oreign :nvestments lJy Chinese firms, often state-ovmed, 

su.:h as Zt;o:lgvJong's proposed p~rct1n::,e Aluminum been 

c.oncr.'m ove1 the loss ot sensitiv<-:; n:-secF·ch dati .. ~ used to make key cefense 

rrateria.s suc1-: flS high-strength nlloys und ligrlt cm"lor mntE·riAI. Likewise, the 

Chongqlr:g Casin Enterprise Group, a Chinese firm w1tl1 possible ties to the Cl-:inese 

government is to purchsse :t18 'Stock This curchZlses 

poses pot0ntia, tl1r12-ats to bmh National Security 3:1d to lncliv:duai fnrs listed on tl1e 

Chicago Exchsnge which are r0quir0d to s:iilrc sensitive datil 1n orrler to be llstGd O!l 

i.h0 txchangQ. inforrnallon which could b12 cor11pronised by this fordgr: Investor. 

F-·in•.1lly, tfian mel1lbcs u !Ptto~ to tnc ·rreosury 

Secretory requesting that [·;,2 lnrtiate a CFit.JS review of the purcilRSE of Vel":ex Raiicar 

Corpo~ation by China RailrooJd Rolli.lg Stock Corpon'ltion (CRRC) ancl Maje:.tic Legend 

holdir;gs< CRRC ;s gover:1ment o\-vnec erd subsidized, and the ChinesE' govGrnment 

cou:cl use this purclwse :o compete unfEmly 1n Ihe US market. CRI~C hns use-d 

subsidized fmancing to Lrderb1 d comestic firm~ on rnl:.::r"lr contracts In Boston and 

Chicago. American sL:ppllers of prod~cts sud1 ss s~eel for railcars must now comoete 

againsr the rosourG:s ofthu ChinPso g~wPrnmQilL Th(::t-.e cnsGs il!ustrotn wr:y 

enh,3nced CFIUS mvlsw is crit!cnl for lirrliting t!""K~ nog:Jtive :rnpacts of tO! by Chinese 

fmns i'"! the United Stutes. 

~ Thank yow again for the opportunity to testify bGfore you today. I look forward to 

yom questions. 

From 2001-::o 2015, impor~s from Chi'"l"l increased di",Jmntically, fron1 $102.3 b!l:io:l in 

2001 to $483.2 billion fn 2015, as shown in Tablet U.S. (:xports to o~~r~.s ~osC> i:lt a rapid 

rate J~om 2001 to 201~'1, but fron1 a much S'lliJI!er bJse, from $19.2 billion in 2001 to $116.1 

bi!liotl in 2015. As a result, C!lina's exports to U1e Un:ted Stntes 2015 were ~1o~e than 

~-our times grei'Jter t!l:lll US. Exports Cn1n2l. P:esE trade figures mflkc tre C:-Jina trade 

rc:!ntionstlip tt1e Unitec States' most !mb<'h':lnccd tri'lce relatiot'SlliP by fnr: 

The trade deficit and job losses, by industry 

Tho composition of impori.s fmrn Chi'ln c~mnging :n fl,ndnrm~ntal woys, with siunifiG:Jnt, 

negat1vc r:npiications for ccdain kinds oT h1gl"'-skill, h!gh-Wf1Q0 jobs: on co ~hought to be tho 

Economic Policy Institute 3 
59


25259c-5.eps

hflllmmk of the U.S. economy. C~1!:lPl iS r:1ovirg mpidly "Jpscflle.'' from low-tech, low-skillEd, 

labm-intens!vc 111dustries suer: as appa(ci, footwear, and basic eloctronlcs to morG capita:-

c:md S'<ills-intt'rsfvc i'ldustries such ns cornp~tors, elcc~rical :nuchinery, cmd motor vehicle· 

parls. 1: r~as Uevt..;>loped a ri:lPidly g~ovv1119 tr·iid0 ~urolus in the~0 specliic lr1dustrie::. and in 

h:gh-tecl1no1oqy prodt.<ets in gcnon:11. 

The 1m port data (show; 1 1n my b:..!t no~ reproduo.::>d here) ref: oct China's r"JfJid 

E'X;)EJ:lslon into higher-volue-udced commodities once considered str<:ngths of the Ur,ited 

Sla1Ps, su01 cornputPr CHHl {-llf!Ctronic. parb. wb:ch 3ccowltcd for 36.5 pr;~c~C~nt ($176.6 

b:ilfonl of US imports trom Chil1a i1 201~1. This growth is spparen: in the sllifting trode 

btllr:-HJCf~ in advm1CE~d tQdmnlngy product•; (ATP), a lm.:Rd category of h1gh-cnd l.oc~ro1ogy 

goods trade trvcked by the U.S. Ce~scs Bure,~JLL AfP it~ eludes the 1T1ure ~idvanced 

e10'Tler:ts of tl:e computer and electronic p01rts inciL1stry os wei: os oH1er sedors such os 

biotechr;ology, life sciences, ncrospsce, nuc,ear ted1nology, nnd fiE:x!ble r:1anufadut in g. 

Tile ATP sector lnoudes sorne Elute~ parts~ China rs one of the top suppliers of nuto pmts ~D 

:he• Uritod Stat0s, having surpssscd G0rmany. 

In 2015, tlv.? United Stntes hnd $1207 bill:on t1·nce rleflclt witfl C11na i:1 ATP, reflcctl·lg ::-~ 

~8nfo!d lnceuse fron; $1l8 billion 2002. Tl~1:s ATP deficit wns respcnslb!e for 32.9 

percent of the tot-11 U.S.-Chlna tmde deficit i'l 2015.1t dwmfs t;le $23.9 b:I!IOt~ surplus i'l 

ATP <J1at th!:;; U;1:l.z·d St.:Jles rwd with l'w rest of u~e world In 2015. As a resul~ o: thl' US. 

ATP deficit \Nit'l Clilno, tr:e United St::~tes ren nn ovH("lil deflc!L 11-'1 ATP products in 20'15lof 

$9'1.8 billion), as ii in year ::.ir:cp 2002. 

loss or Ciisol8cement by industry !s direc~ly rel~tea to trade flows by Industry, as shovm 

in Table 2. Tfw growir·g Va<Jt:> deficit with Chmn e':rninatt?d ?.557,100 m<:lrllJfacturfngJobs 

between 2001 ::me 20'15, nearly three-fo~r~hs (74.3 percent) of the totaL By far the :srgest 

joD rJispldcemPnL occurmd in thu comp~1tor and Bl\!ct~orliC pEl! ts inJusfry, wh1ch :osl 

1,238,300 JObs {36.0 percent of th£ 3.4 million joDs dlsDiaced overa'l). ffli:: incust;y 

includes computer and perlphual GC]Uipmont {670,800 jobs. or 19,5 ;Jercent ofthe ovorall 

jo:Js dis~l-3cPd}, semiconductors and components (282,500 jobs, o~ 8.2 perce11t), .:'mel 

cotllmunlcFltions, clL:dlo, 0nd v!deo equ1p~ent {267,000 joos, or 78 pErcent). Other ~md hit 

indus~ries included appal el {204,900 jobs displaced, equ,ll to 6.0 percent of tile to:a,), 

fn::x:cated meti"JI proaucts (161,800, or 4.7 percent), ~extile mills nnd textrie prodL>:t mills 

(117,800, or 3.4 (JE-rccml), miscellonuous rr:anufacturud cormnoditiC'S (127,000, or 3.7 

percent), fur;J:ture .Jnd (6!fl~ed prod~Jcts (1'15,900, or 3.4 percent), oiPJstlcs f1nd rubber 

p~oduds (7B.ROO, or 2.3 purn:.>r1t), and motor Vf'hidPs rmd 1r10tor vPhick" pans (49,600, or 

14 percent). SeveriJI sc·rvicc :nd~..:stries, which provide key :noL ts tv tradcd-qoocs 

production. E~xp~;rinnct-~d s,gnif1c.-1ntjoa di~plac<-:rncnt. inducing :-:id;nlnislrative ::1nd support 

ana ,,.veste management d'id remediation services (211,500 jolJs, or 6.1 percer~t) and 

profess:onal, scientific, nnd ted:r~ic:n: services {183.000 jobs, or 5.3 percent). 

Economic Policy Institute 4 
60


25259c-6.eps

Jo'J losses are Just L!le tip of the iceberg wf1en it cornes to the negfltive i'llpdcts 01< US 

trnde 'Nit'l ct~inn. Wage .osses ~a';e t1~.;rt notjJst rm:r;ufac:turi'19 wor-kers but workers 

who don't hcwe i'l col!ege degree.2 G!oi:"H-lliZiJt:on and unfair ti-ade cieals i1sve lowered t:1e 

wc~ge~; cf U.S. workPr~ disploclnu JOb~; rmd W(:'i:lkf~nlr;g thr: bflrgE!irllrl\J po~ltion of lowand :niddle-wage workers in two main w2ys. 

F1rst, ilxrensed U.S. t:-Ade deficits push JObs out of bette, -pa1C :r':ldeP.ble secbrs. J:::bs 

d,splaced ~JY growing trade deficits result In lost w;::.ges as worke;s W;'~O leave :1!g11-pay:ng 

nnoort-co:rlpetir'g indushiE-:s sLch HS computt~r and nlectmn'c p;Jrts rmmufucturing t11ke 

Job::. In lower-pBying 'lon-traaabl\2· irdustries. Evc1 w~1cn jobs importing Industries cacrep! aced in by iobs in exporting iGdust.rics such us c~qriculture or fooc; products, ~he 

res:...:1; is wage :o'3scs frorr; rising trade deficits. 

SPcond, 0v0n iftrado dofic1ts co not rise, i'lueuscd tr3dr~ changts the composition of 

JObs, and the new patterns of E·rnployrnent ie.::JC to reduced demand for labor and 

dowmvard pressure on W:39GS. As ~he United States lnc~"c,Jscs production (c11d lnueascs 

ex:Jorts) of cap'trd-:lltensivc goods nnd reduces prod~1ct:o;, (and inc.rt·nses impoi'ts) of 

labor-lntensi,Je goods, this leads directly to reducec demand for labor, eve11 it exp0rts 

and imports measured dollars bEl lance. Funher, fiS lmpo1is displace workers f:-om 

tmdenDie -::ectors (such as ManufActuring), t~1f.Sf> ll.•id-offworkeis :;eed to <1ccept lower 

wages to obtain work 1n ott·1£r secto··s (such ns landscaping or constr~ct'Oil), and th1s 

co1-;1petit1or helps to lower the wages of sirnilm workers already employed 1n these 

secto:·s, In st:ort, while 1t 1m possible ~o i-ep:ace n w0itress (t:i job 1:1 the non-trnd::-i.Jie 

restaurant sectc.r) 'Nitn 111ports, h0r wag0s are f-;armed by neving to compote with apparel 

workers wro have cue to increased trade fiows. 

L.hai t'Xpanded trade has reduced lhe annucJI watJe~ uf a fLII-tirnu Arnurican wor:.:::er wilho:.J1 

a four-ye<Jr co! lege dc~ree vvro ea:~-s trw median vvoge by $1,800 oer yE·ar.7 Given that 

:here are roJg!lly 100 ml 1iion non-coll0.ge-educnted workers In H1e U<S. economy, t!1e scniP 

ot \Ni.ige losses su~fered by this group likely transiGtes into close to a tuil1 pe-rce~t of 

GDP--roLgr-~iy $180 l)i:lion. 

It's Not an Accident: Addressing The 

,_.,...,,UT'"'· ,~of Trade-Related .Job Losses 

The job nnd wage losses f:-orn H1e gmwing US. :rode deficit with C1;na-E1r:d tne nationAl 

security vulr;e~abi;ities- stiOuld be ur~acceptable to US. poik:ymskers. Especial'y since this 

1s fl solv-:>b!e ~roblem: The increase in U1e U.S.-Chini'l trade defic:t causeC by specific 

011nese poiiC'es that U.S. policy Ol:l nddress. 

Economic Policy Institute 5 
61


25259c-7.eps

Subsidies that fuel excess capacity and lead to 

dumping 

Extensive gevcrnment ~ubsidies and rapid growth ot stJtc-owned cnterorises nave 

genemted rn.,-1ssive buiidL1p of excess capdc:ty in a rnnge o~ ct'inese industr·ies. Excess 

capacity rneans that Chine's tuctories are churning o.Jt quant'ties of bss;c cot:lmodlty 

pr·oducts sud1 as stee1 products, Dluminum, rnnd-dnery, rut:ber and plnstics ("Jnd stone, 

cer:1ent, glAss, "!nc soln: pnnels that far exceed the demand for ~hesE- pwclucts :n e:-~:nfl's 

d;:;mestic economy. To prop up these over-cnoa:lty :r;dustries. these produc.is ms sold ir 

other :nmkets oelow marke~ rates (dumpir~g). The United StDtE:'s bears a uniquely la;ge 

burden, suffpring nmtelhon othPr cotmttiz~s from s\~bsidin:~d <mo durnpe~ imports 1n :.hosP 

lndJstries. 

rv1~Krl or ttlls Chinese overcapacity 1K1S been develcped by SOE's, which chm~tiel r:nancial 

support to co:n;:>a'llcs in theso fndus:ri<?s througt1 state banks. Bui di~·cct support from :ho 

Ch1n0s0 fY""JVC'iT1 rr0nt t~e fonT' of subs1dm?d prices for energy ~r~d notural msm:rce 

111puts also play~ a :::.:gnificc:i~lt :o:t.'. Thu U.S.-China Ecor~or-nic Security FJnd Rev!ew 

Commission conciuded in its 2016 annual :0port that 

The proliferation ofsubs:d:es (Along w!th curm·lCY mnr:ipljutlon, discussed in th0 n('Xt 

section) tlAS '"or most of t11e past 15 yems acted like a subsidy wall :::f Chinn's cxoorts and 

a tax o~ evnyth1ng that C!linC'J imports. Tl1ese subs;dies hcwe c:olltrit>uted to ttie 

:rer1endous growt11 of excess Ulpacfty ,n stEel ot!ler pritik1ry produce industries !11 that 

country li~cleed, Cllina hr1s been found guilty of dumping In 759 c.1ses (covering nil 

products) between 1995 and 2014. 

C'l!na's Actions to ;xop up 1ts steel industry serve as an ex-?~ II' pie. Cllin;:,·s steel production 

C::""ipr.city increc1sed tenfold from 2000, when h<1d I"OU911'Y tt"'te same ca:Jflcity the 

Unite~j Stfltes, to 2014, when its pwduction cApncity reached "1.2 billiotl tolls. wnile U.S. 

cc1pacity rcrm1ined lorge1y tmcrmngeo rot)griy 100 rril!ion ton<s. Chirm we11t from being R 

net steel :mportei" to u net expon.er of over 100 mil1ion tons of c:urr:Jed and suos:dized 

siPPi, worldwidE", 20'1.5. U.S. stm:d producw~~ absorb~:d netlossP:~ of $t4.:i bill ton in U:n 

tourth qu.::,rter of 201b and $23:3 million ill tho first ouarter of 2016. IJ011E·stic stee! 

pmducers were forc0d to cup:tul and "'shutter cup::1cfty and lay off 

ernpioyees," with nearly 19,000 U.S. steel And iron ore miners facing layoffs '\~sa result of 

C1rnesc overn;p0city. 

Economic Policy Institute 6 
62


25259c-8.eps

Lax environmental laws that "subsidize" 

Chinese products 

cn:n:.:i has :Jccome onC' ot the vvor:d's biggest pollutc~s and much oft!lis is due to 

increased emissions from steel othe industries. 01lnn operates ,""Js o cJumping 9rm;rc! 

c:wbor; D~d otller key air, water, and waste pollutants. ~ow produces more sui~ur 

d:oxide ilnd cJrbor dioxide than any other county in :he world. For examp:e, ct1'na's steel 

indusrry now uccou'lts for SO pHcent of the v,;or!d's produc~ion of cnrbon dioxide t-om 

steclm.Jking. 

Repression of labor rights 

C1ina extensively suppressos iubor rights, w11:\h iow0rs woduction costs withn: Chin.l. A. 

2006 AFL-C!O study estlrnatec tt1at repress! on of laoor rights by the ct1inese governmer~t 

~lad lowered rranufacturi.-lg 

percent 

of Chinese 1//orkers by bctwee'l 47 percen: and 8:1 

Policies that block imports and foreign 

competition 

indi.-ectly, Chinn's broad notwor~ of subsidies and poky supports for fsvorod cornQanles 

suhstr1ntiul bmriers to i,11port penetriltion, ~Jutting 

ifYterna~ional firms t!lat wish to expor~ :o Cni:1a at a substantial d:sadvant21ge. 

For onP. China irnposPs forcH:Jt<::>chnology traw;f"H on fort>ign fltrns wi~.hing to invos! n 

China and ;:. enga9us in cyber-enaOied th0ft of intdlectua: propony. Thu::. fore1g'1 firrns < ru 

reluctunt to do in Chino for k:iir of ond:'lnqering tecn11ology thnt is to tile'r 

patents' proprieta:y tedlllolog:es and sources of cor1petitrve edge in global mcFkets. 

en rna ulso blocks disco~J~nges il;lports vlu lrnpon Sl:bstitutlot" polic:es. These policias 

irr,pose lrriffs, quoti':ls and o~her Uiruct mstrict1ons on imports, a11d explicitly fnvor 

domestic producers of corr~~odit:Es ti''at V'JOUid othC'P,v:se be imported, n?duc:ng demand 

for U.S. exc-ort~>. 

China is elso become iess welcomi:1g to rorc-lgn ln\rcstors. f1nd Imposes rnanv restr:ctions 

m1 thPir :~ct1vitit:s. Its ~_:mii-cornp.::::titfvH la,.vs rrohibi~ fotdgn parlicipt-li:o~l in broac sectors of 

the C'omest!c eco11omy s·ld give pretcrerces to domestic, Chit~E·se cot~panies. Ch,na has 

mads it clenr tflAt rt does not nl!ow foreign competition to occur, via :mports or foreign 

ciir·e..:t invcstrlC:nt, in vvll8t it vievvs D~ '<.ey sectors of its economy. 

Economic Policy Institute 
63


25259c-9.eps

The crucial missing link of foreign direct 

investment and outsourcing 

Proponents of trnce den:s sud: as tr:e agree1nent to endor':ie Chin"l's edrnission to H1e 

Worid Tr2d0 o-ganlz3:ion LSLally focus on ti1o frqpacrs of th0s0 d00ls on tar:ff Emd nontariff 

brmiers to trade. Chi~n agreed to r:iflke mfljor t"ll"iff reductions as fi condition o~ entry into 

the WTO. Prcsi<J""nt Clnton ::Jnd rnw1y othms argut.~d thnt since U.S. tariff bamers wuu 

alread·y :ow, the agrcenv2:1t would do more to increase U.S. exports to China t11an ~o 

incrof.hP U.S. 1rnports frorn 

But proponents failed to anticipate the effect of China's 

entry on foreign direct investment (FDI) and outsourcing 

rort:>:g•1 direct invt'::.tr~cnt ~san lrwest~r~onl by a r.::orqpany o~ indivioual :none country U1c:i. 

1s made in 81,s:ncss interests in Jnother country_ It ca'l tui<e ~he form of establishing 

bus:ne:-.s OfK!r-f!tiom; ()f m:qulrfng husmG~;~ flSSt:'i:, in the othm country, sud~ a~; owr;ersh,p 

controlling interest in forei~Jn comp,:my. l!rlir<.e oortfolio invcstmerts, in vmich .Jn 

irwestor merely purchases of foreign based co:Tlpanies, fmeign 

dirE"ct es;:ablishes E:·tfect:ve control ot. or at 1eest substantiallnfL,erce ove-r, the 

dc:cision :1m~fng of o foreign busi~ess. 

FDIIlJS plavec1 ~ key role in tne growth of Chir:a's manufactunr:g sector. Chin21 the 

imgesi recipient of FDi of all developing countries und is the t1iro-lmgest rec:p,erlt of FDI 

ever tt1e past tnree decades. tr.JIIir~g on!y U1e Un'tec1 States and tile Unitcci Kingdom. For 

trf:lny yec1rs, foreign -fnvesteo enterprises (botll jclnt ventures snd vv'lo!:y own(~d 

sL:bsldia~ies) were responsible for roughly two-tt"drds of cr-1illn's glob(ll trade suplus_ 

However, due to 0111Vl's indigenous ir"1t~ovntlor poliCie-s ,1:1d otfler mensures that have 

p~1s~1ec out foreign inves:ors. often tt1rough forcsc takt?overs and illegal t!wft 

inwllectual propony, this srare 'las fiJI len sharply to o'liV one-third in 201-S. No~c::h0less, 

outsourcing by U.S. untifJes-1hrough fore1gn d1rc>c\ invc·stmeni 1n factorip~; thc1t rnakt-': 

gcods for ezport to u~e United StJtes-hos playoc e key rolE· !·1 the sllitt of m::1nufe1dJring 

production and jobs fr·r::n~ the United States to Chinii since China entered tne WTO in 200t 

Currency manipulation and misalignment are 

the major causes of the trade deficit 

Finally, m:salig:1rrent of trw U.S. dollar and tl1e :Dgacy of currency rrlanipulation by 

(und other countries) are ma~or G1uses of tho U.S~ traCe deficit and d manufncturing job 

lot:.s. While som0 countnt:'S are stil' manipulal1ng, as t;aditionally d(.::fired, Ch1na is no~. and 

vet we are 1ett with this massive overh;:mq o~ J trade detfcit l hE. C~inese yu<Jn and other 

ctFrenc.ics of current and former manipulators me stil1 substailtially mlsnligneo, anc t~is 

han~JOver is big cause of U.S. and Q!obal traoe imbalar;c€s. 

Recc,nt FPi reports h::~ve explnirmd how currr:ncy iTlEl'lipu,CJtion by C:hina r1nd o:hor East 

Economic Policy Institute 8 
64


25259c-10.eps

Asinn n<Jtfons has led to ri5ing tn-1de s~~i'pluses by ccmency manlpulstors nnd tl1us giobf!! 

trade imbalances, hitting tile Un!tGa States particularly hare 

Chinn's actions call 

responses 

direct polit~J 

To .::dequ1tely responc to these thl"eats, Co11gress and the president should enh~1nce 

cnforc0rr.ont of all fair trade law.:: ana tremy' ooligations (til rough anti-dumpirg. 

count12rvai1irg duty> :v1C VVTO cnse filings) and impiE .. mPrt bE";tt<"!r 0arly w;:uning systems 

and ;noch.::mism::: for re::.ponding to irnport surges. Tho Un1~t~d States should also maku 

Cnincse excess production cGpacity a priority to address iil lJilaterJI ne-gotiations as is 

ttl is excess cnpoc.ity ttu~t fur.c:is dumping of exports in tile Ui~lted Stf!tes. 1:1 pAr:ic:..:lar, 

overcapacity s;,.wuld be addressed .)'/reforming state-O\fJned entE·rprises, barring China 

from all US. government prcct:rc~nent c:ontncts. and proilib:::ing SOEs and most Chinese 

com ponies from foreign direct Investment il" U.S. mnnuf0cturing or high tech comp<-:iiiies, 

ir:cluding tt·1rough enrmnced Committee 0:1 Fo~e1g·1 !nvestmsnt U,.!:tcc Staics 

(CF!US) review ptocesses:~ H;e United States should also cons1cer i!lposir;g a borderc-JcljustclbiH car bOil ff-;e on lrnports produe<.'(i by onL'rgy-intensivr-:) iridusHies. In Rddiiion. tho 

Ur:ltcd States shou!d continuo to ~reat Ch:~fl as a nonrnarket econorY!y In fair trad0 

enfmcemo'lt, oecausc decades of suLlsidics and morkct distortions rE-nder Chinese 

n;arket prices r:lE:aniilg!ess, anC ~JE'Cause g~anting China ll'arket-ecollomy status would 

cu1b tt1e ubility to impose on dumped >;)Oods and tllus ::1llow Chinese ;:ompar;ics to 

undercut domestic production by flooding WTO :~mion rnnrkets wlt!l c!1eap goods. Also, 

C'lina si1oulo not be l"£·1/'/ard<?d for market distort"o:~s with a bilateral ill'ltstmert treaty. 

LAstly, the Ur:itec StZltes must r·nairtnin cJrrenc:y vigilnnce <md consider negotiming a 1IGW 

Pima /\ccor(~ to rebqla:!ce CUiTencies and global 

China's high-tech and industriul 

Jmlides pose grave to 

futu:re of U.S. tet~hnologicalleadershi}J, 

economic growth, and nutional 

security ~ 

According to th~ Prosick:nl's Cc lnCI! or AclViSOh on Sc.itncu find 

ch·na :snow exerti~g o "concerted pL:sn ... to re-shiJpe t:1e ser:ilccnd~ctor mmket !r: its 

fcwor. l:s1r1g lndtislricll policie;, b.1ci<cd by ov~o:'r ont:: h.!'ldrG..i tJi:liorl doiiD~·s in govrHnrm~n1-

directed femes. [whidrj threatens the COill;JPtitiverlf?SS of U.S. industry'~, fhe PCAST report 

found thi]t C"li1KiSe rolicics ArP. reducing U.S. market s'l::us- sernico~ductm· indus~rics, 

undQrrn:nrng innovntion nnd putting US. 1atiorml SGCJiity Jt risk. T!1ey ;ecommend Eel 

three·pronged approach to respond to the- Chinese cn.:illenge ;n sem:conductors. F;rst, 

Economic Policy Institute 9 
65


25259c-11.eps

work in b1inter.:d ar'fo multi!nH:;ral forums to Improve tt1e tra··1sparency r,bnut Chl11ese 

policies, coordl1ate investmon~ security and export controls, and ~esponc to c::n0so 

violation of ft~ternationol 69''0C>IT;Cilts_ Soco:1d, inc0as~.;-; funding fo; ''C'Search and 

devaloprnc:n~. tal0nl attract:or1 

p:o;')osc a sGr:cs of "'lloonshots" designed to dcv0lop transtorrnativc innov<Jtlons in areas 

SL,ch as biodcfense, and CL'tt!ilg ed£0 rnedical tec!lnologiesYAt the S•3me :inc, cr1nc1 :s udvancing s "maoe in Chim1 202E" plan to accelemte 

tc~GlrlologiG::ll innovrJtion and domPslic contPnt ;n 10 broad indu::.trins which will tK: 

sup:,)orteC: by pkns to biilior· for low-inte.-est l081lS, assistance i~ buying 

compGtitor~, anrl r{:>S(~urch subsidips_l Th<::: imlu::,tr1ns t<:4rQ0H'.'d includ<::! rnatmiE~Is, 

attitlc:al !r,telligerce, ir~:egrate<J circ~!ts, <:md !JG mobiiC' te<::hnology, ()Swell as a!rcratt. 

robots, electric curs, ~ail eq~Ji~)ment, ships and agr:cultural macfilne~y. Ct1infl hopGs to r~lise 

dorr:estic content :!1 t~iese industries to 110 perce~lt in 2020 <=md leas~ 7C percent in 

2025. The p:nn cal's for using hi-teci-1 i:westments to "syster-ntica'!y acqu:re cutting edge 

:ech:lolcgy and g•?:1erato largC>-scaiD tGchno:ogy transfel"," according to a Gormar1 report 

on tilt: 2025 prograrr.') 

Over a !I, tile US. has fal!e'l behind O:i'l,l :n totn!, late-stage development '·esea1·c!l, 

.:Kcordmg to a ;ece.n~ f~om t!•e Boston Consulting Group. By 20'18, OllnA could 

spur1d up to tw!cG t]S muct1 the U_S. or' devulop11cmt rr2scarch, threstenlng U.S. 

le.:Jders'1:p In a wide arrfly of nvmuf.:xtunng mdustr:es.0 

"~"n•,~•L .. ,,..,... invcstnu~nt in U.S. 

n1unufiu~turing fun1s. especially by 

Chinese n1ultinationals, threatens U.S. 

nutional security, contl·ol of sensitive 

finandal data and control of key 

technologies, and is likely to lend to 

increases in U.S. ilnports the trade 

defil·it. 

Fore:gn Plllitir:ationflls I lave been respcnslble for 91 owing U.S. trade deficits, as shown in 

Flgme B, at ieast torty percent of U:e total U.S. trade cJeticit in every Yl'ar since 2007 

(euttlo(s estimates). 

Forelq'l invcs:ments by Chinese firr:1s, often state-owned, s:.Kh as lhongwang's proposec, 

purch<:se of Aieris Aiurn:nurc h:wt; cna!lengE:d out of collo.::rn over :110 !oss 

sensitive rescardi dnta used to ma!<e Key defens0 rr:atcrials suer as lligll-stre:l!j:tl alloys 

and !ig'lt armor rnate~1al. likewise. tt1e 01ongc;ing Cr:s,:i Enti:orpr-lse G:·o-ip, o Chmes£ firm 

Economic Policy Institute 10 
66


25259c-12.eps

witt: possible t1es to the Chinese government IS ng ths 

Tt~is purchases post·s potontfal threats to bo:h National Secu:-ity 

:rdrviduul f;rms lish'?d c-r, he Chicago Exchange whch an~ rcq~J:~nd to shnm scns1:1vc dr1tu 

in order lobe l1:.lE:'d on :hu exchaflge, ir1fo;rno~fon which could be co~1pro1nised IJy 

torE'Ign investor, Hnally. tran of :1 iettc,- to 

~he T:easury SeGetary requestfrlg thot !1e :rli!i,'ite a CFIUS rL:view of tile purcJ1,-1se of Vertex 

Raiicar Corporatior IJy Ra!1rood Roiling Steck Corporation (CRRCi 8:10 Majest:c 

Legend t1oiC!ngsY CRRC is goverr1rnent ovmec and ~ubsidized, ()!ld the Chinese 

government coL:Icl use this :x;rcilese to compete unfairly in the US market CRRC. has usi?d 

subsidizeC financing to U'lcierbld dornest'c firms on mllcm co;·!trncts 1:1 Boston and 

C~rcego. Americ:.Fl supplle1 s of woducts such as steel for railcars must now compete 

A9tllnst u-~e resources of the Chinese government Tlli7Se cases fl'ustrate why enhRnced 

CFIUS r0vi0w !S cntlccil for !irniting th0 negat1v0 Impacts of FDI by 01incse firms 111 tno 

Un!teci States. 

Acknowlcdgctnents 

T~e outhor tt10nks Samantha Sanders :or comments, :1nd Zane Mokhlber fo~ tcd1nical 

and ~eseard1 assistence. 

Endnotes 

4. L.S. lJ?~partnK>Ilt ot 

Ln'tr.:-c:i State:; (CFIUS). 

7 Ket:!12dy, Sco~!. 2015 CFnter for Strategic a0<i tnternattonat Stud res: (CSIS) 

MozJr. 2017. 

Economic Policy Institute 11 
67


25259c-13.eps

Sirkin, He, I, Jusu; 

Boslo•J Cunsuft;ny Gmup re,JOI1 

Economic Policy Institute 12 
68


25259c-14.eps

T.:ml~i U.S.-China goods trade and job displacement, 2001-2015 

P~rcent 

Change ($bi!Honsi change 

2001 2008 2015 2001-2015 2003-2015 2001-2015 

$116.1 $96.8 $44.6 503.4% 

$381.8 $145,5 372.5% 

-$284l -$100.8' 

$20.2 $14.4 

Ch.omg~ of P~rccnt 

change 

U.S. total 171.9 S44.2 826.6 654.7 282.4 380.8% 

1,129.6 3,B2t2 3,227.6 4,098.0 1,606,4 362.8% 

U.S.tmde 957.7 3,077.0 4,4C1.0 3,4113 3 1,324.0 359.0% 

deficit-net 

246.J 189.1 ~1.5% 

cbcmgt:;in 

net jobs 

disj::Jii3ce.rf 

201Gf,), Bll'•?a" of L~'J.lO' Statistics (llLS 201f,je). and BLS Crn!JI0)'"18,J P'Oj8d1or:~ ~1rog:d'"1 (DLS-E:P 2014t1 

:owe! 2n14bl 

J.~(·onomic Poliey lnstitut<> 

Economic Policy Institute 13 
69


25259c-15.eps

F:"urc" A U"S. jobs displaced by the growing goods trade deficit With 

China since 2001 (in thousands of jobs) 

4,000 

3,000 

2,000 

1,000 

0.00 

0 

2000 

Source: AL1th•v's Cl"alys·s of U.S 

2016A) Burc3L! of ~Joor StA::stlc, 

a::d 2:JI4b). For.J 

Economic Policy Institute 

3,443.30 

2005 2010 2015 

14 
70


25259c-16.eps

Net U.S. jobs created or displaced by goods trade with 

China, by industry, 2001-2015 

Total" 

SubtD__taJ, m:mmanufactUrit'l.fJ 

Aqriculture, forestry, fishirr.g, and f1unting 

MhJing 

Oi! and gas 

Nlin~rals and ores 

Utiiiti.;:s 

Construction 

Manufacturing 

Nondt.rrable goods 

B€vecagec ard tobacco pmduds 

Textiie:: mii!s O'id to.Y.tife product milts 

Apparel 

L2otht::r ond allied products 

W(Jod nror!ucts 

PrmtPd ,'TJatrC'J m;d ro'atui pr;;ducts 

Pet:ofP~trn and coo! products 

Cher:-ticab 

Plast!cs'nnd rubbet pr(Jducts 

Nonmetal!rc minAra! products 

DurAble 9oqds 

Machin Pry 

Compufer and e!ectronlc p~xts 

Economic Policy Institute 

Share of total 

Totai jobs displaced 

-3,443.30:-) 

-8'86?00 

43,400 

A,700 

-700 

-4,000 

-12,700 

-18,60'0 

-2,557,100 

~391,300 

11,600 

3,000 

-117,800 

-204 900 

-60,000 

-78,400 

-2noo 

3s:.::oo 

A,200 

-27,600 

-78,800 

-33,400 

-94,800 

-1,238,300 

-570,800 

0.1% 

0.0% 

6.1% 

0.4<;, 

0.5% 

74.3% 

11:4% 

0.3% 

-0,1% 

6,0% 

6.8% 

0.0% 

1.0% 

0.0% 

0.89~ 

2.8°~ 

19.5% 

-18,000 O.E% 

15 
71


25259c-17.eps

Tcm:e 2 

Eiectricaf equipment, opp!iC1flCI2S, rmd compon'2nts 

Mntorvehtcff"'s and t:wtor ;-'C:.h'cle parts 

.4erospar-e P,r'Oducts'and fkirts 

FurnJtule and refatPd produr-t~ 

M!scefioTJeous manurart(!rcd cornrnadm2s 

Wholesale_ trade 

Retail trade 

TransPortatkui and warehO_using 

Information 

Firtance and insurcmce 

Real estate and rental and !easing 

Professional, 'scientific, and tec'nn-iCai s~tvices 

Management of companies crnd enterprises 

Total 

~116,000 

-21,50b 

-49500 

32,700 

-4,500 

-11S,900 

-127,000 

~tOO,OQO 

-84,200 

-45,500 

27,200 

-119,700 

Share of total 

jobs displaced 

'3.4% 

0,6% 

0.'9% 

0.1% 

3.4% 

3.7?!. 

O.Q% 

3.1% 

O.S% 

5.3% 

AcimJnistratbte <Jnd s,uppolt and waste man(lfJcment"and -2i' ,500 6.1S'c 

mm~diation sE!ntiC:es 

Education services -2,800 0.1% 

'1,700 b.09d 

Arts, entertainwent, and recreation - 4 3.100 0.4% 

Accomodcttion a!"'d food services 51,700 1.5% 

Et•onmnic Polil·.' Inslitule 

Economic Policy Institute 16 
72


25259c-18.eps

F:g<Jre B Goods trade balance 

US nffiliates ()f foreigli MNCs, 1997 -2014 {bi!lions of doilms) 

1,000 

500 

-500 

I U.S. Exports of Goods Shipped by Aff1l1ates 

U.S. Imports of Goods Shipped to Affiliates 

~%\ Balance 

1997 1999 2001 2003 2005 2007 2009 2011 2013 1998 2000 2002 2004 2006 2008 2010 2012 2014 

I·:c:ouomi(' PoHl'." Iuslitule 

Economic Policy Institute 17 
73

Mr. YOHO. And I really appreciate that. 

And I want to thank our witnesses for the testimony. 

We stand in recess, and we will reconvene directly after votes. 

I am going to offer to you if you want to go in the back here, I 

think there is some coffee back there, for you guys, anyway. The 

rest of you can’t have it. 

But we will be back as quick as we can, because I want to follow 

up on this. I mean, it is such an important topic. I look forward 

to gaining the information to where we can come up with policies 

that stick. 

Thank you. 

[Recess.] 

Mr. YOHO. We are going to call the meeting back to order. We 

have got people coming in. And respecting your time, we will start 

moving on. Being the chairman, it is nice because I get to ask opening questions. 

Dr. Scott, you brought up something very important talking 

about the way China subsidizes and kind of just rolls in and takes 

over different industries through subsidies. If we look at the past 

activity of people of nations, we can predict future actions. I sit on 

the Ag Committee also, and if we look at what they have done 

with, you know, cotton, they heavily subsidized that at $1.63 a 

pound, roughly. Cotton prices over here have plummeted, and they 

have kind of cornered the market on cotton. And we have seen that 

with other commodities, other industries. I wouldn’t—I would think 

that this would be no different. 

So we know what the past is, we can kind of predict the future 

on past activities. So with that, my question to you is, the building 

blocks of the semiconductor industry, you made the reference to 

steel with automotives and the supply chain, but if we know they 

are doing that with semiconductors, my question to you, and all 

three of you really, is if we look at what happened in the past here 

in the last 2 years of the Obama administration, they approved at 

least 13 semiconductor acquisitions in the U.S. Has there been any 

studies to see what effect these acquisitions had on U.S. competitiveness, semiconductor supply, that supply chain? What industry 

sector were they in: Banking, military, other? And have these purchases by the Chinese Government-backed businesses jeopardized 

or weaken national security in any way? 

We will start with you, Dr. Scott, if you would be so kind. 

Mr. SCOTT. Thank you very much, Mr. Chairman. I have not 

studied these 13 specific acquisitions. I have studied general patterns of the impacts of foreign acquisitions of U.S. companies by 

foreign multinationals. I can say that it is almost universally true, 

that when foreign companies come into the United States and take 

over domestic firms, they are looking for two things. They are looking to have access to a distribution center for their own products 

that they are producing in their home markets, and they want to 

have access to technology. 

In my prepared testimony, I produced a chart which showed the 

trade trends of foreign—of U.S. subsidiaries of foreign multinationals, and that includes large numbers of firms that have been 

taken over by foreign multinationals. It showed those companies 

have a growing trade deficit with the United States. They are reVerDate 0ct 09 2002 09:43 Jun 05, 2017 Jkt 000000 PO 00000 Frm 00077 Fmt 6633 Sfmt 6633 Z:\WORK\_AP\042617\25259 SHIRL
74

sponsible for a deficit that reached about $300 billion in 2014, up 

from about 200 billion in 2000—I am sorry—in 1997. So—I am 

sorry. The actual balance figures were—I am sorry, I was wrong. 

The deficit increased from $124 billion in 1997 to over $300 billion 

in 2014. By 2014, responsible for about 40 percent of U.S. trade 

deficits. 

So companies buy up U.S. firms, they hollow them out, they export the technology. I think that is especially true in semiconductors, and I know that Dr. Atkinson has looked at this industry in 

some detail. 

Mr. YOHO. Right. And we have seen that even with the Apple industry. They came over and learned the technology, take it over 

there, and they take over the market. And so I think this is something that we really need to pay stronger attention to. 

And President Xi has prioritized advancing China’s space program to strengthen national security. I know in some of the testimonies, we know that future conflicts or future disagreements between nations, we have to look at shutting down power grids. But 

why is this considered strengthening national security? And they 

seem to be really pushing this stronger than what I would think 

any other nation would—and I think it was you, Dr. Atkinson, talking about going to the backside of the Moon, or was that you Dr. 

Scott? 

Dean, it was you? So why is this so important for them to continue down this path? When you look at the previous nations that 

have been in space, we have had multinational collaboration in the 

space station for the future of development of science, it seems like. 

This seems more nationalistic, and it seems like a scary way. Do 

you want to comment on that? 

Mr. CHENG. China views space as something that they term very 

dense in high technology. When you look at space, it touches on 

such advanced areas as computing, telecommunications, advanced 

materials, high-carbon composites, high-tensile metals. It also involves systems engineering and systems integration, two skill sets 

that the Chinese themselves recognize that they are weak in. 

And they see it as an inspiration, that this will inspire the next 

generation of Chinese young people to go and become aerospace engineers and systems engineers and systems integrators. So developing space, they believe, is going to serve very much like a locomotive to pull the rest of China’s economy forward, to train a new 

generation of Chinese workers in precision manufacturing and the 

like. 

But it also is important because it touches on information. Information is acquired from space; militarily, that is fairly obvious, but 

also even just day to day. More and more industry relies on things 

like precision navigation and timing functions, which for us is provided by GPS, and China wants it displaced through BeiDou. 

So all of these are skills—all of these are technologies and areas 

that, as China develops its space capabilities, it can then turn 

around and exploit better in terms of both exporting its own satellites, which it already does in competition with the United States, 

but also, for them, hopefully, they would like to then compete in 

advanced materials and computers and all of these areas. 

75

In terms of supply chains, it also provides a guarantee for all of 

the domestic industries that China is subsidizing and fostering that 

there will be this very large market of Chinese satellites, Chinese 

aerospace companies that are going to be basically saying, absolutely, I want to buy it, and, of course, I am going to prefer Chinese 

products. 

Mr. YOHO. Right. 

And I think I have heard both—maybe all three of you talk about 

how China—and we know this. I was at a briefing one time, and 

the NSA was there, and this is common knowledge there. He said, 

if you are on the internet, just assume China is in your computer. 

If we know that and we know they have put in backdoors in some 

of the phones and those systems—we were talking earlier about 

CFIUS, and maybe it is time for a second play on that, to make 

it stricter. 

Dr. Atkinson, do you have any ideas or any recommendations on 

how would you go about setting up information if a Chinese company came in legitimately and they got approved to buy here—you 

know, once they are here, that technology that they have acquired 

they start exporting. The military risk or the national security risk, 

how do we block that in a friendly way but preserving our IP, the 

intellectual property, and national security? Any recommendations? 

Mr. ATKINSON. Yes. The Chinese acquire U.S. technology companies for one and only one reason, and that is to take the technology. They don’t do it for market share or anything; it is about 

getting the technology. They are behind us in technology. If they 

acquire leading-edge technology and incorporate it into their production, they do better. 

There are multiple challenges with CFIUS, and I laid some out 

in my report. There is a longer report we wrote recently that incorporated a lot of CFIUS recommendations. 

One of the challenges in CFIUS is the Chinese don’t look at technology the way we do. We tend to look at it as it is either military 

or it is not military. And so a lot of things get through the cracks 

in CFIUS that are ‘‘not military’’ and yet, when you connect the 

dots and you put the capabilities together, it ends up enabling their 

military capability. We don’t look at it that way because it is not 

pure military. 

So I think CFIUS needs much, much stronger abilities to just 

simply deny Chinese technology acquisition, particularly ones that 

are backed by the Chinese Government. 

A case in point that CFIUS approved was a company called 

Lexmark, one of the global printer companies. The Chinese Government went to a Chinese printer company, who, by the way, was 

under several cases for violating the Lexmark and HP, HewlettPackard, patents on printer cartridges—they went to them and 

gave them $2.6 billion and told them to buy up Lexmark and become the dominant global printer company. In our view, this 

shouldn’t have been approved because it wasn’t a market-based 

capitalist transaction; it was a government strategy to take that 

technology. 

Mr. YOHO. I am going to give you free range to send recommendations to this committee through our committee staff here, 

and I would sure love to incorporate that in the next go-around. 

76

And, with that, I am going to yield to the ranking member, my 

good friend, Mr. Sherman. 

Mr. SHERMAN. Thank you. 

I would point out that culture can also be of strategic interest. 

The Chinese have bought, I believe, the second-largest movie exhibiter in the United States. Richard Gere will never make another 

movie about Tibet. They control our free speech through their ownership, and they control our free speech in China through all the 

devices that you have identified. 

Now, before the hearing, I talked—and two of the three witnesses said that they would have a solution, something that would 

eliminate or at least cut in half the trade deficit with China. 

Maybe I heard you wrong. Mr. Cheng is off the hook because he 

didn’t make the promise. Do either of the two doctors here have a 

plan that would cut our trade deficits very substantially? 

Mr. ATKINSON. Yeah. ITIF issued a report in late January, early 

February that was targeted to whoever the new President was 

going to be, President Clinton or President Trump——

Mr. SHERMAN. What is in that plan that would cut the trade deficit in half? 

Mr. ATKINSON. I wish I could give you a simple answer. Let me 

say two things. The first part of that is: Going through the WTO, 

doing these kind of legalistic procedure things isn’t going to work. 

Much of what the Chinese are doing gets through the cracks of 

WTO——

Mr. SHERMAN. I have got such just limited time. Do you have a 

plan that you think will cut the trade deficit in half within a few 

years? 

Mr. ATKINSON. We have to work with our allies to inflict real 

pain on China if they don’t change and make them——

Mr. SHERMAN. How about just a 20-percent tariff on everything 

to start as opening stakes? 

But I will go to Dr. Scott. 

What do you got? 

Mr. SCOTT. I think that is moving in the right direction, but I 

think you need a broader plan. I think the first element of the plan 

has to be realigning exchange rates. The Chinese currency remains 

substantially undervalued. There have been calculations that show 

that in order to——

Mr. SHERMAN. If it is undervalued, why is it that China has to 

intervene in the markets to cause its currency not to go down? 

Mr. SCOTT. Well, the United States has essentially given China 

carte blanche to open up its capital markets. In fact, we have been 

pressuring them to open their capital markets. 

What this has done is, since the Chinese savers have nowhere 

else to put their money, they are pouring it in the United States. 

We also have the Chinese Government pouring their money into 

the United States to buy up Chinese companies. 

All of it bids up the demand for the U.S. dollar, which has risen 

25 percent in real terms in the last 3 years. That makes our goods 

much, much less competitive. Calculations have shown that in 

order to rebalance global trade, the Chinese RMB needs to rise perhaps as much as 35 or 40 percent. 

77

But I think we also have to look at other countries that have 

large surpluses, like China and the European Union. They also 

have large global surpluses. This is not just a China problem. I 

think if we focus on that, there may be less a problem——

Mr. SHERMAN. Have the Chinese ever acknowledged that balanced trade over a period of time, not in any one year, is an appropriate goal? Or do they look at these trade deficits and say, that 

is healthy, that is the way they should continue? Or do they just 

avoid mentioning that they do have a trade surplus with the 

United States? 

Dr. Scott or anyone else? 

Mr. SCOTT. I think the Chinese claim that they are playing the 

game the way it should be played and that they are not engaging 

in unfair trade practices——

Mr. SHERMAN. And, therefore, the resulting trade deficits are incredibly healthy because they result from a system that doesn’t 

have all the things that you and I know that it has. 

Mr. SCOTT. Exactly. 

Mr. SHERMAN. Okay. So if we impose to start off with a 15-percent tariff on all their imports to the United States, with a proviso 

that if they were to retaliate then we would go to 30 percent, what 

would be their reaction? 

Mr. SCOTT. Well, we saw an example of that in 1985 with the 

Plaza Accord. Congressmen Gephardt and Rostenkowski put forth 

a bill in this House, which was passed twice, which would impose 

a tariff of 271⁄2 percent on imports from Japan and Europe. The bill 

passed the House twice, never got through the Senate, was never 

signed by the President. 

But it caused such concern to the finance ministers of those 

countries that they came to us, they came to James Baker and 

said, we have to find a solution, and that is why we negotiated the 

Plaza Accord. So we never——

Mr. SHERMAN. I understand. 

I believe my time has expired. Thank you. 

Mr. SCOTT. I apologize. 

Mr. YOHO. Thank you. 

We will go to Mr. Dana Rohrabacher from California. 

Mr. ROHRABACHER. Thank you, Mr. Chairman, and thank you, 

Mr. Ranking Member. I appreciate it. I have another thing that I 

have to run off to, so I appreciate the courtesy. 

Let me just state right off the bat that, Dean Cheng—is it mister? It is not doctor, but it is—right. Okay. Let me just say that 

I have a fundamental difference in analysis than you do. You seem 

to be giving credit to the Chinese Government and the Chinese 

people who are now under that government for many of the advances that I do not believe they deserve credit for. 

Let me just note that, again, I have been here 30 years now, as 

I have seen this come and go. But I remember full well in the 

1990s when, during the Clinton administration, you had some of 

his biggest political backers who were channeling money from the 

aerospace industries in China to the Clinton campaign, and they 

were then transferring vitally important technologies to the Chinese. 

78

There is a fellow shaking his head back there. I investigated this 

for 6 months on my own. And while I found, for example—and the 

reason I was tipped off is I went to a meeting of aerospace workers 

who told me they had been in China solving China’s rocket problem. They didn’t even have stage separation, the engineers. Well, 

who sent them over there? I will tell you. Hughes Aircraft sent 

them over there. And then the Chinese, without any money for research and development, ended up being able to send things into 

the air MIRV’d, meaning carrying more than one warhead or one 

payload. 

No, I think that when you take a look at the advances that have 

been made in China, it has been made because you have people 

who have no R&D cost at the fundamental level. What we have is 

Chinese graduate students in our major universities, and they are 

saying, oh, well, you can’t bring the records back with you, or you 

have to make sure they are in the security drawers. No, no, they 

remember. 

Just putting them through these courses have given billions of 

dollars, billions and billions of dollars of technological know-how 

that the American people and our companies have had to pay for, 

now transferred to what is not a benevolent government that 

evolved into benevolence by becoming so prosperous, as we were 

told would happen, but, no, a government today that is the world’s 

worst human rights abuser, in the sense that they are the biggest 

human rights abuser on the planet, and a country that has, as we 

say, claims against neighboring countries, territorial claims, that 

are very damaging to the peace of the world. 

I would suggest that what we are talking about here—I am going 

to ask one question, because—okay. I believe the incredible enrichment and increasing power that we have provided since Bill Clinton’s day as President of the United States, since those days, has 

resulted in the fact that America and free countries of the world 

and even the Chinese people themselves, who are in less a secure 

situation for their own potential freedom, that we are worse off, 

way worse off, because of this. 

Now, what I want to ask you—and I will be very quick. Are there 

groups of Americans, like the ones who were giving money to the 

Bill Clinton campaign, who have profited from this transfer of technology and continue—that they are not breaking the law, however; 

people who, without breaking the law, are now engaged in bolstering the strength and power of this rotten dictatorship in China, 

this crony capitalism that threatens their part of the world. Are 

there Americans that you can identify for us that are—not by name 

but by category—that have profited from this horrendous outcome? 

We will start with Mr. Scott—well, no, no, no. Mr. Cheng, go 

ahead. 

Mr. CHENG. Well, sir, I mean, given that we are talking about 

trade relations, presumably there are people who benefit, I guess 

starting with the lobbyists who work on behalf of the PRC Government. Certainly, they are going to benefit from being paid by the 

Chinese Government. 

Mr. ROHRABACHER. How about levels of management in our corporations, that they benefit, and then we don’t have—and that the 

79

people at the lower level of corporate structure in America is just 

damaged dramatically. Is that possible? 

Mr. CHENG. It is certainly possible, Representative. I am afraid 

I don’t——

Mr. ROHRABACHER. Okay. Maybe Mr. Atkinson and then Mr. 

Scott. 

Mr. ATKINSON. Yeah. I guess I would agree with Mr. Cheng. 

There is trade with China. I think the way to think about this, that 

I would urge you to think about, would be: The Chinese Government forces U.S. companies to do things, and if a CEO is unwilling 

to do it, they are going to pay a price. And, in my view, it is a little 

bit like the bully in the school and you need a bodyguard. I think 

the problem is the U.S. Government has refused or been unwilling 

to be the bodyguard and to stop the pressure, stop that kind of extortion. 

Mr. ROHRABACHER. Well, could it be that the people in the management of our companies have short-term personal profit interest 

at heart, even though it has long-term horrible implications for 

their working people in the United States? 

Mr. Scott, go right ahead. 

Mr. SCOTT. I think I can answer that. My answer goes to that 

question. I think the people who benefit most from corporate takeovers—for example, Lenovo’s purchase of IBM and the Chinese 

purchaser of the NextGear auto parts manufacturer, those directly 

benefit stockholders, they benefit the managers of those companies 

who get large bonuses for the sale of those companies, but my research has shown that millions of jobs have been eliminated 

through the purchase of these companies that buy them up and 

they hollow them out and then they ship parts here under those 

companies. That is the way it works. 

Mr. ROHRABACHER. This is a lot deeper issue than that, but 

thank you very much. 

Sorry to take an extra minute. 

Mr. YOHO. Thank you, sir. 

We will next go to Mr. Scott Perry from Pennsylvania. 

Mr. PERRY. Thank you, Mr. Chairman. 

Mr. Cheng, long time, no see. 

I don’t know if the American people are aware of this, and I just 

want to have a conversation with you about the Chinese space program. It would be my assertion that they followed us into space but 

they are ahead of us in a couple different ways that Americans 

aren’t aware of, and I think it has manifested in a couple different 

ways, which is a more aggressive use of space as a warfighting domain, a state-of-the-art technological breakthrough domain, and 

through groundbreaking civil space initiatives that have serious 

military implications. I don’t know if you will agree with those, but 

I am hoping, if you don’t, that you will explain that. 

I just want to ask you about a couple of things regarding their 

strategy, not the least of which is their quantum communications 

satellite. I don’t know the science of these electrons that react to 

one another, whether they are on the other side of the galaxy or 

not, but, as I understand it, it is unhackable and unjammable. We 

are not in that domain at all, as far as I understand it. 

80

And then, when I understand that they are mapping the other 

side of the moon, they plan on going to the poles, I think they have 

satellites in orbit around the moon, I think that they are ostensibly 

for civil purposes, but I want to know if you can discuss the military implications. 

If you can verify what I said are the three, kind of, domains that 

they are operating in that we are behind them in. 

Mr. CHENG. Well, sir, to begin with, you left one out, which is 

manned space. At this point, the United States cannot put its own 

astronaut into space. We rely on the Russians. The Chinese do not 

rely on the Russians; they are able to send their own people up into 

space. That is a very sorry state for our manned space program to 

be in. 

In terms of warfighting, the Chinese military has reorganized 

itself to include now an information warfare service that specifically includes the space component. So it is very clear based on 

their doctrinal writings that they expect the next conflict to be 

about information, and space is a key means of acquiring and 

transmitting information. 

This is also where quantum computing comes in, because information needs to be secure. It needs to be secure physically, in 

terms of the servers and routers. It also needs to be secure in 

terms of being able to be hacked and tampered with. Quantum 

computing—which I must admit, I also am not a physicist, and I 

don’t pretend to even play one on TV—nonetheless, does seem to 

have a set of capabilities. The Chinese want a quantum computing 

capability in orbit, which says something about their ability to miniaturize it, their ability to shield it from cosmic rays and other aspects. 

The Chinese are making a conscious push in terms of the array 

of capabilities that they have developed to be able to engage in 

military operations in space, everything from direct-ascent kinetickill vehicles, which you fire from Earth, which can reach all the 

way out to geosynchronous orbit, to lasers, which have been fired 

at American satellites, to cyber and jamming capabilities. 

And, finally, it is important to note that China’s space program 

is essentially run through the People’s Liberation Army. Every 

major space facility is manned by the People’s Liberation Army, including through this new service. The idea that we could cooperate 

with China’s space program, which I know has been an issue raised 

before this and other committees here on the Hill, means, at the 

end of the day, getting in bed with the People’s Liberation Army. 

We have talked here about American security and is there a 

threat from Chinese acquisition of companies. I would suggest that 

openly getting in bed with the Chinese military is a more direct 

threat to our security. 

Mr. PERRY. So if you were going to make a recommendation 

based on what you know or believe the Chinese to be pursuing, 

which seems to me, at least based on the last paragraph of your 

statement, regarding their military involvement, what should 

America be doing right now? 

Mr. CHENG. We do still have one of the foremost aerospace industries out there, but we seem to be lacking in direction. Much along 

the same lines as we have talked about here about defending our 

81

own high-tech crown jewels, are we intent upon being able to win 

any competition, including armed competition——

Mr. PERRY. Is this the business of NASA or DOD or both? 

Mr. CHENG. We need to coordinate both of them. NASA is a civilian agency. It is dedicated much more toward science, but it should 

recognize that it plays a role in terms of diplomacy. NASA has the 

best brand of any part of the U.S. Government, and yet it doesn’t 

play that role. 

Mr. PERRY. Thanks, Mr. Chairman. 

Mr. YOHO. Thank you for those questions. 

We will next go to Mrs. Ann Wagner from Missouri. 

Mrs. WAGNER. Thank you, Mr. Chairman. And I thank you for 

holding this hearing and shining a light on China’s technological 

advancements across sectors—frankly, a challenge that poses a 

threat to the rules of global trade. 

I hardly agree with Dr. Atkinson that to defend free trade and 

American jobs we should not advocate U.S. protectionism but actively respond to Chinese protectionism. There is no question that 

China’s theft of American intellectual property, their state control 

of major industries, and WTO accession have cost the American 

people. 

So I am going to jump right into it. The last administration created a pathway to sanction foreign companies that steal American 

intellectual property through cyber activities in Executive Order 

13694, but it appears that only Russian actors were ever sanctioned. 

Dr. Atkinson, or others, do you recommend that the Trump administration sanction Chinese companies that repeatedly steal 

American IP? 

Mr. ATKINSON. I do. I think the only way that this is ever going 

to turn around is for the Chinese Government to realize that there 

will be actions in reaction to what they are doing. And those actions have to impose some level of pain, if you will. 

Mrs. WAGNER. You said real pain, yes? 

Mr. ATKINSON. Real pain, and not just pretend like we are going 

to do it at the next G20 meeting. 

Mrs. WAGNER. Right. 

Mr. ATKINSON. So we have to identify those pain points, if you 

will, and where we can apply them. But we have to do it in a way 

that is respectful. We have to do it in a way that is strategic and 

focused on real goals and things that we want to see the Chinese 

accomplish within a particular period of time. 

Mrs. WAGNER. Dr. Scott, you have put together a compelling 

statement on jobs. China’s market interference and anticompetitive 

subsidies hurt the U.S. economy. While I am not convinced that 

currency manipulation and the trade deficit are the key drivers of 

U.S. job loss, I am curious to hear your thoughts on the U.S.-China 

Bilateral Investment Treaty and where you think it should go 

under the Trump administration. 

Mr. SCOTT. Thank you very much, Congresswoman. 

I am very concerned about the Bilateral Investment Treaty. As 

I have documented in my testimony and elsewhere, my research 

has indicated that bilateral investment tends to lead to a loss of 

jobs, particularly with a country like with China, both in terms of 

82

when Chinese firms come here to take over U.S. firms, as we have 

been discussing, but also when U.S. firms go to China and 

outsource their production to that country. 

So I think that a passage or adoption of a bilateral investment 

treaty is not in our national interest at this point, especially with 

a country like China that is such an egregious violator of the 

norms of fair trade behavior. 

Thank you. 

Mrs. WAGNER. Absolutely. 

Dr. Atkinson, last year, Congress created a private right of action 

for victims of trade secret theft in U.S. courts. And 1 year later, 

have companies doing business in China begun taking advantage, 

do you know, of this cause of action? 

Mr. ATKINSON. I would have to consult with my colleague Stephen Ezell, who follows that issue for us more carefully. My sense 

is they have not, and I think one of the principle reasons for that 

is retaliation. 

American companies are incredibly hesitant to raise any complaints because they know from real experience there will be retaliation and pain and consequences within that, which is why I 

think, again, it has to be the U.S. Government that leads this. The 

Chinese know how to divide and conquer among our firms and 

within particular industries, picking one firm off against another. 

The U.S. Government has to have essentially a policy that we will 

defend U.S. economic interests regardless. 

Mrs. WAGNER. What about the Department of Justice? Should 

they be directing additional resources toward prosecuting trade secret theft, perhaps? 

Mr. ATKINSON. One of the big problems that we have is that, if 

you look, for example, within the FBI at the commercial counterintelligence arm that we have, it is vastly underfunded. The folks 

who are doing that are very, very talented and hardworking 

agents, both in terms of counterintelligence and going after this. 

But that is an afterthought at the FBI right now. There are bigger 

fish that the FBI is focusing on, and they have really let that slide. 

There is a very good book, by the way, that two FBI counterintelligence agents wrote—and I will send that link to you—wonderful 

book about how the Chinese are going after our secrets and how 

limited their ability is to go after them just because of the resources. 

Mrs. WAGNER. I wish I had more time, but it appears that I have 

run out, Mr. Chairman, so I shall yield back. 

Mr. YOHO. Thank you, ma’am. 

If you guys are up to it, if you guys want to ask an additional 

question or two, it would be okay—are you guys okay with that? 

Go ahead, Ann. 

Mrs. WAGNER. Mr. Atkinson, are there additional efforts you 

would recommend to the new administration—I am sorry, Dr. Atkinson. Forgive me—to the new administration to safeguard U.S. 

intellectual property? How can we better safeguard from our Chinese cyber attacks? 

Mr. ATKINSON. Well, a couple things. 

I mean, one is, clearly, we need better defensive measures. One 

of the challenges has been the U.S. Government itself has weakVerDate 0ct 09 2002 09:43 Jun 05, 2017 Jkt 000000 PO 00000 Frm 00086 Fmt 6633 Sfmt 6633 Z:\WORK\_AP\042617\25259 SHIRL
83

ened our own commercial cybersecurity by not giving out information on zero-day exploits, for example, because they want to then 

use those weaknesses for their own purposes. We can have a good 

discussion about that, but it is clear that one of the results of that 

is to weaken our cybersecurity and allow the Chinese to be inside 

our systems. So that is a very important debate to have. 

A second area would be, again, I think we have to go back to results-oriented trade, if you will. Reagan did that in the eighties 

with Japan; it was results-oriented. We need to pick four or five 

key things—cyber theft and cyber attacks should be on the top of 

that list—and say, we need to see a reduction of that within X 

amount of months or else there will be consequences. 

Mrs. WAGNER. Mr. Cheng, would you care to comment, please? 

Mr. CHENG. Two other key points. 

One is it is essential to recognize a Chinese cyber activity is not 

random. We are playing Whac-A-Mole. Oh, my gosh—or kiddie soccer. Oh, my gosh, something happens over here, and everybody 

rushes over there, and it is the OPM hack, or it is UnitedHealth, 

or it is some company. 

To recognize that there is a Chinese strategy behind their cyber 

activities means that we can stop addressing individual items, 

which are important but, at the end of the day, are tactical. If we 

can counter the Chinese strategy, whether through better investment in counterintelligence, perhaps by also improving the level of 

overall computing security in this country, then, in that case, that 

would go a far distance. 

Representative Perry asked about quantum computing. One of 

the great problems we have is this idea that, ‘‘Well, but quantum 

computing will make the NSA’s job almost impossible.’’ And there 

is a great deal of truth to that. But the answer is not to, therefore, 

stand in front of quantum computing and scream, ‘‘Don’t go there.’’ 

It may be that, at the end of the day, we are all better off, American companies and the American Government, if we simply embrace quantum computing and think about other ways to then 

counter that issue rather than denying our own companies and 

government the benefits from that. 

Mrs. WAGNER. Very good testimony. I appreciate that. 

Let me shift gears here, and I will just toss this out to whomever 

thinks that they are most schooled on this. The saga over rare 

earth minerals and Mountain Pass mine in California has been 

right out of a movie script. The Wall Street Journal reported this 

week that coal-mining magnate Tom Clarke may purchase the 

mine. 

To anyone who knows best, do you think that Mountain Pass 

could play a role in rebuilding a U.S. supply chain for rare earth 

minerals? 

Yes, Mr. Cheng. 

Mr. CHENG. Rare earths, one, aren’t rare. They happen to be 

heavily localized in China, but India, Canada, the United States, 

and Australia all produce rare earths. Part of the issue is that rare 

earths are, however, incredibly environmentally damaging in terms 

of the refining process to get at it. 

So the interesting problem here is not can a domestic source be 

found. It is how important is it that we have a domestic source relVerDate 0ct 09 2002 09:43 Jun 05, 2017 Jkt 000000 PO 00000 Frm 00087 Fmt 6633 Sfmt 6633 Z:\WORK\_AP\042617\25259 SHIRL
84

ative to EPA standards, EPA requirements. If we want to be dependent on the largest supplier, which is China——

Mrs. WAGNER. Right. 

Mr. CHENG [continuing]. That is one thing. If we want not to be 

totally dependent upon it, then we also need to recognize that there 

may need to be regulatory relief with regards to environmental——

Mrs. WAGNER. Well, you may have answered my followup question, which is: What can the U.S. do to compete with China’s dominance in the rare earths production? 

Dr. Atkinson? 

Mr. ATKINSON. So there are a couple things, I think. 

Certainly, the Chinese have used their monopoly on rare earth 

production to force U.S. companies to localize production. If you 

want to get that, we are not going to export that material to you, 

you have to come here to get it. Again, that violates the WTO. We 

should have brought a case against that. 

Mrs. WAGNER. Right. 

Mr. ATKINSON. In terms of domestic production, I agree with Mr. 

Cheng. We just have to decide that is a national priority. And, unfortunately, we haven’t done that. We have chosen to believe that 

the Chinese will give us those materials. 

Then the third thing we have to do, because we have seen this 

from experience, is when a company tries to then get in the market, the Chinese then dump to bring down prices so that they can’t 

get in the market. We have to be ready to go with a dumping case 

and dumping and pressure so that they can’t use that to keep new 

entrants from getting into the marketplace. 

Mrs. WAGNER. Thank you for your testimony. 

Yes, Dr. Scott. 

Mr. SCOTT. Just one final point. As an economist——

Mrs. WAGNER. Could you hit your mike, please? 

Mr. SCOTT. Yes. Speaking as an economist, these are clearly industries that are huge externalities because it is such a polluting 

industry. There may have to be public subsidies for the cost, and 

we may also have to regulate the industry, not export the product, 

and, as Dr. Atkinson says, respond when we are challenged by actions in China if they dump the product. 

Mrs. WAGNER. Great. Thank you. 

I think this is very good testimony, Mr. Chairman, and testimony 

that certainly can be taken on board by this administration. So I 

thank you very much, and I appreciate the indulgence, sir. 

Mr. YOHO. Yes, ma’am. 

And I was going to follow up with that question. Mr. Perry, do 

you have another question? 

Mr. PERRY. I do. Thank you for your indulgence, Mr. Chairman. 

Mr. Cheng, thinking about the Chinese, their incursions on the 

Moon, so to speak, satellite, you know, around-the-Moon mapping 

and communications on the back side of the Moon, what is the purpose of being on the other side of the Moon and mapping the other 

side of the Moon and endeavoring, I think, to go to the other side 

of the Moon in the next couple years? What would be the civilian 

purposes, and what are the military implications? 

Mr. CHENG. Well, the civilian purposes is probably to make contact with the Transformers base over there. 

85

That was intended as humor. 

No, almost certainly one of the most important aspects is prestige, to demonstrate, again, that China can be innovative, that 

China can do things that no other country has done. 

From a security perspective, however, it is the communications 

link with the far side of the Moon. Because of the way the Moon 

orbits around the Earth, the far side of the Moon never faces 

Earth. So communicating with the far side requires one of two options, either creating a lunar satellite, a satellite that orbits the 

Moon itself—no one has done that yet—or putting a satellite at certain key points in deep space that will allow you to communicate, 

which is what China has already announced it is going to do. 

It will deploy a communications satellite to Lagrange point 2. No 

other country has done that. Countries have put scientific exploration satellites there, but no one has put a communications or application satellite there. Once there, China will have opened the 

door to deploy other satellites there. 

That is beyond the geosynchronous belt. It will complicate our 

ability to do space situational awareness. It will allow the Chinese 

to create essentially an on-orbit reserve of communication satellites, so, in the event of conflict, it will have, essentially, already 

in place additional systems to take up the slack. 

It could, in theory, bring those satellites back in, whether to populate geosynchronous to replace casualties in time of war or, alternatively, even as a potential form of anti-satellite capability. Because, of course, the satellites in geosynchronous are very predictable, so you could, in fact, come in from outside orbit and come in, 

whereas right now we are focused on going out to geosynchronous. 

Mr. PERRY. Do we have any plans whatsoever that are similar 

to the Chinese in this regard to station, to map, to communicate 

on the back side? Do we have any of these plans whatsoever? 

Mr. CHENG. Not to the best of my knowledge. The closest is the 

deployment of the James Webb Space Telescope, which will also go 

to Lagrange point 2. But that, of course, is a dedicated scientific 

satellite which intends to base a supplement to Hubble. So, no, 

there is nothing like this, as far as in the public record, for either 

DOD or NASA. 

Mr. PERRY. In my mind, in the way that you present it as well, 

it seems like they have, if they complete this task, an extraordinary military capability from a communications standpoint and 

from, if you think about a GPS satellite and how much the military 

depends—nobody reads a map in the military anymore, right? It is 

all GPS-based. Not saying it will always be, but right now that is 

the primary means of location. 

I mean, it presents, I think, a significant hazard. The door is 

wide open for them, if they chose to, to take military action on our 

communications and location array that is in geosynchronous orbit 

without any—there is almost nothing we can do. 

Mr. CHENG. Yes, sir. The Chinese, they publish an enormous 

amount of material, and they are very open in saying, the next 

war, one of the things we will try to do—we, the PLA—is establish 

space dominance. This is clearly a step in that direction. 

Mr. PERRY. Is it something that we should be concerned about? 

I don’t know when the next national military strategy or national 

86

security strategy comes out. Do we not care? Do we not take them 

seriously? Do we not see this as a problem? Or is this out of the 

realm of your expertise? 

Mr. CHENG. There is no evidence that we have taken this on 

board in the most recent national military strategy, national security space strategy, or national space strategy, sir. 

Mr. PERRY. Okay. Thanks, Mr. Cheng. 

Thank you, Mr. Chairman. 

Mr. YOHO. Again, I appreciate you all, your patience staying 

here. 

I want to just touch base. There is no separation, from what I 

have studied—and I think you have alluded to this—between the 

Chinese Government, the Chinese military, and/or Chinese businesses. They are kind of one entity. 

The idea of national pride, going to the Moon, if China wants to 

do that, we can understand that in this country because we did 

that. We can remember how this Nation rallied behind that. I truly 

believe that was for national pride. It was a leap of faith and a 

giant step for mankind that the whole world benefited from. 

But what I am seeing here with the Chinese program, I am not 

seeing that. It is like I talked about before; if you look at a past 

activity, we can predict future actions. I wanted to touch on the 

rare earth comments that Mrs. Wagner talked about. As of late 

2016, China produced more than 85 percent of the global rare earth 

mineral supply, which is used in the production of everything from 

smartphones to advanced weapons. I have heard reports that there 

are almost 2 tons of rare earth metals in some of our fighter jets. 

China’s control of the market, however, enabled them in 2010 to 

restrict rare earth exports by 40 percent and cut off supplies to 

Japan over territorial disputes. We remember that, the Japanese 

Coast Guard ramming the Chinese ship. China just backed up, 

says, ‘‘Not a problem,’’ and cut off their rare earth, crippling their 

market. 

So we have seen the story over and over again. And then their 

leader—and I remember this because I saw a documentary on it. 

It was from 1992. It was the Chinese leader, Deng Xiaoping. He 

said that the Middle East has oil, America and Japan are in technology. We can’t compete with them, but we can compete with 

them on rare earth metals, and we are going to corner the market. 

And they have done that. 

I think we are at a point in this country—and this is something 

we have talked about on this committee—to develop a rare earth 

national security policy for the United States. I know they are difficult to mine and there are EPA things that we have to look at 

as far as regulations and make sure it is done right. But we would 

be foolish if the American Government didn’t come together and 

say, we are going to procure and secure the rare earth metals needed from us instead of having to depend on any other country, I 

don’t care who it is. 

One of the things I saw when I first came up here is we were 

arguing the farm bill, and one of the sentiments of some of the people up here was, why do we need a farm bill? Why don’t we import 

our food? I am thinking, good God, we tried that on oil. Do we really want to go down here again? So to be dependent on another 

87

country for rare earth metals when we need them in everything, 

I think, is foolish, and I think we need to have that policy. 

The other thing is, as General Perry brought out about the intentions of China in space, I think that is very telling, again, by their 

past history. All we have to do in current days is see what they 

are doing in the South China Sea. They are going to do what is 

best for China. 

And then we know the IP Commission estimates that possibly up to $600 billion of intellectual property has been stolen—$600 billion. And, again, it points to future activity. 

So I guess a question I want to ask you, are there existing nation-to-nation or U.N. treaty and/or agreements that are satisfactory to prevent China’s aggressive pursuit of space in something 

other than civilian purposes for exploration versus military? Are 

there sufficient treaties or agreements between nations, or is there 

something that needs to be written up on that? 

Go ahead, Mr. Cheng. 

Mr. CHENG. There is only a handful of international treaties governing space. 

Mr. YOHO. Right. 

Mr. CHENG. China and the United States and quite a few other 

countries are party to almost all of them. The U.S. is not a party 

to the Moon Treaty, but that is actually not specifically relevant 

here. 

The U.S. has resisted most efforts at creating a space arms control treaty because of the very real—two very large real problems. 

One, it is almost impossible to define what a space weapon is. The 

Chinese version of a treaty that they have forwarded actually 

would allow all of the anti-satellite activities that they have conducted and would ban any American militarization of space. Yes, 

it is a lovely treaty——

Mr. YOHO. A great plan. 

Mr. CHENG. Exactly. And it goes directly to the other piece, sir, 

which is that the Chinese are excellent practitioners of legal warfare. You sign a bad treaty; it is not just like a bad contract, although we have seen examples of bad contracts here today. What 

happens is China will basically—and there will be an American 

community, both from the legal, academic——

Mr. YOHO. Right. 

Mr. CHENG [continuing]. And arms control communities, who will 

basically say, if we signed it away, it doesn’t matter that China has 

it and we don’t. 

Mr. YOHO. I agree with you. 

Anybody else? Any comments? 

All right. Gentlemen, I appreciate your time. And what you see 

is a rare earth policy and a policy to secure our semiconductor industry are paramount. I think we need to rally this Nation. 

Through leadership is the only way that we are going to go back 

and do the things we used to do, of exploring space and going on 

to that next frontier. It would be a poor choice for us not to pursue 

that, and it is something we need to do. That comes from the top 

down and for America to put a focus out there. 

I want to thank you for you time, for your commitment to come 

here, for your patience while we voted. 

88

And, with that, this meeting is adjourned, and we look forward 

to having your statements submitted. 

[Whereupon, at 4:34 p.m., the subcommittee was adjourned.] 

(89)

A P P E N D I X 

MATERIAL SUBMITTED FOR THE RECORD

90

f


25259n.eps

SUBCOMMITTEE HEARING NOTICE 

COMMITTEE ON FOREIGN AFFAIRS 

U S HOUSE OF REPRESENTATIVES 

WASHINGTON, DC 20515-6128 

Subcommittee on Asia and the Pacific 

Ted Yoho (R-FL), Chairman 

April 26, 2017 

TO: MEMBERS OF THE COMMITTEE ON FOREIGN AFFAIRS 

You are respectfully requested to attend an OPEN hearing of the Committee on Foreign Affairs, to be 

held by the Subcommittee on Asia and the Pacific in Room 2172 of the Rayburn House Office Building (and 

available live on the Committee website at http.//www.ForcignAff:1.1rs.hous2.gov): 

DATE: 

TIME: 

SUBJECT: 

WITNESSES: 

Wednesday, April26, 2017 

2:30 p,m 

China's Technological Rise: Challenges to US. Innovation and Security 

l\1r. Dean Cheng 

Senior Research Fellow 

Asian Studies Center 

The Heritage Foundation 

Robert D. Atkinson, Ph.D. 

President 

Information Technology and Innovation Foundation 

Robert E. Scott, Ph.D. 

Senior Economist 

Director of Trade and Manufacturing Policy Research 

Economic Policy Institute 

By Direction of the Chairman 

seeks to make its frtci/ities accessible to persons with disabilities. ~f _you are in need of 

call 202 225-5021 at least four business 1n admnce the event, whenn·er 

to speCTaf accommodations in materials m 

1/STC/11/Wae\'/CCSI may he 
91

f


25259m.eps

COMMITTEE ON :FOREIGN AFFAIRS 

:\1Tl\IJTES OF SCBC0:\1MITTEE ON ________ A_.-t_a_an_d_r_he __ P_a_c_:_ifl_c ________ HEARING 

Day Wednesday Date Apri/26, 2017 ___ Room _ __,RR=O~B=2cc1.:.:72::__ 

Starting Time 2:33p.m. F:nding Time 4:32p.m. 

Recesses (-''"P"' to N-'J"" 1 (____lo __ ) ( __ to ___j (_ ____ to __ ) (____to ___j (____to ___j 

Presiding lVlcmbcr(s) 

Chairman Ted Yoho 

Check all ofthefiillowing that apply: 

Open Session 0 

Executive l!:J9sed) Session D 'I elevised U 

TITLE OF HEARING: 

Electronically Record~taped) D ~Henogn1phic Record U 

"China's Technological Rise: Challenges to U.S. Innovation and Security" 

SUBCOMMITTEE MEMBERS PRESENT: 

Rep. Ted I'oho, Rep. Dana Rohrabacher, Rep. Scott Perry, Rep. Steve Chabot, Rep. Ann Wagner 

Rep. Brad Sherman 

NOJ'\-SUBCOMMITTEE MI::\ffiERS PRESENT: (Mark with an *if they are not members offull committee) 

N/A 

HEARING WITNESSES: Same as meeting notice attached? Yes 0 :"o D 

(If "no", please list bel au.-· and include title, agency, departmeni, or organization.) 

STATEMENTS FOR THE RECORD: (List any statements submittedfor the record) 

Rep. Gerald Connol(y, statement for the record 

Rep. Ted Yoho, questions for the record 

TIME SCHEDULED TO RECONVENE ___ _ 

ur 

TIME ADJOURNED-----
92


25259d-1.eps

Statement for the Record 

Congressman Gerald Connolly 

AP Subcommittee Hearing: ''China's Technological Rise: Challenges to U.S. Innovation and Security" 

April 26, 2017 

China has pursued policies in the technology industry that pose a serious threat to U.S. economic and 

national security interests. Beijing's state-directed cyberattacks, noncompetitive practices, and policies 

that limit market access for US. companies directly harm U.S interests in the Asia-Pacific 

The United States had an opportunity to set the rules for economic engagement in the Asia-Pacific, 

where we already maintain longstanding commitments, with the Trans-Pacific Partnership. The trade 

agreement encompassed 12 countries that account for 40 percent of global GDP and 20 percent of global 

trade. A high-quality TPP deal would have deepened U.S. alliances, strengthened ties to emerging 

partners, and established labor, environmental, human rights, and intellectual property standards 

Conversely, our withdrawal from TPP has created a vacuum, and given an unbelievable gift to the 

Chinese. They are still drinking champagne in Beijing. 

Abandoning TPP is one of the most profound retreats since the U.S. Senate's failure to ratify the Treaty 

of Versailles after World War l. lt is no coincidence that right after we walked away from TPP, the 

Chinese have moved ahead with their own alternative trade agreement, the Regional Comprehensive 

Economic Partnership, which meets none of the standards that the U.S. fought so hard to include in TPP. 

Earlier this month, President Trump hosted a summit with Chinese President Xi Jinping The two 

leaders apparent! y agreed to 100 days of negotiations in order to address trade tensions, but exact! y what 

that plan looks like and which concessions China will make remain to be seen. Early commitments from 

China to offer the U.S. better market access for financial sector investments and U.S. beef exports are 

relatively easy to make. China had already been willing to allow majority foreign ownership in securities 

and insurance companies during the Obama Administration and the beef ban has been in place since a 

bovine infection scare in 2003. The real test will come amidst negotiations about China's unfair and 

illegal trade practices regarding its technological industries at home and abroad. 

China has limited foreign competition in its domestic market and propped up private enterprises with 

Chinese state funding and intelligence. For example, in order to bolster China's semiconductor industry, 

the Chinese government launched a $150 billion public-private fund to subsidize investment, 

acquisitions, and the purchase of new technology from 2015 to 2025. Such biased policies flood global 

markets with cheap supply, undercut foreign competition, and create an environment where it is 

impossible for U S. companies to compete. 1 recently wrote a letter to the Chinese Ambassador 

expressing concerns over steps the Chinese government is taking to restrict U.S. cloud service providers 

from providing services in China. Currently China has two draft notices that would essentially require 

the transfer of all cloud ownership and operations to a Chinese partner. 

In cyberspace, China has been even more aggressive. Chinese state-backed hackers have stolen 

intellectual property and trade secrets from technology companies so that China can reduce its reliance 

on foreign technology suppliers and spur its own technological innovation. This theft of trade secrets, 

along with counterfeit goods and pirated software, costs the U.S. economy between $225 and $600 

billion annually, and China is the largest source of such illegal activity. 
93

f


25259d-2.eps

Our concerns extend far beyond just the economic impacts of Beijing's tech policies. Semiconductors 

are ever-present in today's tech products from smart phones to satellites and advanced military systems. 

China produces more than 85 percent of the global supply of rare earth minerals, which are essential 

components in many of these same technologies. China's subversion of the semiconductor market and 

near dominance of rare earth production create significant concerns about supply chain control that 

threaten U.S. national security interests. China has also used its cyber capabilities to hack into U.S. 

military networks to steal information about U.S. weapons programs, including the F-35 fighter aircraft, 

and penetrate critical U.S. infrastructure. 

During the I 00 days of trade negotiations with China, the Trump Administration should push back on 

China's unlawful support of private enterprises and cyberattacks on the U.S. military and private sector 

companies. At the same time, China has an essential role to play in addressing many global and regional 

challenges, not the least of which is de-escalating tensions on the Korean Peninsula. It is imperative that 

any dialo!,'l.le with the Chinese Government account for these competing interests. !look forward to 

hearing from our witnesses regarding the best way to carefully manage our relationship with China to 

assert U.S. economic and national security interests that are threatened by Beijing's unfair trade 

practices. 
94


25259e-1.eps

Questions for the Record 

Chairman Ted Yoho 

AP Subcommittee Hearing: ''China's Technological Rise: Challenges to U.S. Innovation and Security'' 

April 26, 2017 

1.) Mr Cheng, the US and China announced a cybersecurity agreement in 20 15 that you referred to at 

the time as "a broad statement of generalities." A private sector report last year found a drop in 

China-based hacking, which the Obama Administration attributed to the agreement. How do you 

assess the impact of the US.-China cybersecurity agreement on Chinese cyber operations? Do you 

believe that the US. and China share a ''common understanding'' of cybersecurity and nonns in 

cyberspace" 

Mr. Cheng: It is not clear how much, or even whether, Chinese cyber espionage for economic purposes 

has decreased. This is in part because it was not clear what metrics were used to assess the level of such 

activity prior to the agreement. That is, at this point, has there been an ah.mlute drop in Chinese cyber 

activity, or only a drop in the obsen•ed Chinese cyber activity. While it is possible that there has been a 

reduction in Chinese cyber espionage (especially that aimed at American commercial entities), it is also 

possible that there has been a reduction in Chinese cyber information gathering by known Chinese 

government entities, while overall levels of cyber espionage may not have changed at all I (For example, 

if the Chinese government contracted with civilian hackers or employed non-governmental "patriotic 

hacker" groups, substituting them for cyber units from the PLA) 

This goes to the bigger question of whether there is a ''common understanding" of cybersecurity and 

cyber norms. Chinese activity in cyberspace, including the continued efforts to censor what the Chinese 

population can access, as well as ongoing efforts to extend Chinese sovereignty throughout cyber-space, 

would suggest that no such "common understanding" has been reached. 

2.) The State Department describes "cyber diplomacy'' as "encompass[ing] the full range of U.S. 

interests in cyberspace ... including security, freedom, governance, human rights, and economic 

growth." What role should the State Department or other U S. Government agencies play- if anyin addressing China's authoritarian approach to Internet governance, including its advocacy of 

"cyber sovereignty" as a global regulatory norm0 

Mr. Cheng: The United States has been, and should remain, the foremost champion of a free and open 

Internet, where not only governments but civil society organizations can participate in both the free flow 

of information and the administration of the Internet itself Therefore, the United States government, 

whether through the State Department or other parts of the bureaucracy, should resist efforts to place the 

administration of the Internet under government-only authorities such as the UN International 

Telecommunications Union (ITU). Instead, the US Government should make clear that it will firmly 

support the role of entities such as ICANN, the International Corporation for the Assignment of Names 

and Numbers, in administering the Internet. ICANN's multi-stakeholder approach, whereby both 

government and non-government entities have essential roles in helping set the rules ofTntemet 

operation, must be defended, if the free flow of information, a hallmark oftoday's Internet, is to be 

preserved. 
95


25259e-2.eps

Mr. Atkinson: China considers "cyber sovereignty'' an inalienable right in that each country should 

respect how other countries decide to manage the Internet.' China's view and management of the 

Internet is very different to the United States, Japan, and other countries. China tightly censors the 

Internet through the "Great Firewall of China" maintains strict controls of what information is accessed 

from outside the country. 

When it comes to values-based issues, each country should be able to pursue its own policies. For 

example, some countries block objectionable content like hate speech. Nations have these rights, but 

they should exercise them without impeding on how the Internet and information flows in other 

countries. It is when China crosses this line is when the U S. government needs to be vigilant and 

prepared to push back-both bilaterally and in coordination with likeminded countries-in resisting 

China's efforts to enforce its values and rules ofthe Internet in other countries. 

Equally important, countries should work together on technical issues that underpin the connectivity, 

administration, and security of the global internet. The U S. government needs to do more on this front 

as China is ramping up etforts to enforce its view of the Internet as part of a new international 

framework or set of global norms. In recent years, China has begun pushing for a new model for 

government the Internet based on strict rules and order. President Xi made China's major push for 

global internet leadership in 2015 when he outlined that the world needed to "create a fine cyberspace 

order following relevant laws."" In November 2016, President Xi called for "more fair and equitable" 

governance of the global internet at the China-run Wuzhen World Internet Conference, where China 

often tries to get government and private sector officials from other countries to sign onto China's 

approach to managing the Internet as a way to influence their own approach. China has said that it thinks 

the internet is dominated by the United States, leading it to back a proposal to transfer control over some 

of the internet's core architecture to a UN agency, the International Telecommunication Union;;; 

3.) The Chinese government recently released an updated draft of its new Cybersecurity Law, which 

would require technology firms to undergo a cybersecurity assessment before transferring their data 

abroad. Could this be considered just another way for the Chinese government to require data 

localization? How could a law like this affect US. technology firms and continue to support 

policies in Beijing that undermine the high-tech industry in the United States? 

Mr. Cheng: The Chinese government has made clear that it is intent upon controlling information 

within the PRC. This is reflected in the development of the ·'Great Firewall of China," the armies of 

censors maintained by not on! y the PRC government but also Chinese Internet Service Providers (ISPs ), 

and the willingness to shut down large portions of the Internet within China (e.g., in Xinjiang). 

It should therefore not be surprising that Chinese cybersecurity laws will be fashioned (and as important, 

interpreted and enforced) to ensure that the Chinese government can monitor information within the 

PRC. This will include compelling foreign companies to not only warehouse data in China, but to 

provide means of accessing even secure data (e.g., requiring back doors which the Chinese government 

can access). 

Mr. Atkinson: China's has introduced a number of new laws and regulations that will greatly expand 

local data residency requirements-known as data localization-and other measures that make it harder 

to transfer data outside of China or to use foreign technology products, all of which discriminate against 
96

Æ


25259e-3.eps

foreign technology companies. Despite pushback from the United States and other countries, China's 

Cybersecurity Law, initially adopted in late 2016 and due to come into effect on June 1, maintains many 

ofthese measures. As lTIF outlined in a submission to the Chinese government, China's recent draft 

measure on personal and other personal data would greatly expand the scope of data localization as well 

as measures that inhibit the seamless collection, use, and transfer of datan These efforts have already 

made it harder for foreign firms to sell their products in China, raised the risk of disclosing valuable 

intellectual property, and also forced them to set up or use duplicative computing facilities and be 

constrained in how they use data. 

The United States needs to more aggressively push back against China's use of cyber and data-related 

policies to discriminate against U.S. firms. Like every country, China has legitimate grounds to address 

cybersecurity and privacy issues. However, mandating data localization does not make data more secure 

or private. Moreover, the Chinese government has consistently used these concerns as a pretext to 

introduce intrusive and discriminatory policies that target foreign technology companies. For example, 

the day after President Xi made his comments last November, the People's Daily, warned in an editorial 

that China must break monopolies over core technologies and standards and remain untethered to other 

countries' technolob'Y supply chainsv 

By limiting access to best-in-class technology products and services, China is undermining its own firms 

and economy's ability to compete and innovate in today's global digital economy. U.S. technology 

companies have considerable experience and technology that could help China develop a dynamic and 

competitive data-intensive and innovative economy. These discriminatory laws limit the ability (and 

their willingness) of U.S. and other foreign technology companies to operate in China. China's rapidly 

changing regulatory environment has further raised a number of serious concerns about the role that 

foreign technology tirms will be allowed to play in China in the years ahead. 

Eva Dou, China's Xi Jinping Opens Tech Conference With Call for ·cyber Sovereignty', W5J, 

November 16, 2017, https://www.wsj .com/articles/chinas-xi-jinping-opens-tech-conference-with-callfor-cyber-sovereignty-1479273347 

;; Gerry Shih, China seeks global support for cyber sovereignty framework, AP, March 2, 2017, 

https://apnews.com/ede57c2d442b437492f2aaccbee27f44/china-seeks-global-support-cybersovereignty-framework 

iii Gerry Shih, China doubles down on internet control after tough new law, AP, November 17, 

20 16, https :1 I apnews. com/ d3 c654 5 80 I d040d69cc4021 f4 9a83 926/ china-doubles-down -stance-internetcontrol 

i" Robert Atkinson and Nigel Cory, Comments to Chinese State Internet Information Office on 

Handling Data (Information Technology and Innovation Foundation, May, 2017), 

https :1 /i tif org/publi cati ons/20 I 7/0 5 I ill comments-chinese-state-internet-information-office-handlingdata 

Gerry Shih, China doubles down on internet control after tough new law, AP, November 17, 

2016, https:/ /apnews.com/d3c654580 1 d040d69cc4021 f49a83926/china-doubles-down-stance-i nternetcontrol