U.S. GOVERNMENT PUBLISHING OFFICE

32–689 PDF WASHINGTON : 2018

COUNTERING CHINA: ENSURING AMERICA REMAINS THE WORLD LEADER IN ADVANCED 

TECHNOLOGIES AND INNOVATION 

HEARING 

BEFORE THE

SUBCOMMITTEE ON 

INFORMATION TECHNOLOGY 

OF THE

COMMITTEE ON OVERSIGHT 

AND GOVERNMENT REFORM 

HOUSE OF REPRESENTATIVES 

ONE HUNDRED FIFTEENTH CONGRESS 

SECOND SESSION 

SEPTEMBER 26, 2018 

Serial No. 115–107 

Printed for the use of the Committee on Oversight and Government Reform 

( 

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

http://oversight.house.gov 


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COMMITTEE ON OVERSIGHT AND GOVERNMENT REFORM

Trey Gowdy, South Carolina, Chairman 

John J. Duncan, Jr., Tennessee 

Darrell E. Issa, California 

Jim Jordan, Ohio 

Mark Sanford, South Carolina 

Justin Amash, Michigan 

Paul A. Gosar, Arizona 

Scott DesJarlais, Tennessee 

Virginia Foxx, North Carolina 

Thomas Massie, Kentucky 

Mark Meadows, North Carolina 

Ron DeSantis, Florida 

Dennis A. Ross, Florida 

Mark Walker, North Carolina 

Rod Blum, Iowa 

Jody B. Hice, Georgia 

Steve Russell, Oklahoma 

Glenn Grothman, Wisconsin 

Will Hurd, Texas 

Gary J. Palmer, Alabama 

James Comer, Kentucky 

Paul Mitchell, Michigan 

Greg Gianforte, Montana 

Michael Cloud, Texas 

Vacancy 

Elijah E. Cummings, Maryland, Ranking 

Minority Member 

Carolyn B. Maloney, New York 

Eleanor Holmes Norton, District of Columbia 

Wm. Lacy Clay, Missouri 

Stephen F. Lynch, Massachusetts 

Jim Cooper, Tennessee 

Gerald E. Connolly, Virginia 

Robin L. Kelly, Illinois 

Brenda L. Lawrence, Michigan 

Bonnie Watson Coleman, New Jersey 

Raja Krishnamoorthi, Illinois 

Jamie Raskin, Maryland 

Jimmy Gomez, Maryland 

Peter Welch, Vermont 

Matt Cartwright, Pennsylvania 

Mark DeSaulnier, California 

Stacey E. Plaskett, Virgin Islands 

John P. Sarbanes, Maryland 

SHERIA CLARKE, Staff Director 

WILLIAM MCKENNA, General Counsel 

TROY STOCK, Information Technology Subcommittee Staff Director 

SARAH MOXLEY, Senior Professional Staff Member 

SHARON CASEY, Deputy Chief Clerk 

DAVID RAPALLO, Minority Staff Director 

SUBCOMMITTEE ON INFORMATION TECHNOLOGY

Will Hurd, Texas, Chairman 

Paul Mitchell, Michigan, Vice Chair 

Darrell E. Issa, California 

Justin Amash, Michigan 

Steve Russell, Oklahoma 

Greg Gianforte, Montana 

Michael Cloud, Texas 

Robin L. Kelly, Illinois, Ranking Minority 

Member 

Jamie Raskin, Maryland 

Stephen F. Lynch, Massachusetts 

Gerald E. Connolly, Virginia 

Raja Krishnamoorthi, Illinois 


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C O N T E N T S 

Page 

Hearing held on September 26, 2018 ..................................................................... 1 

WITNESSES 

Mr. John Neuffer, President and CEO, Semiconductor Industry Association 

Oral Statement ................................................................................................. 4 

Written Statement ............................................................................................ 6 

Mr. Dean Cheng, Senior Research Fellow, Asian Studies Center, Davis Institute for National Security and Foreign Policy, The Heritage Foundation 

Oral Statement ................................................................................................. 12 

Written Statement ............................................................................................ 14 

Ms. Sarah Cook, Senior Research Analyst, East Asia, Freedom House 

Oral Statement ................................................................................................. 20 

Written Statement ............................................................................................ 22 

Mr. Rob Atkinson, President, Information Technology and Innovation Foundation 

Oral Statement ................................................................................................. 35 

Written Statement ............................................................................................ 37 


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COUNTERING CHINA: ENSURING AMERICA 

REMAINS THE WORLD LEADER IN ADVANCED TECHNOLOGIES AND INNOVATION 

Wednesday, September 26, 2018 

HOUSE OF REPRESENTATIVES, 

SUBCOMMITTEE ON INFORMATION TECHNOLOGY, 

COMMITTEE ON OVERSIGHT AND GOVERNMENT REFORM, 

Washington, D.C. 

The subcommittee met, pursuant to call, at 10:05 a.m., in Room 

2247, Rayburn House Office Building, Hon. Will Hurd [chairman of 

the subcommittee] presiding. 

Present: Representatives Hurd, Issa, Cloud, Kelly, and 

Krishnamoorthi. 

[Audio malfunction in hearing room.] 

Mr. HURD. Welcome, everyone. We do not have an echo, so let’s 

try that again. 

The Subcommittee on Information Technology will come to order, 

and without objection, the chair is authorized to declare a recess 

at any time. 

Good morning. For more than 40 years, the U.S. has encouraged 

China to develop its own economy and take its place alongside the 

U.S. as a central and responsible player on the world stage, but 

China does not want to join us. They want to replace us. More importantly, China has not been playing fair. They coerce American 

companies into entering into joint ventures with Chinese companies with close links to the Communist Chinese Government as the 

price for market access. 

The United States Trade Representative, which led a sevenmonth investigation into China’s intellectual property theft, recently found that Chinese theft of American IP currently costs between $225 billion and $600 billion annually. 

The Chinese have not been secretive about their ambitions and 

their goals. Chinese President Xi made it clear upon taking office 

that his dream for China is, and I quote, ‘‘the great rejuvenation 

of the Chinese nation.’’ Critical to Xi’s vision of a rejuvenated China’s dominance is manufacturing, modern advanced technology. 

In 2015, China’s State Council introduced the Made in China 

2025 initiative with the aim to modernize the Chinese economy and 

become the world leader in manufacturing. Made in China 2025 focuses on promoting breakthroughs in critical sectors of the Chinese 

economy, and of the sectors this hearing will focus primarily on 

next-generation IT, a topic that this subcommittee has been exploring for three and a half years. A next-generation IT includes the 


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hardware that make up today’s technology and the networks that 

support communications. Examples include 5G networks, semiconductors, cloud computing, artificial intelligence, blockchain, and 

quantum computing. 

As we explore these issues, we cannot lose sight of the many 

abuses the oppressive Chinese Government perpetuates on its citizens. In China today Uighur Muslims are sentenced to years in 

prison for praying. Mothers and fathers are shipped to reeducation 

camps for practicing Falun Gong and never heard from again. The 

communist Chinese Government oversees one of the strictest online 

censorship regimes in the world, and the Human Rights Watch recently stated the broad and sustained offensive on human rights 

that started after President Xi Jinping took power five years ago 

shows no sign of abating. The U.N. estimates as many as 1 million 

Chinese citizens are currently quarantined in concentration camps. 

The Communist Party that runs the Chinese Government is an 

oppressive regime with an abysmal human rights record. As Americans, we believe everyone has a right to life, liberty, and the pursuit of happiness. The millions of men, women, and children living 

under the oppressive Chinese regime in China deserve better from 

their government. Our nation faces a great challenge rising from 

the East, but we have met greater challenges before, and I am confident we can meet this one. 

And I am also looking to explore how we do other things than 

tariffs. How do we put a regime in place that deals with the practices that we know China is doing? They are stealing our technology. They are forcing intellectual transfer. Alibaba is treated 

like a U.S. company in the U.S., but are American companies treated like Chinese companies in China? No. We know China prevents 

investment in key future sectors, but we allow Chinese investment 

in those sectors here in the U.S. 

I think there are other tactics we can be taking other than tariffs 

in order to deal with and ensure America and American companies 

specifically stay the leaders in innovation, and I am looking forward to exploring these issues today. And as always, I am excited 

to explore these issues with the one and only, my friend and colleague, Robin Kelly from the great State of Illinois. 

I thank our witnesses for being here today and look forward to 

hearing from them innovative solutions to ensure that America remains the world leader in advanced technologies and innovation. 

Mr. HURD. And now, it is my pleasure to recognize the ranking 

member of the subcommittee, Ms. Kelly, for her opening statement. 

Ms. KELLY. Thank you, Mr. Chairman, and thank you for calling 

today’s important hearing. And I too want to welcome the witnesses. 

China is mounting a serious challenge to the United States for 

global leadership in technology and innovation. China’s success so 

far is attributed to two policies: China uses pressure tactics on 

American companies requiring them to transfer technology to Chinese firms as a condition of doing business in the Chinese market; 

and China’s making world-leading investments in research and development. In fact, for the first time Chinese investment in R&D 

will surpass U.S. investment next year. Together, these policies 


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have transformed China into America’s chief global competitor in 

advanced technology. 

Unfortunately, this administration’s response has been to start a 

trade war with China with few results to show for it. Tariffs will 

not stop China from making huge investments in research and development, but tariffs are hurting Americans. Farmers are already 

feeling the effects. Soybean farmers in my home State of Illinois, 

which we are number one in soybean, are losing out on contracts 

in China, and workers have been laid off as a result. 

American shoppers will soon feel the effects. A recent study by 

the National Retail Federation estimates that the most recent 

round of tariffs will cost U.S. consumers $6 billion in higher costs 

for products like furniture and luggage. The Consumer Technology 

Association estimates that tariffs on technology products will cost 

Americans another $3 billion for devices such as modems. 

On top of the counterproductive tariffs, the Trump Administration’s immigration policies are damaging our own ability to compete for the talent we need to remain a lead in technology innovation. The Administration recently announced that it was rescinding 

employment authorization for technology workers’ spouses under 

the H–4 visa program. That sends a clear message that highly 

skilled immigrants who come to work for American technology companies are not welcome. 

And President Trump has not led the major increases in R&D investment and education funding that are necessary to stay ahead 

of China’s commitments. Over the past three years, China has outspent the United States by approximately $24 billion on investments in telecommunications infrastructure. China is planning to 

invest an additional $400 billion over the next five years to win the 

race to deploy 5G wireless technology for cell phones. The United 

States is falling behind. China has already deployed 350,000 cell 

sites for 5G, while the U.S. has only deployed 30,000. Overall, 

while the U.S. remains a leader in spending on research and development, China is expected to surpass the U.S. in total research 

spending by the end of this year. 

China is also catching up to the United States in education. According to the National Science Foundation, China now awards 

nearly as many doctorates in science and engineering as the United 

States. Expanding STEM education is key for America to remain 

a leader in innovation in the global economy. To that end, I have 

introduced today’s American DREAM Act to incentivize college 

graduates with degrees in a STEM field to teach for five years. 

This legislation would help the United States build the pipeline 

necessary to educate the next generation of innovators in science 

and technology. 

President Trump has gotten the U.S. into a trade war with 

China, which is harming American farmers and businesses. This 

trade war lacks a clear strategy with no end in sight. The United 

States should be investing in research and in education to preserve 

America’s global leadership in technology and attract the best talents from around the world. 

Again, thank you, Mr. Chairman, for the opportunity to discuss 

this extremely important topic with our panel. Thank you. 


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Mr. HURD. Thank you, Ranking Member. And I agree; education, 

immigration, two ways we can solve this problem. 

And now, it is a pleasure to introduce our witnesses. Our first, 

Mr. John Neuffer, president and CEO of the Semiconductor Industry Association. Thank you for being here. Mr. Dean Cheng, senior 

research fellow, Asian Studies Center, Davis Institute for National 

Security and Foreign Policy at The Heritage Foundation. Say that 

three times fast. Ms. Sarah Cook, senior research analyst for East 

Asia at Freedom House; and Rob Atkinson, president of the Information Technology and Innovation Foundation. 

And welcome to you all. And pursuant to committee rules, all 

witnesses will be sworn in before you testify, so please stand and 

raise your right hand. 

[Witnesses sworn.] 

Mr. HURD. Thank you. Please let the record reflect that all witnesses answered in the affirmative. 

In order to allow time for discussion, please limit your testimony 

to five minutes. The entire written statement has been made part 

of the record. And thank you for your submissions. A reminder, the 

clock in front of you shows remaining time. When it is yellow, you 

have 30 seconds. When it is red, your five minutes are up. Please 

remember to press the button to turn your microphone on before 

speaking. 

And now, it is a pleasure to recognize Mr. Neuffer for your opening remarks. 

WITNESS STATEMENTS 

STATEMENT OF JOHN NEUFFER 

Mr. NEUFFER. Thank you. I work for a tech association, and I’m 

glad to see we’re not the only ones with—that have technical difficulties with our equipment. 

Good morning, Chairman Hurd, Ranking Member Kelly, and 

members of this subcommittee. I’m John Neuffer, and I’m testifying 

on the behalf of Semiconductor Industry Association. Thanks for 

the opportunity to testify before this committee regarding one of 

the most pressing challenges facing the U.S. semiconductor industry today: How to maintain U.S. semiconductor technology leadership in light of the full-throated effort by China to compete with 

the U.S. in advanced technologies, especially in regard to those 

Chinese Government policies and practices that threaten our intellectual property and distort markets. 

Invented right here in America, semiconductors are the building 

blocks upon which U.S. technological leadership rests. They power 

virtually all modern electronics from communications to transportation to health care to energy to military systems. U.S. ship makers lead the world. We account for close to half of the $412 billion 

global semiconductor market. We are the Nation’s fourth-largest 

exporter after aircraft, refined oil, and automobiles. We have a 

global trade surplus of over $6 billion, and a bilateral trade surplus 

with China of over $2 billion. Importantly, nearly half of our manufacturing operations are right here in America, spread across 19 

States, not just in Silicon Valley. And the industry employs close 

to 25,000 workers in the U.S. with well-paying jobs. 


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So China is a critical market for our industry, to be sure. At the 

center of the world’s electronics supply chain, China is, 

unsurprisingly, the leading destination for U.S. semiconductor exports. We are especially concerned with Chinese actions, policies, 

and practices that force the transfer or allow the outright theft of 

our technology. This includes the forced transfer of our technology 

as a condition of market access, which you’ve addressed this morning, the plethora of formal and informal requirements that force 

the disclosure of intellectual property, and persistent economic espionage to steal viable IP. 

In 2014, China is—set in motion a massive effort to indigenize 

its semiconductor ecosystem with the goal of becoming the global 

leader in all major segments of the industry by 2030. Core to this 

effort are substantial government subsidies. Altogether an estimated $90-$100 billion in government financial support has been 

earmarked to support the sweeping undertaking. Similarly, Chinese industrial policies in sectors such as solar, wind, and LEDs 

have led to major distortions in the marketplace and left lots of 

wreckage, so we know what that picture show looks like. 

To maintain U.S. leadership in the semiconductor industry, the 

U.S. Government must develop a comprehensive and adequately 

resourced competitiveness and innovation agenda. Other steps need 

to be taken. First, let’s eliminate tariffs, the recently imposed tariffs on semiconductors. Slapping tariffs on our products only hurts 

U.S. semiconductor companies, while failing to address the real 

problems we’re having with China. Chinese semiconductor companies don’t even send their products to the U.S., so Chinese enterprises are not hurt by tariffs. 

Second, strengthen multilateral actions with U.S. allies. Multilateral pressure is one of the few tactics that has historically prompted China to change course in a positive direction. 

Third, strengthen protection of IP. Press harder on China to 

adopt policies and engage in stronger IP enforcement to prohibit 

and penalize state or state-owned enterprises from misappropriating trade secrets or proprietary technologies generally and especially through activities related to the hiring of overseas talent. 

Finally, help the U.S. run faster with increased Federal investment in research. While the U.S. has long been the leader in semiconductor R&D, Federal investment in this area is simply not keeping pace with nation-state competitors. 

The United States is at a critical juncture. It’s facing intense 

global competition from China in multiple high-tech sectors, including semiconductors. While our nation continues to dominate leading technologies from semiconductors to aerospace, we must not be 

complacent. There are real near-term and long-term challenges 

that require closer collaboration between industry and government 

to ensure we retain our technological leadership in key technology 

arenas. 

Thank you. 

[Prepared statement of Mr. Neuffer follows:] 


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El I A SEMICONDUCTOR 

INDUSTRY 

ASSOCIATION 

Written Testimony from the 

Semiconductor Industry Association 

Regarding 

"Countering China: Ensuring America Remains the World Leader in Advanced 

Technologies and Innovation" 

Hearing by the House of Representatives Committee on Oversight and Government Reform, 

Subcommittee on Information Technology 

September 26, 2018 

The Semiconductor Industry Association (SIA) appreciates the opportunity to testify before this 

Committee regarding one of the most pressing challenges facing our nation today: how to 

maintain America's leadership position in advanced technologies in light of strengthened 

international competition, particularly from China. China is the largest market for the U.S. 

semiconductor industry. At the same time, SIA and many other industry groups have concerns 

with China's policies and practices that threaten IP and distort market access. 

SIA is the voice of the U.S. semiconductor industry, one of America's top export industries and a 

key driver of America's economic strength, national security, and global competitiveness. 

Invented right here in America, semiconductors are the building blocks upon which U.S. 

technological leadership rests, powering virtually all modem electronics used in 

communications, computing, transportation, health care, energy, and military systems, along 

with many other sectors at the forefront of U.S. competitiveness. 

U.S. chipmakers lead the world with close to half of the $412 billion global 

semiconductor market. 

Semiconductors are the nation's fourth largest export, after aircraft, refined oil, and 

automobiles. 

The U.S. has a global semiconductor trade surplus of over $6 billion and a semiconductor 

trade surplus with China of $2 billion in 2017. 1 

Nearly half of the manufacturing operations of major U.S. semiconductor firms are 

located here in the United States, across 19 states, directly employing close to 250,000 

workers with well-paying jobs and supporting over one million additional indirect jobs 

throughout our economy. 

The U.S. semiconductor industry is one of the most research-intensive industries, 

investing 18.7 percent of revenue annually in research and development (R&D)-- the 

second-highest rate of any U.S. industry in 2017. 

As the world's largest exporter of electronic goods powered by semiconductors, China is a 

critical market for many U.S. semiconductor companies. In 2017 alone, China exported $600 

1 Official U.S. government trade data, U.S. Department of Commerce, obtained from the U.S. International Trade 

Commission, Dataweb: https://dataweb.usitc.gov/. 
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billion in electronic goods powered by semiconductors, representing nearly one third of all 

Chinese exports. 2 This includes over $140 billion in personal computers and nearly $220 billion 

in smartphones produced in China in 2017.3 Correspondingly, China is the fastest growing and 

single-largest market for semiconductors, accounting for about one third of global semiconductor 

sales in 2017. Unsurprisingly, it is also a leading destination for U.S. semiconductor exports. 

Today, the U.S. semiconductor industry is the leader in the China market, capturing a little over 

half of China market sales in 2017, totaling $66.4 billion. This is the largest market share the 

U.S. industry enjoys in any region.4 Thus it is critical that U.S. semiconductor companies are 

able to access the China market and continue to do business there. At the same time, SIA 

companies face a growing number of Chinese government policies and practices that threaten IP, 

market access, and the competitiveness of U.S. semiconductor companies. 

I. Chinese Government Forced Technology Transfer, IP Theft & Import Substitution 

Practices 

The U.S. semiconductor industry invests nearly $36 billion in research and development 

annually. So protecting the fruits of this research is critical to our competitiveness. In particular, 

we are concerned with Chinese actions, policies, and practices that force the transfer or outright 

theft of U.S. semiconductor technology.5 Numerous official policy pronouncements and 

statements by senior Chinese government officials reveal an intent to use government measures 

to force the transfer ofiP and technology and engage in import substitution (replace imports of 

foreign products with domestic technology). 

1) The Chinese government, in conjunction with state-owned or state-influenced electronics 

companies, applies informal pressure on foreign technology suppliers to transfer 

technology as condition of access to the large and growing Chinese market. 

2) Chinese cybersecurity rules and measures either require the direct disclosure of 

intellectual property, and/or put tremendous pressure on foreign tech firms to find local 

partners to help them comply with these rules. 

3) Some in the industry face challenges due to economic espionage. Indeed, a report by the 

U.S. intelligence community noted that "China has expansive efforts in place to acquire 

U.S. technology to include sensitive trade secrets and proprietary information."6 

Unfortunately, a small number of Chinese government or state-owned institutions, and/or 

individuals acting on their direction, may choose to steal or misappropriate the targeted 

technology from foreign firms as a short-cut to developing the technology. 

2 General Administration of Customs, People's Republic of China, found at: http://www.gov.cn/xinwen/2018-

01112/content 5255987.htm#l. 3 Ministry oflndustry and Information Technology of the People's Republic of China, found at: 

http:/ /www.miit.gov.cn/n ll46312/nll46904/nl6483 73/c6048688/content.html. 4 U.S. total exports of semiconductors in 2017 were $44 billion, of which $5.9 billion go to China directly. Due to 

global supply chains and the prominence of the fabless-foundry business model, most U.S. semiconductors are not 

sold or shipped directly to China. 

'For a more detailed assessment of semiconductor industry challenges in China, please refer to SIA's "Written 

Comments to USTR Regarding the Initiation of a Section 301 Investigation into China's Acts, Policies and Practices 

Related to Technology Transfer, Intellectual Property, and Innovation." October 5, 2017. 

https://www.regulations.gov/document?D=USTR-2017-0016-005 7 6 https://www.dni.gov /files/NCSC/documents/news/20 180724-economic-espionage-pub.pdf 

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II. China's Semiconductor Industrial Policy & Subsidies 

These policies should be understood within the broader context of Chinese industrial policy for 

the semiconductor industry. Today, Chinese domestic semiconductor sales only account for five 

percent of the worldwide market as Chinese firms struggle to compete in any of the advanced 

semiconductor technology segments. Due to this perceived strategic vulnerability, the 

government in Beijing set a formidable initiative in motion to build and enhance its own 

homegrown semiconductor industry.7 In June 2014, China released the "Promotion of a National 

IC Industry Development Guidelines," which call for the development of an entire 

semiconductor industry ecosystem within China, with the goal of becoming the global leader in 

all major segments of the industry by 2030. 8 One of the explicit objectives of China's IC 

industry promotion effort is to increase its semiconductor industry's share of the domestic 

market from the current level of under 20 percent to a minimum of70 percent by 2025. These 

Guidelines are consistent with efforts underway in China to indigenize the broader ICT sector 

and establish so-called "secure and controllable" technologies. 

Core to China's IC promotion efforts are substantial central and local government and/or statedirected subsidies in the form of investment funds, credit lines, or grants designed to build or 

acquire a leading semiconductor industry. Of course, this kind of government intervention can 

have serious market-distorting effects. As of September 2018, the central government IC Fund 

has committed 138 billion RMB ($21 B USD) to 55 projects. Altogether, an estimated $90-100 

billion in government financial support has been earmarked to support China's domestic 

industry. These funds alone demonstrate the Chinese government's commitment towards 

boosting its self-sufficiency in semiconductor technology and capturing a greater share of the 

global market. 

III. How to Maintain American Technological Preeminence 

To maintain U.S. leadership in the semiconductor industry (and for that matter in other tech 

industries), the U.S. government needs to develop a comprehensive and appropriately resourced 

competitiveness and innovation agenda. SIA recommends the following approaches to help 

make the U.S. a more competitive environment for manufacturing, innovation, exporting our 

products, and job growth and thereby contribute to maintaining and growing semiconductor 

technology leadership. 

A. Eliminate Tariffs on Semiconductors 

SIA supports the administration's goal to address discriminatory and burdensome trade practices 

of the Chinese government. As stated in our multiple public submissions related to the Section 

301 investigation, however, imposing tariffs on semiconductors and semiconductor-related 

products not only fails to address the problematic Chinese forced tech transfer policies and IP 

7 China's Next Target, U.S. Microchip Hegemony. Wall Street Journal, July 27, 2017. Online, Available at: 

https://www. wsj.com/articles/chinas-next-target-n-s-microchip-hegemony-1 SO 1168303 8 China Daily: China Announces Measures to Boost IC Industry. Jnne 26, 2014. Online, available at: 

http:/ /usa.chinadaily .com.cnlbusiness/20 14-06/25/content _17 613 997.htm 

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theft that is the subject of the investigation, but it undermines U.S. industry and technology 

leadership. 9 

At present, Chinese companies export almost no semiconductors to the U.S. market In reality, 

the vast majority of U.S. semiconductor imports from China are semiconductors designed and/or 

manufactured in the United States and shipped to China for the final stage of semiconductor 

fabrication known as assembly, test and packaging. These are low-value processes that add only 

about 10 percent of the value to the chips. U.S. tariffs on semiconductors misdirect penalties 

toward the U.S. semiconductor industry, while failing to curtail Chinese discriminatory trade and 

unlawful IP practices. 10 

We instead call on the Administration to explore more effective approaches and targeted 

policies, as discussed below. 

B. Strengthen Multilateral Action with U.S. Allies 

In order to maintain U.S. leadership in the semiconductor industry, the administration and 

Congress need to work together with allies to adopt and promote a stronger rules-based trading 

system. Multilateral pressure is one of the few tactics that has historically prompted China to 

change course. For example, in 2004, China proposed an international standard for wireless 

security, "Wireless Authentication and Privacy Infrastructure (WAPI)." China subsequently 

tried to make this standard mandatory for wireless LAN equipment imported for use in China. 

The U.S. government partnered with the European Commission and Japanese government to 

compel the Chinese government to stand down, rightly pointing out that its requirements were 

discriminatory and served as a market access barrier to foreign ICT. Another example of 

successful multilateral pressure is China's suspension of its 2009 requirement that all computers 

sold in China be installed with "Green Dam-Youth Escort" screening software. This Chinesedeveloped software had clear "censor-ware" capabilities with intrusive surveillance potentiaL 

The international business community, rights groups, and NGOs, as well as governments of the 

United States, Japan, and EU applied intense pressure on numerous fronts. And, the Chinese 

government suspended the program, which not seen the light day again since then. We 

encourage the U.S. government to work with its allies in multilateral fora, including the 

9 I. SIA's "Written Comments to USTR Regarding the Initiation of a Section 301 Investigation into China's Acts, 

Policies and Practices Related to Technology Transfer, Intellectual Property, and Innovation." October 5, 2017. 

https:i/www.regulations.gov/document?D=USTR-2017-0016-0057 

2. SIA Submission on the Proposed Determination of Action Pursuant to Section 301: China's Acts, Policies, and 

Practices Related to Technology Transfer, Intellectual Property, and Innovation. Docket Number USTR-2018-0005. 

May 14, 2018. https:/ /www.regulations.gov/document''D~USTR-20 18-0005-2555 

3. SIA Submission on the Proposed Determination of Action Pursuant to Section 301: China's Acts, Policies, and 

Practices Related to Technology Transfer, Intellectual Property, and Innovation. Docket Number USTR-2018-0018. 

July 20, 2018. https://www.regulations.gov/document?D~USTR-2018-0018-0538 

4 .. SIA Submission on the Proposed Determination of Action Pursuant to Section 301: China's Acts, Policies, and 

Practices Related to Technology Transfer, Intellectual Property, and Innovation. Docket Number USTR-2018-0026. 

September 6, 2018. https://"ww.regulations.gov/document?D~USTR-2018-0026-6032 

10 See SIA Submission on the Proposed Determination of Action Pursuant to Section 301: China's Acts, Policies, 

and Practices Related to Technology Transfer, Intellectual Property, and Innovation. Docket Number USTR-2018-

00 18. July 20, 2018. 

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Government Authorities Meeting on Semiconductors (GAMS) to press China to changes its 

unfair practices related to IP theft and forced technology transfer, and increase transparency. 

C. Enforce China's International Commitments 

While SIA supports efforts to strengthen WTO rules, the GATT and WTO disciplines remain 

reasonably effective, but not sufficiently enforced. There is a widespread lack of compliance by 

China on the subsidies front with the transparency, notification, and surveillance obligations in 

Part VII of the WTO Subsidies Agreement, and an accompanying lack of enforcement by the 

Subsidies and Countervailing Measures Committee and their respective domestic trade authorities. 

SIA, through the U.S. Information Technology Office in China (USITO) has provided more details 

on China's IC subsidies to USTR in response to the Federal Register on China's Compliance with 

its Accession Commitments to the WTO. 

D. Strengthen Protection of IP 

The U.S. government should press China to adopt policies and engage in stronger IP 

enforcement to prohibit and penalize state or state-owned enterprises (SOEs) from 

misappropriating trade secrets or proprietary technologies through activities related to the hiring 

of overseas talent. This should include initiation of a public and transparent national audit by 

China's IPR enforcement agencies into current hiring practices within China's state-owned 

semiconductor firms, with a commitment to prosecute any and all identified illegal activity and 

verified execution of that commitment. Patent and trade secrets disputes should be adjudicated 

by Chinese courts in a fair and impartial process that does not favor domestic companies over 

foreign companies. To help drive toward these objectives, the U.S. and China should create an 

annual review mechanism to ensure third-party review of any disputes that allege discriminatory 

rulings. 

E. Ensure a More Competitive Policy Environment in the U.S. 

Our global competitors are investing and working actively to grow their own semiconductor 

industry, and the U.S. needs to adopt policies that will enable U.S.-based companies to run faster 

and compete more effectively. Three ways the U.S. can increase domestic competitiveness 

include: 

• Increase Federal Investment in Research Federal investment in research has 

played a critical role in supporting America's technology leadership and our national 

security. The semiconductor industry is unique in its sustained partnership with 

civilian and defense research agencies over decades to invent and develop enabling 

technologies that help address critical national security needs and have led to 

ubiquitous commercial products and systems that underpin our nation's growth and 

productivity. Federal investment in basic research is supplemented by the 

semiconductor industry's huge investment in applied R&D, amounting to nearly $36 

billion (approximately one-fifth of revenue, among the highest of any industry). This 

investment depends on precompetitive university research to provide the fundamental 

advances. While the U.S. has long been the leader in semiconductor R&D, federal 

5 
11 


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investment in this area is not keeping pace with nation-state competitors who are 

poised to challenge U.S. leadership in the coming years. The U.S. should 

significantly increase its investments in research in semiconductor-related fields, 

conducted at American universities and national labs and in collaboration with the 

semiconductor industry. Funding basic research at America's colleges, universities, 

and national labs plays a critical and equally important role in supporting the 

"pipeline" of talent for the next generation of semiconductor innovators, thereby 

strengthening America's technology workforce. 

• Strengthen America's Semiconductor Workforce- The success of the U.S. 

semiconductor industry is due to the talent and skills of our workforce. America's 

technology leadership is dependent on our country's ability to develop and attract the 

best technologists and engineers in the world. SIA calls on the administration to take 

action to ensure the U.S. workforce remains the best in the world, including: (a) 

incentivizing qualified STEM graduates to work in the U.S. semiconductor industry 

by, for example, forgiving tuition loans for such graduates; (b) increasing long-term 

funding for STEM education in primary and secondary schools as a means of 

building the American technology workforce of the future; and (c) enacting 

immigration reforms that expand the number of"green cards" for STEM graduates 

educated at U.S. colleges and universities, thereby enabling the semiconductor 

industry to attract and retain the best and brightest from around the world. 

• Implement Appropriate and Balanced Export Controls- SIA strongly believes U.S. 

national security and economic competitiveness interests are most effectively 

advanced by an export control system that focuses on national security and foreign 

policy as the exclusive bases for U.S. dual-use controls. In order to avoid unduly 

controlling non-sensitive, commercial semiconductor technology, SIA encourages the 

regular review of U.S. export controls to ensure that regulations remain up-to-date, 

reflect the current state of semiconductor technology, and are properly tailored to 

national security objectives. SIA also encourages the U.S. government to advance 

multilateral export controls adopted by all major semiconductor-producing nations, 

rather than unilateral controls only applied to U.S. companies that generally fail to 

restrict the transfer of emerging and foundational technology developed outside the 

United States. Multilateral controls are also necessary to avoid putting U.S. 

technology companies at a competitive disadvantage. 

IV. Conclusion 

The United States is at critical juncture. It is facing intense global competition from China in 

multiple high-tech sectors, including semiconductors. While our nation continues to dominate 

leading technologies from semiconductors to aerospace, and the gap with China remains 

significant, we cannot be complacent with our current leadership. There arc real ncar- and longterm challenges that require closer collaboration between industry and government to ensure we 

retain our technological leadership in key areas. We need to address China's unfair practices in a 

targeted, productive way, and at the same time double down on our own technological 

advantages through increased government investments and other means. 

6 
12 

Mr. HURD. Thank you, sir. 

Mr. Cheng, you are now recognized for your opening remarks. 

STATEMENT OF DEAN CHENG 

Mr. CHENG. Good morning, Chairman Hurd, Ranking Member 

Kelly, members of the subcommittee and committee. My name is 

Dean Cheng. I’m the senior research fellow for Chinese political 

and security affairs at The Heritage Foundation. My comments this 

morning are my own. 

My comments this morning are intended to provide some context 

for better understanding the Chinese approach to information and 

information technology. Three key aspects underlie the Chinese 

view of the world and in particular their approach to information 

and communications technology: comprehensive national power, the 

period of strategic opportunity, and the impact of living in the information age. 

Comprehensive national power is how the Chinese compare the 

world’s various nations, how do they rack-and-stack Bolivia, Botswana, Brazil, the United States. It includes all aspects of national 

power, military capability, economic capacity, political unity, diplomatic respect, even cultural security. 

Science and technology writ large, but especially information 

technology, contributes to and affects all three aspects—all of these 

aspects of comprehensive national power. It improves the economy, 

enhances military effectiveness, and can even elevate cultural security and strengthen political unity. It’s also important to recognize 

that in the Chinese context, scientists and the scientific community 

often have an outsized political impact, and I would point to the 

example of the Chinese scientist Qian Xuesen, who was a combination of J. Robert Oppenheimer, Albert Einstein, and Robert Goddard in the Chinese context and had an enormous political influence. 

The period of strategic opportunity is from the Chinese perspective the first two decades of the 21st century. It is a period marked 

by low probability of war and therefore an important moment for 

China to focus on national development, to elevate GDP, GDP per 

capita, level of national infrastructure, and, again, level of science 

and technology capacity. Exploiting the period of strategic opportunity is central because it will allow China to catch up with the 

rest of the world and will include both internal domestic efforts, as 

well as exploiting ties to the outside world. 

And here the fact that we live in the information age becomes 

central because the rise of the information age facilitates China’s 

access to the rest of the world’s R&D capacity but also provides a 

focus for China’s internal development. The rise of the information 

age means that future power is going to be measured not simply 

in an industrial capacity, how many gigawatts of power do you 

produce, how many millions of tons of bauxite do you refine, but 

in terms of the ability to generate, to gather, to analyze, to exploit, 

and to transmit information more rapidly and more accurately both 

within China but around the world. And so within this context information and communications technology, ICT, plays an especially 

outsized role, given its impact as the basic metric for future power. 


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13 

It is—should therefore not be surprising then that China is focused on developing information, not just ICT as we tend to think 

of it, whether it’s semiconductors or 5G, but ancillary and related 

aspects, software, social media, even space. Space is seen as a vital 

part of information technology because it is a central means of both 

transmitting and gathering information. 

Again, it should not be a surprise that for the Chinese of particular emphasis is so-called ABC: artificial intelligence, big data, 

and cloud computing. In each of these areas the Chinese are pushing their state champions. It should be noted these are not necessarily state-owned enterprises, but all Chinese companies at the 

end of the day are state-influenced, and therefore, may not be directly working for China but are certainly not going to say no the 

way Google has over Project Maven. 

The Chinese do see all of this information revolution as fundamentally altering the state of play among nations, much like 

HMS Dreadnought instantly made all warships around the world 

obsolete. The Chinese believe that ICT is providing an opportunity 

to in a sense reset the global balance of power. 

In this context, however, I do want to emphasize to the members 

of the committee that the Chinese are not simply stealing. This is 

not of course to say that they don’t steal but that they have spent 

an enormous amount of effort and energy to promote indigenous innovation, and therefore, it would be a horrible mistake for us to believe that if we simply could curtail theft, that China will inevitably fall behind. You cannot look at the amount of sustained effort 

and investment and believe that China is going to allow itself to 

fall behind. 

Let me conclude then with just a couple of quick thoughts on solutions, one of which is that if the issue is about stolen technology, 

then we should perhaps treat Chinese companies as dealing in stolen goods. And we have an extensive legal array of measures to 

deal with that. If it is about information, however, then for China 

it is as much about information access as it is about the information goodness itself. 

Thank you very much. 

[Prepared statement of Mr. Cheng follows:] 


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'TiieHetitage Foundation 

CONGRESSIONAL TESTIMONY 

"China's High Technology Challenge to the United States" 

Testimony before 

Committee of Oversight and Government Reform 

United States House of Representatives 

September 26, 2018 

Dean Cheng 

Senior Research Fellow 

The Heritage Foundation 

My name is Dean Cheng. I am a Senior Research 

Fellow at The Heritage Foundation. The views I 

express in this testimony are my own and should not be 

construed as representing any official position of The 

Heritage Foundation. 

Over the past three decades, the American view of the 

People's Republic of China (PRC) as a potential 

competitor in various areas of high technology has 

steadily evolved. In the 1980s, a decade after Deng 

Xiaoping began his policy of"Reforrn and Opening," 

China was still seen as primarily a source of cheap 

goods of limited sophistication. China's economic 

growth, however, saw not only an expanding array of 

goods, but a steady increase in their sophistication. 

Today, China is seen as a near-peer competitor in 

terms of its scientific and technological prowess. 

Chinese supercomputers are among the world's 

fastest, while China is now their leading 

1

Ben Guarino, Emily Rauhala and William Wan 

"China Increasingly Challeng~s American Domi~ance of Science," Washington Post, June 3, 2018, 

https://www.washingtonpost.com/nationallhealthscience/china-challenges-american-dominance-ot~ 

science/20 18/06/03/c I e0cfe4-48d5-lle8-827e190efafl flee story.html?noredirect on&utm term . 79 

778c5f5aae (accessed September 18, 2018). 

manufacturer. The world's largest radio telescope is 

located in China. A Chinese lunar probe will make an 

unprecedented landing on the far side of the Moon. 

American policymakers have worried about the 

effects of a Chinese lead in quantum computing and 

artificial intelligence development. 1 

At the same time, the Chinese Communist Party 

(CCP), the ruling element within the PRC, sees itself 

as both competing with the United States and in a 

period of "strategic opportunity."' The implication is 

that the current competition is most likely to remain 

peaceful, focused on the non-military aspects of 

"comprehensive national power," and affording the 

PRC a historic opportunity to catch up with the more 

developed countries of the West, including the United 

States, Europe, and Japan. 

"Comprehensive National Power" in the "Period 

of Strategic Opportunity" 

2 Chen Erhou, Liu Zhen, et. al., HSeize the Strategic 

~portunity and Concentrate Progressive Energy," 

Xmhua, March4, 2018, 

http://www.xinhuanet.com/oolitics/20 !Slh/20 18-

03/04/c 1122483315.htm (accessed September 23, 

2ill.[l, and Li Junru, "Fully Recognize Our Nation's 

Vital Strategic Opportunity Period for National 

Development," Study Times, February 21,2011, 

http://theory.people.eom.cn/GB/13967607.html 

(accessed September 23, 2018) 

-------------------------- 214 Massachusetts Avenue, NE • Washington, DC 20002 • (202) 546-4400 • heritage.org 
15 


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CONGRESSIONAL TESTIMONY 

Central to understanding how the PRC views science 

and technology (S&T) is the idea of "comprehensive 

national power" (zonghe guojia liliang; g;f,i'!@J*;i] 

:11). According to the China Institute of Contemporary 

International Relations (CICIR), a Chinese think-tank 

associated with the Ministry of State Security, 

comprehensive national power (CNP) is the "total of 

the powers or strengths of a country in economics, 

military affairs, science and technology, education, 

resources, and influence."3 

One of the central lessons from the collapse of the 

Soviet Union was Moscow's over-emphasis on the 

military, while neglecting other elements of national 

power. For China, given that it is starting from an even 

lower level of national development, the focus has 

been on improving all the elements of CNP. 

This, in turn, means advancing the various strands of 

national power that defme a nation and, as important, 

how it compares with other states. CNP includes both 

hard and soft power. It involves not only military 

capability and economic strength, but also diplomatic 

respect, political cohesion, and levels of scientific and 

technical attainment. 

In this context of lifting China's CNP, science and 

technology plays an increasingly pivotal role since it 

affects multiple strands of power, including the 

economy and the military. Lack of scientific and 

technological progress condenms a nation to secondclass status, forever reacting to developments 

elsewhere. Advances, on the other hand, allow a 

nation to set the terms of economic and military 

engagement. 

The role of science and technology has accelerated in 

the past several decades. According to Chinese 

assessments, the world has shifted from the Industrial 

Age to the Information Age. National economic 

3 China Institute of Contemporary International 

Relations, Global Strategic Pattern-International 

Environment of China in the New Century (Beijing: 

Shishi Press, 2000), cited in Hu Angang and Men 

Honghua, "The Rising of Modern China 

Comprehensive National Power and Grand Strategy." 

4

State Council Information Office, China's Military 

Strategy (Beijing, PRC: State Council Information 

Office, 2015), https:lljamestown.org/wpcontent/uploads/20 161071China%E2%80%99sMilitary-Strategy-2015.pdf (accessed September 18. 

power is no longer a function of just industrial output 

(e.g., tons of bauxite smelted or steel produced). 

Instead, it is increasingly affected by the ability to 

gather, transmit, and generate accurate information 

rapidly. The developments in the area of infonnation 

and communications technology (ICT) has led to a 

revolution in the measure of national power, which in 

turn has widespread political, social, and military 

ramifications. 

ICT, however, is itself the product of a number of 

disciplines, including software engineering, 

microchip design, batteries and energy storage, and 

also is related to aerospace technologies (e.g., 

communications satellites), electromagnetic spectrum 

management, and even maritime technology (in the 

laying of undersea cables). If the PRC is to compete 

in the Information Age, then it must develop 

capabilities in many if not all of these sub-disciplines 

and associated fields. 

The interest in improving China's level of science and 

technology has redoubled during this "period of 

strategic opportunity." The Chinese assess the first 

decades of this century as a period of relative 

quiescence, with few direct threats to Chinese 

security. Consequently, now is the opportunity for 

China to improve its economic and technological 

competitiveness, elevate its international standing, 

and make the leap to a mid-level power (in the 

Chinese conception) 4 As Xi Jinping declared at the 

19th Party Congress in 2017, China will use the 

current period to improve its standing. By the middle 

of the 21st century, according to Xi, China will have 

become "a global leader in terms of comprehensive 

national power and international influence."' 

In the Chinese view, demonstrating prowess in 

various fields of scientific endeavor enhances China's 

reputation in terms of both soft and hard power. With 

the former, it makes China a more desirable partner in 

2Ql.[l, and Ian Rinehart, "The Chinese Military: 

Overview and Issues for Congress," Congressional 

Research Service, 2016, p. 9, 

httos://fas.org/sgplcrs/row/R44196.pdf (accessed 

September 18, 2018). 

'Bonnie Glaser and Matthew Funaiole, "Xi Jinping's 

19th Party Congress Speech Heralds Greater 

Assertiveness in Chinese Foreign Policy," The Lowy 

Interpreter, October 26,2017, 

httos://www .lo\\yinstitute.org/the·interoreter/ 19th· 

partv-congress-more-assertive-chinese-foreign-policy 

(accessed September 18, 2018). 

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CONGRESSIONAL TESTIMONY 

·~--···-·--········----·· ··--·-··--------··· 

both economic and scientific projects. At the same 

time, an advanced scientific and technological base 

can have a deterrent effect on potential adversaries, 

since it implies that China can field sophisticated 

military systems. 

To this end, improving China's scientific and 

technological capabilities is a clear priority. 

A Long-standing Interest in S&T 

It is not a new priority, however. When Deng 

Xiaoping came to power in 1978, the PRC was an 

economic disaster. The policies of Mao Zedong from 

1949 to 1978, emphasizing central planning, forced 

draft industrialization and economic isolation. Deng's 

policies, which refonned all of these aspects, laid the 

foundation for the subsequent forty years of growth. 

China's annual gross domestic product (GDP) growth 

from 1979 to 2016 has averaged 9.6 percent. "This has 

meant that on average China has been able to more 

than double the size of its economy in real tenns every 

eight years."6 

One of the key reasons for this growth was Deng's 

reassessment of the "tenor of the times." Under Mao 

Zedong, the Chinese leadership operated under the 

belief that a major war between the capitalist and 

socialist camps was likely. Moreover, after the SinoSoviet split of 1960, there was also the likelihood of a 

Chinese war with the Soviet Union. 

Consequently, the PRC had to prepare for "major war, 

early war, nuclear war." Chinese economic efforts 

were focused on supporting a protracted conflict that 

would likely include nuclear strikes on Chinese soil, 

and a potential invasion by the Soviet Union. Not only 

was major investment focused on supporting military 

industries, but many factories were inefficiently 

distributed across China, to help sustain an extended 

resistance by guerrilla forces. 

Deng, however, concluded that the current era was not 

marked by the likelihood of war, but was one of 

"Peace and Development." Far from facing the 

prospect of imminent war, according to Deng, there 

was only a limited likelihood of great power conflict. 

6

Wayne M. Morrison, "China's Economic Rise: 

History, Trends, Challenges, and Implications for the 

United States," RL 33534, Congressional Research 

Service, February 2018, p. 5, 

https:/ lfas.org/sgp/crslrow/RL3 3534 .pdf (accessed 

September 18, 2018). 

China could therefore safely adjust its priorities, and 

focus on improving its economy. Deng therefore 

slashed the size of the People's Liberation Army 

(PLA), and also redirected resources towards building 

commercial industries. Military industries were given 

the stark choice of going out of business or shifting 

their products to commercial goods for the civilian 

market. Deng's efforts are described by the Chinese 

as "Reform and Opening" (gaige yu kaifang; G.lC!'Ia~ 

:tftf{). 

Even in the early days of Chinese reform, however, 

there was a recognition that Chinese long-tenn 

competitiveness required investments in high 

technology. Chinese scientists approached Deng 

Xiaoping in 1986, proposing a national effort to foster 

certain high-technology sectors. Deng personally 

approved the National High-Tech R&D Program, 

"Plan 863," which fosters Chinese high-technology 

development in key technical fields deemed to be of 

particular strategic value. These include: 

Information technology, 

Bio-technology and advanced agricultural 

technology, 

Advanced materials technology, 

Advanced manufacturing and automation 

technology, 

Energy technology, and 

Resource and environment technology7 

Aerospace technology was also an early focus for Plan 

863. In the mid-1990s, the Chinese added marine 

technology to the list. Research areas included in Plan 

863 enjoy additional funding and priority access to top 

research facilities. 

Other Chinese technology development efforts 

include Plan 973, the National Basic Research 

Program, which supports research in "cutting edge" 

technology areas; the Key Technologies R&D 

Program, which apparently supports applied 

technology areas that aid manufacturing; the Spark 

Program, focused on technology benefiting rural 

7

PRC Ministry of Science and Technology, "National 

High-Tech R&D Program (863 Program)," 

httn:llwww.most.gov.cn!englprogrammesll (accessed 

September 18, 2018). 

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CONGRESSIONAl TESTIMONY 

areas; and the Torch Program, which supports 

commercialization of high technology. 8 

In February 2016, the Chinese press reported that 

several major technology programs, including Plan 

863 and 973, had been merged into a single new 

program, in order to improve efficiency. These reports 

indicate that the new program, operating under the 

PRC Ministry of Science and Technology, would 

support an initial group of 59 projects, and would 

"focus on key fields such as 

Biotechnology 

Space 

Information 

Automation 

Energy 

New Materials 

Telecommunications 

Marine Technology."9 

Within all of these areas, the expectation is that 

Chinese scientists will be leaders, not simply 

followers. That is, the Chinese are pushing for 

"indigenous innovation" (zizhu chuangxin; §'I .:E. 13U), 

and not simply copying (or stealing) foreign 

technology. 

Indeed, alongside the various funding programs 

intended to foster certain specific research areas has 

been a broader effort to push Chinese innovation, i.e., 

the application of S&T. In 2006, the PRC 

promulgated the "National Medium and Long-Term 

Program for Scientific and Technological 

Development," providing guidelines for areas of 

emphasis and funding through 2020. This plan 

8Joel R. Campbell, "Becoming a Techno-Industrial 

Power: Chinese Science and Technology Policy," 

Brookings Institution Issues in Technology Innovation 

No. 23, April2013, https://www.brookings.edu/wpcontentluploads/20 16/06/29-science-technology-policychina-campbell.pdf(accessed September 18, 2018). 

9

Chinese Academy of Sciences, "'China Inaugurates 

National R&D Plan," Xinhua, February 17, 2016, 

http://english.cas.cn/newsroom/china research/20 1602/ 

t20160217 159669.shtml (accessed September 18, 

2018). 

10National Research Council of the National 

Academies, The New Global Ecosystem in Advanced 

Computing (Washington, DC: National Academies 

Press, 2012), p. 99, 

marked the formal incorporation of "indigenous 

innovation" into Chinese strategic economic 

planning. It identified some 39 key areas, frontier 

technologies, and scientific and engineering 

megaprojects. 10 

The purpose of this program is to promote innovation 

within China, by Chinese scientists and research 

establishments, for the benefit of China. Elements 

include: 

A substantial increase in research and 

development (R&D) funding, to reach 2.5 

percent of GDP by 2020; 

Tax policies to promote investment in 

research by Chinese businesses; and 

A reduction in the reliance on foreign 

technologies11 

In association with the Medium and Long-Term 

Program, especially the effort to reduce reliance on 

foreign technologies, Chinese policymakers 

subsequently also created a system for accrediting 

products based on the level of national indigenous 

innovation. This system, announced in 2009, would 

initially be applied in six product areas, including 

computers and software, telecommunications 

products, and energy equipment. The assessed level of 

indigenous innovation would then be used to "guide" 

national, provincial, and local government 

procurement.12 

Not surprisingly, this effort to limit foreign access to 

Chinese markets led to a major international outcry. 

Even though the PRC eventually stepped back from 

this effort, however, the extent to which Chinese 

policymakers would go to promote indigenous 

https://www.nap.edulread/134 72/chapter/16 (accessed 

September 18, 20 18). 

11 Josef Bichler and Christian Schmidkonz, "The 

Chinese Indigenous Innovation System and Its Impact 

on Foreign Enterprises,)~ Munich Business School 

Working Paper 2012-1 (Munich, Germany; Munich 

Business School, 2012), p. 3, https:/lwww.munichbusinessschool.de/fileadmin/mbs datenldateien/working papers 

/mbs-wp-2012-0l.pdf(accessed September 18, 2018). 

12Jingxia Shi, "China's Indigenous Innovation and 

Government Procurement," Bridges, Vol. 14, No.3 

(September 16, 2010), https://www.ictsd.org/bridgesnews/bridges/newslchina%E2%80%99s-indigenousinnovation-and-government-procurement (accessed 

September 18, 2018). 

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CONGRESSIONAL TESTIMONY 

innovation was made clear. As important, it 

demonstrates how China can promote its own 

industries and encourage its S&T through the 

establishment and manipulation of technical and 

industrial standards. This approach is arguably more 

difficult to counter than outright theft of intellectual 

property, since it ostensibly employs market tools and 

legal measures. 

Additional Means of Accessing Advanced 

Technology 

The employment of accreditation also highlights the 

evolving set of tools available to Chinese decision 

makers in developing and acquiring advanced 

technologies. Not only does the Chinese government 

control access to a potentially enormous market, but 

the economic growth of the past four decades has 

given Beijing financial resources that allow it to 

purchase technologies and companies outright. 

Foreign companies that seek access to the Chinese 

market, especially those in key high-technology 

industries or sectors, are often only able to do so if 

they establish a local footprint. This may be in the 

form of an equity joint venture or a contractual joint 

venture. The former entails the creation of legal 

entities that have partial foreign ownership and partial 

Chinese ownership. The latter is the creation of a 

specific, contractually based entity, rather than a new 

organization. 13 While recent Chinese legal reforms 

have loosened which types of joint ventures are 

necessary for particular industries, and in some cases 

expanded the permissibility of wholly foreign 

investment, high-technology areas typically remain 

constrained. 

13Paul Edelberg, "Is China Really Opening Its Doors to 

Foreign Investment?" China Business Review, 

November 8, 2017, 

https://www.chinabusinessreview.corn!is-china-reallyopening-its-doors-to-foreign-investmentl (accessed 

September 18. 2018). 

14Matthew Nitkoski, "The Heat Is on for the Chinese 

Pharmaceutical Industry," CKGSB Knowledge, 

November 14,2016, 

http·//www.knowledge.ckgsb.edu.cn/2016/11/14/ ... 

/heat-chjnese-pharrnaceutical-industr:y/ (accessed 

September 18, 2018). 

15"Factbox: Chinese Investments in German 

Companies," Reuters, February 26,2018, 

As important, the Chinese system often encourages 

foreign companies to establish R&D facilities in the 

PRC, whether as part of a joint venture or not. As one 

observer of pharmaceuticals noted, "In principle, 

companies with local operations are eligible for fasttrack approval of new products." As a result, a number 

offoreign pharmaceutical companies have established 

research campuses in China. 14 

China has also increasingly tried to purchase foreign 

high-technology companies. Chinese efforts in the 

United States have at times been stymied by the 

Committee on Foreign havestraent in the United 

States (CFIUS), which can block foreign acquisitions 

of American companies if it is seen as posing a 

potential national security challenge. As a result, 

China has increasingly targeted European companies. 

Chinese investraents in Germany, for example, have 

risen substantially since 2015. China has acquired 

German plastics, biotechnology, and engineering 

firms. 15 The Chinese purchase of the German robot 

manufacturer Kuka for 4.4 billion euros 

(approximately $5.1 billion) in 2016 set off alarms, 

and has led to discussion of the establishment of a 

German equivalent of CFIUS to review foreign 

acquisitions of Gennan companies. 1

6 

Earlier in 2018, Chinese investors acquired the French 

chip manufacturer Linxens. The company's products 

are mainly used in security and identity applications. 

"The group's products are used in areas ranging from 

smartphones, transport cards, identity cards and 

passports to contact and contactless transactions and 

biometrics."17 

Ongoing Chinese Concerns 

httns://www.reuters.com/article/us-daimler-geelyfactbox/factbox-chinese-investments-in-gennancompanies-idUSKCN I GAl RO (accessed September 

18, 2018). 

16Benjamin Bathke, "China's Unsatisfied Hunger for 

German Companies," Deutsche Welle, July 12,2017, 

https://www.dw.com/en/chinas-unsatisfied-hunger-forgerman-companies/a-39658363 (accessed September 

18, 2018). 

l1Don Weinland, Harriet Agnew, and Javier Espinoza, 

"China's Unigroup Buys French Chipmaker Linxens 

for $2.6 Billion," Financial Times, July 25,2018, 

https:/ iwww.ft.com/ conten1Jf919b032-8 fe5-11 e8-b639-

7680cedcc421 (accessed September 18, 2018). 

-----------------------------· 

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CONGRESSIONAL TESTIMONY 

Despite these efforts, however, Chinese leaders 

remain concerned about the state of China's hightechnology capabilities. In key teclmology areas, 

China remains heavily dependent on foreign sources. 

A World Bank study in 2012 concluded that China 

had a $10 billion intellectual property deficit; that is, 

China imported some $10 billion more than it 

exported. 18 Despite Chinese investments in high 

technology in the intervening six years, it is not clear 

how much the situation has changed. 

In 2018, for example, the United States announced 

that it would impose a seven-year ban on sales of 

microprocessors and other components to Chinese 

telecommunications company ZTE. Jt soon emerged 

that such a ban would effectively kill China's second 

largest telecommunications company. Nor is ZTE 

unique; many other major Chinese companies, 

including key state-owned enterprises such as Petro 

China, depend on Western high teclmologies for their 

operations. 19 

China's "Made in 2025" program, where the Chinese 

hope to be able to become largely autonomous in key 

manufacturing areas by 2025, should therefore be 

seen as part of the larger effort to promote Chinese 

science and technology, not only in terms of 

innovation and R&D, but sustaining China's industry 

by localizing the entire technology development, 

commercialization, and production process. 

******************* 

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at any level, nor does it perform any government or other contract work. 

The Heritage Foundation is the most broadly supported think tank in the United States. During 2017, it had 

hundreds of thousands of individual, foundation, and corporate supporters representing every state in the U.S. Its 

2017 income came from the following sources: 

Individuals 71% 

Foundations 9% 

Corporations 4% 

Program revenue and other income 16% 

The top five corporate givers provided The Heritage Foundation with 3.0% of its 2017 income. The Heritage 

Foundation's books are audited annually by the national accounting firm ofRSM US, LLP. 

Members of The Heritage Foundation staff testify as individuals discussing their own independent research. The 

views expressed are their own and do not reflect an institutional position for The Heritage Foundation or its board 

of trustees. 

18UNESCO, "China: Taking Stock of Progress Toward 

Becoming an Innovation-Driven Nation," Science, 

Technology and Innovation Policy, December 2, 2016, 

http://www.unesco.org/new/en/naturalsciences/science-technology/single-view-scpolicvlnews/china taking stock of progress towards 

becoming an innovati/ (accessed September 18, 2018). 

19Jean Baptiste Su, "Analysis: ZTE's Collapse Reveals 

China's Huge Dependence on U.S. Technologies," 

Forbes, April22, 2018, 

httos:/lwww. forbes.com/sites/jeanbaptiste/20 18/04/22/a 

nalysis-ztes-collapse-reveals-chinas-huge-dependenceon-u-s-technologies/#623 7918b7326 (accessed 

September 18, 2018). 

6 
20 

Mr. HURD. Ms. Cook, you are now recognized for your opening 

remarks. 

STATEMENT OF SARAH COOK 

Ms. COOK. Chairman Hurd, Ranking Member Kelly, and members of the subcommittee, thank you. It is an honor to testify. 

Last fall, the Chinese Communist Party declared its aspirations 

for China to become a, quote, ‘‘cyber superpower.’’ A September 

2017 article in a top party journal lays out China’s strategy for 

achieving this status and is surprisingly candid about the party’s 

ambitions and motives, including, one, increasing domestic Chinese 

internet controls to ensure authoritarian longevity so that, quote, 

‘‘The party’s ideas always become the strongest voice in cyberspace,’’ end quote; two, using the technology sector as a foundation 

to secure China’s economic health, including by enhancing the global influence of Chinese tech giants; and three, expanding information controls beyond China’s borders in order to, quote, ‘‘push China’s proposition of internet governance toward becoming an international consensus,’’ end quote. 

Prioritization and effective implementation of such strategies has 

emerged as a hallmark of Xi Jinping’s leadership of the Chinese 

Communist Party. Xi has a sophisticated understanding of how the 

internet and social media applications function, and he’s proven 

himself adept at closing previously existing loopholes in internet 

controls. Indeed, over the past year alone China has taken new 

strides in technological advancement, censorship, surveillance, and 

international expansion. 

The Communist Party’s cyber ambitions directly and negatively 

impact U.S. companies. China is home to over 800 million internet 

users, but many of the world’s top technology and social media 

firms are banned or extremely constrained in their ability to provide services to them, including Facebook, Twitter, and Google. A 

2016 survey by the American Chamber of Commerce found that 79 

percent of U.S. companies reported that Chinese Government internet’s restrictions hurt their businesses. 

Chinese technology firms have been at the forefront of the party’s 

censorship and surveillance efforts, but American and international 

firms are increasingly implicated. The Chinese Government is 

adept at using the combination of its ability to block online services 

and allure of its enormous domestic market to extract concessions 

from foreign firms, including assistance with its censorship and 

surveillance system. Under China’s new cybersecurity law, foreign 

companies operating in China are also increasingly at risk of becoming complicit in politicized arrests. 

As Chinese and foreign companies take more steps to appease 

the regime, the human toll will continue to mount. Censorship and 

surveillance on sensitive topics like Taiwan, Tibet, Xinjiang, and 

Falun Gong either whitewash or actually exacerbate large-scale 

human rights violations, including mass detentions, torture, and 

extrajudicial killings. Ironically, the complicit companies are also 

victims of the government’s repression. They suffer from the arbitrary nature of Chinese regulatory decisions, reduced profit margins, and distrust abroad due to close Chinese Government ties. 


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China and the Communist Party’s cyberspace policies and strategies are complex and multilayered. They require an equally sophisticated response. I would urge the committee to consider the following recommendations: One, the United States should be 

proactive in developing its own capabilities and upholding international free speech and privacy standards. This should include developing a comprehensive 5- to 10-year national strategy on artificial intelligence. 

Two, the United States Government should encourage the business community to take a principled stance vis-?-vis Chinese Government internet controls. This should include reintroducing and 

passing the Global Online Freedom Act, which would designate 

internet-restricting companies and impose certain requirements on 

companies doing business in those places. 

And three, the United States should be proactive in challenging 

the very clear authoritarian foundations of the Communist Party’s 

cyberspace strategy. A central pillar of this effort should be increasing both the scale and effectiveness of funding for countering 

censorship efforts specifically related to China. The Chinese Government is spending billions of dollars a year not only to keep Chinese people from freely accessing the internet but also to keep U.S. 

companies from offering services to the largest internet market in 

the world. Some of the first websites Chinese users visits after 

jumping the so-called Great Firewall are actually sites like Google, 

Facebook, and Twitter. Supporting Chinese internet users’ ability 

to access these websites not only enhances internet freedom but 

also U.S. economic competitiveness. 

In this context, I urge the committee to investigate and report on 

whether current U.S. Government funding for internet freedom in 

China is being deployed in the most effective manner to address today’s challenges. This would involve seeking information from the 

Broadcasting Board of Governors and the State Department on 

questions such as how much internet freedom funding has been allocated to China? How many users in China have benefited? Does 

this appropriately match the needs and demands of users, as well 

as U.S. interests in policy goals vis-?-vis China? 

Funding efforts to date have undoubtedly done much good, but 

there is reason to believe that an even greater impact could be 

achieved with a more efficient strategy, possibly without the need 

to even increase funding. American and international firms are 

caught between a rock and a hard place. The Chinese Communist 

Party has laid out its own plans and ambitions, and it shows every 

sign of implementing them to the fullest. The question is whether 

the United States, other democracies, and tech entrepreneurs will 

assert their own principles, including freedom of expression, with 

equal determination. 

Thank you. 

[Prepared statement of Ms. Cook follows:] 


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f:. Freedom House 

' 7S Yl?d~"S ( 'ldTrD,<Yllng C·:>mocacy 

China's Cyber Superpower Strategy: Implementation, 

Internet Freedom Implications, and U.S. Responses 

Written Testimony by Sarah Cook 

Senior Research Analyst for East Asia and China Media Bulletin Director 

House Committee on Oversight and Government Reform, Subcommittee on 

Information Technology 

Countering China: Ensuring America Remains the World Leader 

in Advanced Technologies and Innovation 

September 26, 2018 

Chairman Hurd, Ranking Member Kelly, and members of the subcommittee, it is an honor 

to testify before you today. I have divided my comments into four parts: 

I. A brief overview of the Chinese Communist Party's strategy for becoming a "Cyber 

Superpower" 

II. Examples of how this is being implemented, often with the assistance of Chinese and 

foreign technology companies 

III. Analysis of the costs these dynamics impose on human rights, internet freedom, and 

tech companies themselves 

IV. Recommendations for steps the U.S. government can take in response to these 

trends 

V. Concluding thoughts based on Freedom House experience 

China's "cyber superpower" strategy 

Last fall, the Chinese Communist Party (CCP) declared its aspirations for China to become a 

"cyber superpower," the desired outcome of developing improved capabilities and influence 

in areas ranging from domestic censorship to high-tech innovation to global internet 

governance. 

During his October 2017 speech to the 19'h Party Congress, Chinese president and CCP head 

Xi Jinping emphasized the importance of innovation as China emerges as a world power.l 

The speech was preceded by a detailed article published in the vanguard Party journal Qiushi 

1 Freedom House, China Media Bulletin, No. 126, November 4, 2017, https·//freedomhouse.org/chjnamedia/china-media-bulletin-party-congress-medja-vjsjon-surveillance-updates-africa-impact-issue-no-123 
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the month before outlining the full details of Xi and the CCP's vision for achieving "cyber 

superpower" WJ;§s!ilOO (wiing/uo qitinggu6) status.z The piece-authored by officials at the 

Cyberadministration of China (CAC), the country's top internet regulator-is at times 

surprisingly candid about the Party's ambitions and motives in several areas relevant to 

today's discussion: 

• Increasing domestic Chinese internet controls to ensure authoritarian longevity: 

The authors note that the goal of strengthening "positive energy" online and making 

innovations in propaganda and content controls is "so that the Party's ideas always 

become the strongest voice in cyberspace." The article acknowledges that controlling the 

internet is key to the party's own political survival, stating that "If our party cannot 

traverse the hurdle represented by the Internet, it cannot traverse the hurdle of 

remaining in power for the long term." A central element of strengthening party 

leadership in the cybersecurity and information technology field includes safeguarding 

"Comrade Xi )in ping as the core of Party Central Committee authority." 

• Using the technology sector as a foundation to secure China's economic health at a 

time of reduced GOP growth rates: A central part of the strategy laid out is to 

"accelerate indigenous innovation of core technologies in the information field," "obtain 

breakthroughs,' and "narrow the gap with developed countries" in areas like artificial 

intelligence, cloud computing, and SG mobile networks. Other aspects of the CCP's 

strategy in this regard include developing the digital economy and continuing to enhance 

the "global influence of internet companies like Alibaba, Ten cent, Baidu, [and] Huawei," 

as well as supporting the international adoption of Beidou satellite navigation as an 

example of military-civilian integration. 

• Expanding information controls beyond China's borders: The article's authors note 

that online propaganda should also target international audiences with the goal of 

"expanding online international communication to 200 countries ... and more than 1 

billion overseas users." They also state that the purpose of strengthening international 

exchanges and cooperation in the field of information technology and cybersecurityincluding with the United States-is "to push China's proposition of Internet governance 

toward becoming an international consensus." 

Prioritization and effective implementation of such CCP strategies related to cyberspace has 

emerged as a hallmark of Xi jinping's leadership of the Communist Party since 2012. 

Compared to his predecessor Hu Jintao, Xi is more sophisticated in his understanding of how 

the internet and social media applications function, as well as how free expression in the 

2 Elsa Kania, Samm Sacks, Paul Triolo, and Graham Webster, "China's Strategic Thinking on Building Power in 

Cyberspace," New America, September 25, 2017, https: llwww newamerica org/cybersecurity· 

jnitiative/blog/chinas·strategjc-thinking-building-power-cyberspace/ 

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Sarah Cook 

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September 26, 2018 

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online sphere could pose an existential political threat to the CCP. He has also proved himself 

to be adept at closing previously existing loopholes in internet controls that enabled tens of 

millions of Chinese netizens to share breaking news, expose corruption and rights abuses, 

debate government policies, and have an occasional laugh at the expense of CCP leaders. 

This track record of Xi's within China-as well as the full scale and impact of the domestic 

internet control apparatus-are worth keeping in mind when considering the CCP's 

commitment to implementing the dimensions of his vision with international implications. 

Even before the above article's publication outlining this strategy, China's authoritarian 

regime had begun taking steps to achieve its stated goals, adopting and implementing a new 

Cybersecurity Law and declaring its Made in China 2025 policy. But over the past year, China 

has taken new strides in technological advancement and international expansion. 

Technological innovation in China, for better or for worse 

Some aspects of the Chinese government's innovation drive have clear public benefits. The 

number of internet users in China has grown exponentially over the past 15 years, reaching 

an estimated 802 million people as of June, more than double the entire population of the 

United States. The vast majority of these Chinese users access the internet via their mobile 

phones.3 That access is set to get a new boost. In August, state-owned China Unicorn 

successfully launched and tested its first 5G experimental network in Beijing, the next 

generation of high-speed mobile web access, which it plans to have rolled out across the 

city by next summer.4 

But other advances are more problematic. Although widespread mobile web connectivity 

engenders many benefits, it also personalizes censorship and surveillance practices to an 

unprecedented degree. This is especially the case when, alongside increased access to 

internet services, China's ruling Communist Party has developed the world's most multilayered and sophisticated internet control apparatus. For the past three years, China has 

been the worst abuser of internet freedom among 65 countries assessed in Freedom House's 

annual Freedom on the Net report.s 

Yet even with that robust baseline, the past year has seen new waves of tightening in areas 

of free expression or dissemination channels that were previously tolerated. Since a new 

Cybersecurity Law came into effect in June 2017, online censorship and surveillance have 

expanded dramatically alongside increasing arrests of Chinese citizens, particularly for 

content shared on the popular instant messaging platform WeChat. 

3 China Internet Network Information Center. (2018). Statistical Report on Internet Development in China. 

Retrieved from https: I /cnnic.com en /IDR/ReportDownloads/201807 /P020180711391069195909.pdf 4 Sina, "Beijing enters SG network era with China Unicorn's experimental sites," August 14,2018, 

http://english.sina com/huzfb/2018-08-14/detail-ihhtfwqq8823911.shtml 5 Freedom House, Freedom on the Net 2017, November 2017, https·l/freedomhouse org/rgport/freedomnet/freedom-net-2017. 

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Technical and regulatory innovation and experimentation is constantly underway. Additions 

to the censorship and surveillance toolbox from the past year include: large-scale shuttering 

of social media accounts rather than just deleting posts and particularly influential accounts, 

forcing the removal of hundreds of mobile phone apps that enable users to reach blocked 

websites, and the mass purchasing by security agencies of devices for extracting and 

scanning the contents of smartphones.6 

Chinese technology firms at the forefront 

Chinese technology companies have been central to censorship advancements. For example, 

some firms are developing the ability to automatically scan images for subversive text rather 

than relying solely on human censors. An August 14 report by the Toronto-based Citizen Lab 

revealed two forms of image censorship being deployed by Tencent's mobile application 

WeChat7: One tool filters images containing sensitive text, and the other snags those that are 

visually similar to images already on a blacklist. Social media users have long posted images 

to circumvent censorship of simple text, and these new capabilities could close that loophole. 

Tencent has taken a number of other steps since May to meet the government's censorship 

demands. It has barred users from linking to external videos in chat groups, a deleted large 

numbers of audio and video clips (including those deemed to "distort history"), 9 and banned 

users from making changes to their profile pictures or user names-a common form of 

commentary-during the june summit of the Shanghai Cooperation Organization, the 

regional security bloc Jed by China.1o 

In the realm of surveillance, the western region of Xinjiang has become a laboratory for 

testing big-data, facial-recognition, and smartphone-scanner technologies that can 

eventually be deployed across China and beyond. Several firms have emerged at the cutting 

edge of this effort, including CloudWalk, Hikvision, Dahua, SenseTime, and Yitu.11 Although 

6 Freedom House, China Media Bulletin, No. 121, September 11,2017, https://freedomhouse org/chjnamedia/china-media-bulletjn-partv-congress-censorshjp-vpn-crackdown-surveillance-uogrades-no-121; 

Freedom House, China Media Bulletin, No.127, March 23, 2018, https://freedomhouse.org/chinamedia I china-media-bulletin -risks-of· xjs-power-grab-npc-censorshj p· xiniiang-reprisals-issue-no-12 7. 

Cate Cadell, "From laboratory in far west, China's surveillance state spreads quietly," Reuters, August 14, 

2018, https: I /www.reuters com /article /us-china-monitoring· insight/from-laboratory-in-far-west -chinassurveillance-state-spreads-quietly-jd US KB N 1 KZOR3 7 Jeffrey Knocke!, Lotus Ruan, Masashi Crete-Nishihata, and Ron Deibert, "(Can't) Picture This," The Citizen 

Lab, August 14, 2018, https: 1/citizenlab.ca /201 8 /08/cant-picture-this-an-analysis-of-image-filterjng-onwechat-moments/ 

8 https: f /www.rfa.org/mandarin /yataibaodao /meitj /QI2 -OS 212 0181 01620.htm I 9 Xinhua, "Chinese video websites delete 1.5 min illegal clips," May 10, 2018, 

http· f!www xinhuanet com /english /2018-05/10 /c 13 71 701 87.htm 1° China Digital Times, "Minitrue: WeChat Group Controls for Qingdao Summit," June 5, 2018, 

https· //chinadigitaltimes net/2018/06/mjnitrue-wechat-group-controls-for-qjngdao-sco-summjt/ 11 Charles Ro!let, "In China's Far West, Companies Cashin on Surveillance Program that Targets Muslims," 

Foreign Policy, june 13,2018, https://forejgnpolicy com/2018/06/13/in-chjnas-far-west-companies-cash-jnon-surveillance-program-that-targets-muslims/ 

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the work entails complicity in the oppression ofXinjiang's Uighur Muslim population, it could 

give the companies a competitive edge on the international market, partly because access to 

large amounts of data can help train artificial-intelligence algorithms. For example, data and 

images of ethnic Chinese, Turkic Uighurs, and-under a new deal with Zimbabwe's 

government-sub-Saharan Africans could collectively enable developers to correct common 

race-related errors in facial-recognition software and gain market share in other parts of the 

world.12 Chinese firms are already expected to control 44 percent ofthe global market for 

such technology by 2023.13 

Chinese firms seek to expand in a wide range of other areas. A report published by Hong 

Kong-based Abacus in July shows how Baidu, Alibaba, and Tencent have been investing in or 

acquiring dozens of companies within China and abroad, from e-commerce and ride-sharing 

apps to blockchain developers and makers of self-driving cars.14 These tech giants are 

private enterprises, and they may have their own reasons for making such investments, but 

they also remain beholden to the government and its strategic goals. As the report notes: 

"Success or failure in China's internet landscape is contingent upon government authority." 

Evidence of this reality has been abundant in recent months. In May, after a brief suspension 

by regulators, Toutiao overhauled the content and messaging of its popular personalized 

news app, altering its mission statement to include spreading "correct public opinion 

orientation."lS Also that month, industry leaders joined in the creation of a new China 

Federation of Internet Societies (CFIS), directed by the Cyberspace Administration of China 

(CAC).16 Individuals like Tencent chairman Pony Ma, Alibaba founder Jack Ma, and Baidu 

chairman Robin Li were appointed as vice presidents. One of the CFIS's inaugural 

commitments was to "conscientiously study and implement the spirit of Xi Jinping's Strategic 

Thought on Building a Cyber Superpower." 

Foreign tech firms in China 

Chinese tech firms are not the only ones eager to please the leadership in Beijing. Many of 

the world's top technology and social media companies are banned or extremely constrained 

in their ability to provide services to Chinese internet users. Notably, the websites of 

12 Lynsey Chute!, "China is exporting facial recognition software to Africa, expanding its vast database," Quartz 

Africa, May 25, 2018, htt;ps· //qz.com /africa/1287675/chjna-js-exporting-facial-recognition-to-africaensuring-ai-dominance-through-diyersity/ 

13 Eudora Wang, "China To Take Nearly Half Of Global Face Recognition Device Market By 2023," China Money 

Network, August 23, 2018, htt;ps://www.chinamoneynetwork.com/2018/08/23/china-to-take-near!y-halfof-globa!-face-recognition-deyjce-rnarket-by-2023 

14 Abacus News. (2018). China Internet Report 2018 {Short Version]. Retrieved from 

https: I /www.slideshare.net/EdithYeung/chjna-jnternet-report-20 18-short -version 15 Yirnian Wu, "China's Toutiao Has A New Mission: To Shape Correct Public Opinion," China Money Network, 

May 17, 2018, htt;ps·//www chjnamoneynetwork.com/2018/05 /17 /chinas-toutiao-has-a-new-mission-toshape-correct-public-opinion 

16 David Bandurski, "Building the Party's Internet," China Media Project, May 11, 2018, 

http- //chinamedjaproject org/2018/05 /11 /building-the-partys-jnternet/ 

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Facebook and Twitter are blocked, while restrictions on Google have expanded from its 

search engine to its email client, translation services and more. Such restrictions place real 

costs on these companies and U.S. businesses operating in China generally. A 2016 survey by 

the American Chamber of Commerce found that 79 percent of U.S. companies reported that 

Chinese government internet restrictions hurt their business.U 

The Chinese government is adept at using the combination of its ability to block online 

services from reaching potential customers and the Jure of its enormous domestic market to 

extract concessions from foreign firms, including assistance with its censorship and 

surveillance system. The recent controversy surrounding Google's plans to develop a 

censored search engine for the Chinese market is only the latest among many examples of 

such cooperation. Linkedln restricts users in China from accessing profiles or posts by 

people based outside the country that are deemed to contain politically sensitive 

information.ts Earlier this year, Apple removed more than 600 applications from its mobile 

store that facilitated Chinese users' ability to access blocked websites.19 

Foreign companies operating in China also increasingly risk accusations of complicity in 

politicized arrests or violations of user privacy. Last year's Cybersecurity Law stipulates that 

foreign companies must store Chinese users' cloud data on servers located in China. To meet 

this requirement, Apple announced in january that iCloud data would be transferred to 

servers run by Guizhou on the Cloud Big Data (GCBD), which is owned by the provincial 

government.zo Apple and GCBD now both have access to iCloud data, including photos and 

other content. In February, the U.S.-based note-taking app company Evernote similarly 

announced that Chinese users' data would be transferred to Ten cent Cloud by mid-2018 to 

comply with data localization rules in the Cybersecurity Law.21 Airbnb alerted its hosts that 

starting on March 30, "Airbnb China may disclose your information to Chinese government 

agencies without further notice to you."22 And one of the biggest investors in the artificial 

17 Erik Crouch, ''79% of American companies say China's internet restrictions arc hurting them," Tech in Asia, 

january 20, 2016, https: //www techinasja.com /chjna-amcham-restrjctjons-internet-suryey 

1s Paul Mozur and Vindu Goel, "To Reach China, Linked!n Plays by Local Rules,' New York Times, October 5, 

2014, https· !lwww nytimes.com /2014/1 0 /06/technology/to-reach-china-linkedin-plays-by-local-

~. 

19 Letter from Cynthia C. Hogan, Apple Vice President for Public Policy in the Americas to Senators Patrick 

Leahy and Ted Cruz, November 21, 2017, 

https: //www.leahy senate.gov limo/mgdja/doc/Apple%2011212017.pdf. 20 BBC, "Apple: Chinese firm to operate China iCloud accounts,'' january 10, 2018, 

http· //www bbc com/news/business-42631386. 

21 Freedom House, China Media Bulletin, No. 126, February 27, 2018, https·//freedomhouse org/chjnamedia/china~media·bnlletin~resisting-beijings-intluence-new-year-flala-metoo-in-china-issue-no-126#a4. 

22 Twitter post by Bill Bishop with screenshot of AirBnb notice, March 28, 2018, 

https://twitter.com/niubi/status/978945772971614209. 

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intelligence (AI) firm SenseTime, which provides facial recognition technologies to some 

local police and at least one prison in China, is U.S. chipmaker Qualcomm.23 

But in a new and disturbing development, the Chinese government has used market 

leverage-and in some cases arbitrary blocking and other regulatory actions-to spur 

censorship of information available to people outside China. In a spate of incidents over the 

spring and summer, hotel, airline, and automobile companies changed their presentation of 

content on topics like Tibet or Taiwan to fit Beijing's political positions. A piece of code in 

Apple's iPhone operating system that was meant to prevent Chinese users from displaying 

the Taiwan flag emoji recently caused phones with China location settings to crash, even if 

the device was being used in San Francisco.24 Apple is now weighing the inclusion of China's 

Beidou navigation system on the next generation of iPhones; one can already imagine how 

its maps will handle Beijing's territorial claims.zs 

The costs of compliance 

As Chinese and foreign companies take more steps to appease the regime, the human toll will 

continue to mount. The space for ordinary Chinese to obtain and share information on a wide 

range of both political and apolitical topics has noticeably shrunk in recent years, while the 

risks of punishment for even facetious comments deemed unacceptable to the authorities 

have risen. These shifts have affected hundreds of millions of users in China. Although not all 

may be aware of the full set of changes, many have been forced to alter their online habits 

due to increasing censorship and real-name registration requirements. 

For target populations like activists, religious believers, or members of ethnic minorities, the 

consequences have been dire. Censorship and surveillance on sensitive topics like Taiwan, 

Tibet, Xinjiang, Falun Gong, and the 1989 Tiananmen massacre either whitewash or 

exacerbate large-scale human rights violations-including mass detentions, torture, and 

extrajudicial killings. 

Beyond that, on a daily basis, vital information is kept from the Chinese public. Annual 

Freedom House analysis of leaked censorship directives has repeatedly shown that a broad 

range of breaking news topics are targeted for control, including critical information about 

public health and safety.26 Meanwhile, Chinese people's ability to discuss the current and 

''Reuters, "Qualcomm invests in Chinese AI facial recognition startup SenseTime," November 14, 2017, 

https: //www.reuters com /article /us-sensetime-fundraising-qualcomm /qualcomm-invests-in-chinese-aifadal-recognition-startup-sensetime-jd{JSKBN1DFOHE. 

24 Andy Greenberg, "Apple's China-friendly Censorship Caused An !Phone-crashing Bug," Wired, July 10, 2018, 

https· //www.wired.com/stor:y/apple-china-censorship-bug-iphone-crash-emoii/ 25 Asia Times, "Apple may build China's BeiDou navigation into future iPhones," August 22, 2018, 

http: //www.atjmes com/article/apple-may-build-chjnas-bejdou-navig:atjon-into-future-iphones/ 26 Freedom House, China Media Bulletin, No. 125, January 27, 2018, https://freedomhouse.org/chjnamedja I chjna-medja-bulletin-2 017 -year-in-review-issue-no-125 

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future direction of their country has been severely constrained. This was especially evident 

in the run-up to the 19th Party Congress last October and constitutional changes earlier this 

year. As the country underwent some of the most significant political events in its recent 

history, deletion of social media posts and accounts spiked. The vast majority of Chinese 

citizens were not only shut out of the conversation, but also risked severe punishment should 

they even try to take part from afar. 

But ironically, the complicit companies themselves are also important victims of the 

government's repressive measures, enduring a number direct and indirect costs as a result 

of state abuses. 

First, the arbitrary nature of Chinese regulatory decisions can wreak havoc on the best-laid 

business plans and nascent successes. In july, it seemed briefly that Facebook had gained 

government approval to open a subsidiary and innovation hub in Zhejiang Province, no 

doubt after long and arduous negotiations,27 But within hours, the registration 

announcement disappeared and was censored in Chinese media, apparently because the CAC 

vetoed the local government's decision. The same arbitrariness affects the Chinese tech 

sector as well. In April, several extremely popular applications providing news or enabling 

the sharing of humorous content to tens of millions of users were abruptly suspended or 

shut down for failing to "rectifY" their content sufficiently. 

Second, the Chinese government's ever-increasing censorship and surveillance demands 

reduce profit margins. Actions like moving data service centers from overseas to China and 

partnering with local companies-as required under the new Cybersecurity Law and 

implemented by companies like Apple and Evernote-are not inexpensive endeavors. 

Neither is rapid expansion of censorship staff, as Toutiao announced following its suspension 

in April; the company increased the number of editorial monitors from 6,000 to 10,000 and 

established a special committee to manage a politicized content overhauJ.28 

Third, while close government ties are a necessity in China, they provoke scrutiny, distrust, 

and skepticism abroad. More foreign governments and civil society groups now object when 

Chinese firms seek to build critical infrastructure or provide important technology and 

services. Last month, Australia blocked Huawei and ZTE from building the country's SG 

network, citing security risks.29 The Fiscal Year 19 National Defense Authorization Act signed 

into law on August 13 banned federal agencies from purchasing equipment made by 

27 Paul Mozur, "China Said to Quickly Withdraw Approval for New Face book Venture," New York Times, July 

25, 2018, "https·l/www.nytimes.com/2018/07/25/busjness/facebook-chjna html 

2s Yimian Wu, "Toutiao CEO Issues Apology As Chinese Media Regulator Shuts Joke App Permanently," China 

Money Network, Aprilll, 2018, https:l/www.chinamoneynetwork com/2018/04/11/toutjao-ceo-jssuesapology-as-chjnese-media-regulator-sbuts-joke-app-permanently. 

29 Hong Kong Free Press, "Australia blocks China's Huawei, ZTE from SG network citing security risks," 

August 23, 2018, htt;ps: //www.hongkongfp.com /2018/08/23/australia-blocks-chjnas-huawej-zte-Sgnetwork -citing-security-risks I 

!Freedom 

1 House 

Sarah Cook House OGR Information Technology Subcommittee 

September 26,2019 

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Hikvision, Dahua, Huawei, or ZTE.30 And on September 18, broadcasters in Ghana raised 

concerns about the government's talks with a Chinese company on a contract to build the 

country's digital television infrastructure. 31 Meanwhile, Google's reputation has taken a hit 

from the revelations about its Chinese search engine project,32 with some top employees 

resigning in protest.33 

Recommendations 

China and the CCP's cyberspace policies and strategies are complex and multi-layered. Some 

aspects have clear public benefits. Some are legitimate government actions to support 

Chinese companies in a competitive market or restrict circulation of content deemed 

problematic by international standards. But at least as many aspects of the Chinese regime's 

actions involve unfair practices, corporate espionage, and rights violating censorship and 

surveillance. This reality requires an equally sophisticated and multi-layered response, not 

only to uphold U.S. economic competitiveness, but also internet freedom for people within 

China, the United States, and elsewhere around the world. 

The U.S. government and international community should be ready to respond to recent 

events and future trends. The following are a few select recommendations to the U.S. 

government 

I. The United States should be proactive in developing its own capabilities and 

upholding international free speech and privacy standards. This can be done 

by: 

Developing a comprehensive national strategy on artificial intelligence. 

This should cover a five to ten year time frame and include outlining the state 

of current research and applications, threats and opportunities presented by 

artificial intelligence, current gaps, and how to move forward. 

Dedicating diplomatic resources to upholding internet freedom at 

international forums and holding China to its World Trade Organization 

commitments. This should include proactively tracking and countering 

3o United States. Cong. House. johnS. McCain National Defense Authorization Act for Fiscal Year 2019. 115'h 

Cong. H.R. 5515. https· lfwww congress gov /bill /115th-congress/house-bill/5515/text 

31 Ghana Web, "Don't hand digital migration contract to StarTimes- GIBA warns government," September 18, 

2018, https: //www.ghanaweb com /GhanaHomePage/NewsArchiye /Don-t-hand-digjtal-migration-contractto-Starijmes-GIBA-warns-government-685952 

32 Ryan Gallagher, "Google China Prototype Links Searches to Phone Numbers," The Intercept, September 14, 

2 018, https ·//thejntercept.com /2 0 18/09/14/google-china-prototype·li nks·sea rches-to-phone-numbers I 

33 Ryan Gallagher, "Senior Go ogle Scientist Resigns Over 'Forfeiture of Our Values' in China," The Intercept, 

September 13, 2018, https· //thejntercept com/2018/09/13/google-chjna-search-engjne-emplqyee-resjgns/ 

fFreedom 

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Sarah Cook 

House OGR Information Technology Subcommittee 

September 26,2018 

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Chinese, Russian and other authoritarian countries' efforts to weaken 

international standards and protections for human rights online. 

Exercising caution regarding Chinese investments in the United States. In 

addition to investigating potential national security risks and economic 

impacts, reviews would do well to take into consideration whether there is 

evidence or reason to believe that Chinese companies have been involved in 

human rights abuses in China. 

II. The United States should be proactive in challenging the authoritarian 

foundations of the Communist Party's cyberspace strategy. This can be done 

by: 

Promoting internet freedom within China in bilateral engagement. U.S. 

officials should consistently raise the issues of internet freedom in China 

publicly and in private meetings with Chinese counterparts, including at the 

highest levels. They should urge the release of imprisoned journalists and free 

expression activists (see here for sample list) and highlight the harm done to 

Chinese citizens when reporting on topics of public concern-like health, 

safety, and corruption-is constrained. Additional recommendations on how 

to support and advance free expression in China are available on Freedom 

House's website as part of the resource section of our China Media Bulletin 

project. But, restrictions on the internet in China don't just hurt Chinese, 

citizens, they hurt U.S. businesses, as well. 

Funding counter censorship efforts specific to China. Studies and 

anecdotal evidence have shown that some of the first websites that Chinese 

internet users visit after "jumping" the so-called Great Firewall are internet 

services provided by top U.S. technology companies such as Google's search 

engine, Facebook, YouTube, and Twitter. Supporting Chinese internet users' 

ability to access these websites enhances both U.S. economic competitiveness 

and internet freedom. Actions to be taken might include: 

o Review how much U.S. funding to date for internet freedom has 

assisted users from China, including by seeking information from the 

BBG and State Department, and whether this appropriately matches 

demand. 

o Support groups that develop and disseminate tools to enable Chinese 

users on a large scale to access blocked websites and expand funding 

for applications that enhance access to uncensored information and 

digital security on mobile phone devices. 

o Create an emergency fund that can be activated quickly during 

moments of crisis or political turmoil to rapidly enhance the server 

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capacity of circumvention tools facing increased demand from China as 

periodically happens when the number of Chinese people seeking 

uncensored information spikes. The Senate Fiscal Year 19 State and 

Foreign Operations Appropriations bill contains an additional $2.5 

million in internet freedom funding for this purpose, and we would 

urge its inclusion in final legislation that is worked out in December. 

o Support efforts to monitor, preserve, and recirculate censored content 

within China, including news articles and social media posts that have 

been deleted by censors. This should also include support for 

developing new tools to create images more likely to evade artificialintelligence driven censorship on applications like WeChat. 

Support projects that raise awareness of internet controls: Support 

research and outreach initiatives that inform Chinese audiences about the 

censorship and surveillance apparatus, imprisoned journalists and online 

activists, the regime's human rights record overall, and how democratic 

institutions function. Existing studies and surveys have shown that netizen 

awareness of censorship often yields a greater desire to access uncensored 

information, assist a jailed activist, or take steps to protect personal 

communications. 

III. The United States government should encourage the business community to 

take a principled stance vis-a-vis Chinese government internet controls. This 

could be done by: 

• Pressing companies doing business in China to do no harm, whether it be 

turning private citizen data over to the Chinese government or providing 

surveillance or law enforcement equipment used by Chinese authorities to 

violate user rights. 

• Reintroducing and passing the Global Online Freedom Act: The Global 

Online Freedom Act, introduced in every Congress from 2006-2014, contains 

provisions that are relevant to today's challenges. Congress should 

reintroduce and pass these provisions, including directing the Secretary of 

State to designate internet-restricting countries; prohibiting the export to 

those countries of any items that could be used to carry out censorship, 

surveillance, or internet freedom restrictions; and requiring internet 

communication service companies operating in internet-restricting countries 

to disclose as part of their annual reporting what they are doing to protect 

human rights and freedom of information. 

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Conclusion 

American and international firms are caught between a rock and a hard place. As they 

compete for profits and market share, they must navigate between the legal regimes and 

political demands emanating from Beijing on the one hand and democratic societies on the 

other. The Chinese Communist Party has laid out its own plans and ambitions, and it shows 

every sign of implementing them to the fullest. The question is whether the United States, 

other democracies, tech entrepreneurs, and investors will assert their own principlesincluding freedom of expression, free enterprise, and the rule of law-with equal 

determination. 

At times, it can appear that internet freedom may be at odds with innovation or robust 

competition with China, but a race to the lowest common denominator of internet repression 

is precisely what Beijing would be happy to see take place. Some measures that would 

uphold principles of internet freedom and fair competition in the long term might seem to 

impose a cost on U.S. businesses in the short term, but as outlined above, currying favor with 

the Chinese government's repressive demands carries its own costs. Developing more 

resilient business models will benefit companies in the long run and garner support of many 

people in China as well. 

As part of the China Media Bulletin project, Freedom House has been working with partners 

who run circumvention tools like GreatFire's Free Browser or overseas Chinese outlets who 

gain traffic via tools like FreeGate and Ultrasurf. These channels garner millions of 

impressions each month and bring tens of thousands of readers from inside China to the 

bulletin, many of whom stay on the page for long periods to read the content or subscribe to 

the newsletter directly. This is just one example of the eagerness with which a notable 

contingent of Chinese people are actively seeking out uncensored, credible information 

about their country and the media controls in place. 

Earlier this year, we conducted a survey among Chinese readers of the bulletin. The impact 

on their own behavior of gaining a better understanding of censorship and surveillance in 

China was palpable. Significantly, 55 percent of Chinese respondents reported being more 

careful when using Chinese social media applications after reading the bulletin and over 45 

percent reported making a greater effort to seek out uncensored information. In addition, 18 

percent of Chinese readers reported deciding to take some action to support free expression 

or an individual activist. 

As they learn about the reality of Chinese technology companies collaboration with the 

Chinese government, individuals like these are likely to seek out more secure internationaland often American-alternatives, so long as those companies are not also compromising 

their services by conceding to Chinese government demands. 

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I would like to conclude with a quotation from one of those readers as a testament to the 

importance of international support for free expression and access to information in China. 

I am a lower class worker in Chinese society and I don't speak English. An independent 

Chinese media like you, that does in-depth reports about the situation in China, gives me 

a better understanding of China's current situation and future development. And it also 

helped my persona/life and work. On a macro scale, China is the largest authoritarian 

country in the world, the Chinese Communist Party oppresses its citizens, blocks 

information flows, and also threatens the existing world order. I think the flow of 

information and freedom of speech are very important to China's future development. 

Birds in cages long to fly, even if we can't fly out now, hearing the chirping of birds 

outside can still give us hope and faith! 

fFreedom 

f House 

Sarah Cook 

House OGR Information Technology Subcommittee 

September 26, 2018 

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35 

Mr. HURD. Mr. Atkinson, you are now recognized for five minutes. 

STATEMENT OF ROBERT ATKINSON 

Mr. ATKINSON. Thank you, Chairman Hurd and Ranking Member Kelly, members of the subcommittee. It’s a pleasure to be here 

today. 

ITIF is a technology policy thinktank. We’ve long focused on the 

question of what we’ve termed innovation mercantilism from 

China. I won’t go into the details of what that is. I put that in my 

written testimony. And let me say what should we be doing. 

Clearly, the avenue now is tariffs. I’m not going to say whether 

they’re overall good or bad, but I think if we’re going to use tariffs, 

we should use them strategically. Mr. Neuffer alluded to the fact 

that tariffs on semiconductors only hurt us, they don’t help—they 

don’t hurt the Chinese. We put tariffs on certain types of products 

or inputs where the American firm is competing against, say, a 

firm from Japan or a firm from Indonesia. They come into the 

country tariff-free. Our companies don’t. If we’re going to use tariffs, let’s be strategic about it. Let’s put some thought behind it and 

not just use it as a blunt instrument. 

I think more importantly, though, we need to think about how 

do we orient trade policy towards China in a results-oriented way. 

This is something people argued about with regard to Japan in the 

1980s. One of the results we want from China—I say that by the 

way because I don’t think a process-oriented process works with 

China. They’re just too sophisticated, and any time we say don’t do 

a particular process, they will figure out a new way to do it. I think 

we want a number of clear easily measured results: one, an end to 

coerced and forced tech transfer. We can measure that. We can say 

just no more. 

Secondly, a vast reduction of industrial subsidies as, again, Mr. 

Neuffer alluded to. They’re not just in the semiconductors. They’re 

in a vast array of technology industries way, way beyond what the 

OECD subsidy guidelines would allow; a reduction in IP theft and 

cyber theft, and much better U.S. market access. 

So how do we do that? I think it’s clear that our best chance of 

doing that is a deep, deep coalition with our allies. We had meetings with the Japanese, with the European officials, with Korean 

officials. They all ask for one thing, for us to take the lead, but they 

all want to be part of that. And I think right now we’re not doing 

that. 

We’ve seen that that process works back in—I’m going to guess 

2012 or so. There was a Chinese policy called indigenous innovation product catalogs, very onerous, restrictive process. You 

couldn’t sell to the Chinese if you were a European or American 

firm unless you gave them your technology. That’s essentially it. 

And the Europeans, their Chamber of Commerce, our Chamber of 

Commerce, our government, their government, all banded together, 

and that pressure was enough to force the Chinese Government to 

back off and eliminate the indigenous innovation product catalog. 

So we’ve seen that that way of organizing pressure works. 

If we don’t do that, though, what do we need to do? I think a 

big part of this is going to basically be making their ability to catch 


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up more difficult. We’re just going to have to throw roadblocks in 

the way while at the same time speeding up our catchup. And part 

of that has to be limiting their global market share and expanding 

our global market share. Technology industries is probably one of 

the most important things you can do because global market share 

means more revenues to then invest in R&D. 

And in that regard I would say that having a company like 

Google go into China is completely in the American interest even 

if they comply with Chinese law. We want to take market share 

away from Baidu. We want to give our companies more market 

share. 

What else can we do? I think we need a better and more comprehensive ability to understand what’s going on. That’s why we’ve 

supported the Senate Bill S. 2757, the National Economic Security 

Strategy Act, which would call for an economic strategy aligned 

with national security for the first time in our history. We would 

encourage the House to adopt something similar. 

We certainly would encourage the administration to take a hard 

line on Chinese investment. FIRRMA certainly helps on that. But 

you see this now. For example, there are Chinese-backed technology accelerators. There’s one in University of Maryland, for example. These aren’t out of the goodness of the heart of the Chinese 

Government. These are designed for one and one—only one purpose, to support new firms, new high-tech startup firms, and to 

take their technology across the ocean back to China. 

We need to have USTR bring a case before the WTO on subsidy 

disclosure, which they have not done. This is in—actually an area 

where the WTO might be able to actually act against Chinese interests as opposed to some other areas where it’s much more difficult. 

I would work hard to ban Chinese access to our final—Chinese 

firm access to our banking system, our securities system. They 

don’t give us that. 

We need to rethink antitrust. For example, right now, we have 

a regulation that our Justice Department exempts mergers at 

state-owned enterprises in China. There’s no reason to do that. We 

should be holding them accountable for antitrust the way they 

have used their process against us. 

And finally, even with all the efforts we need to be taking to slow 

them down and put roadblocks in front of them for their unfair actions, we need to take stronger actions at home, increase R&D, 

EXIM Bank funding, better STEM talent, better R&D tax credit, 

and the like. Thank you very much. 

[Prepared statement of Mr. Atkinson follows:] 


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IT I F I INFORMATION TECHNOLOGY & INNOVATION FOUNDATION 

Testimony of 

Robert D. Atkinson 

President 

Information Technology and Innovation Foundation 

Before the 

House Committee on Oversight and Government Reform 

Subcommittee on Information Technology 

Hearing on Countering China: Ensuring America Remains the World 

Leader in Technology and Innovation 

September 26, 2018 

Washington, DC 

INFORMATION TECHNOLOGY AND INNOVATION FOUNDATION 1101 K STREET NW SUITE 610 WASHINGTON. DC 20005 

IIEIIi ' MAIL@ITIF ORG 1202! 449!35! FAX, 1202! 638 4922 
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Good afternoon Chairman Hurd, Ranking Member Kelly and members of the Committee; thank you for 

inviting me to share rhe views of rhe Information Technology and Innovation Foundation (ITIF) on rhe issue 

of unfair Chinese trade and technology policies and practices and what the U.S. government should do in 

response. 

The Information Technology and Innovation Foundation is a non-partisan think tank whose mission is to 

formulate and promote public policies to advance technological innovation and productivity internationally, 

in Washington, and in the stares. Recognizing rhe vital role of technology in ensuring prosperity, ITIF focuses 

on innovation, productivity, and digiral economy issues. ITF has long focused on rhe issue of how unf.tir 

foreign policies and practices, particularly Chinese, negatively impact rhe U.S. economy. I very much 

appreciate rhe opportunity to comment on these issues today. 

The Technology Threat From Unfair Chinese Technology and Trade Policies 

Ever since rhe first industrial revolution advanced countries have worried about technology transfer to foreign 

nations. For example, it was against the law to transfer technology designs outside of Britain; something that 

Samuel Slater did when he memorized rhe plans for textile machines before immigrating to the United Stares 

and establishing rhe first U.S. textile mill in Rhode Island. 

Today rhe United States leads in rhe so-called fifth industrial revolution (information technology) and hopes 

to lead in the 6rh (artificial intelligence, robotics, ere.), but a major rhreat to our leadership is from China's 

unfair and harmful trade and technology policies. China is seeking global technology dominance in an array 

of advanced technology industries, including in information technology, rhrough an unprecedented array of 

predatory economic and trade policies and practices, including rheft of U.S. technology and coerced rransfer 

thereo£ The world has never seen a country like China before, with its organized and strategic system of 

authoritarian state capitalism. It is not a market economy where firms largely dictate their own strategy and 

behavior. It is not a country governed by the rule of law. It is not a country constrained by global norms of 

acceptable economic and trade behavior. It is a country where the government is concerned with one and only 

one economic goal: winning in advanced technology industries by any means possible. 

As ITIF has documented across a series of reports-including "False Promises: The Yawning Gap Between 

China's WTO Commitments and Practices," "Enough is Enough: Confronting Chinese Innovation 

Mercantilism," and "Stopping China's Mercantilism: A Doctrine of Constructive, Alliance-Backed 

Confrontation "-China has deployed a vast panoply of innovation mercantilist practices that seek to unfairly 

advantage Chinese advanced-industry producers over foreign competitors. 1 These practices have included 

forced technology transfer and forced local production as a condition of market access; theft of foreign 

intellectual property (IP); curtailment and even outright denial of access to Chinese markers in certain sectors; 

manipulation of technology standards; special benefits for state-owned enterprises; capricious cases to force 

foreign companies to license technology at a discount; government subsidies of Chinse companies, and 

government-subsidized acquisitions of foreign enterprises. U.S. and foreign enterprises across virtually every 

advanced technology sector-from aerospace and biotechnology to infOrmation and communications 

technology (ICT) products, Internet, clean energy, and digital media-have been harmed by China's 

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aggressive use of these types of innovation mercantilist policies and will continue to be harmed if China 

cannot be pressured to roll back its egregious predatory practices. 

In the last few yeats, though, the focus of China's efforts has shifted. In 2015, Chinese President )G Jinping 

unabashedly trumpeted a goal of making China the "master of its own technologies."' China's arrival at that 

point resulted from the evolution of Chinese economic policy over the past two decades. Up to the mid2000s, China's economic development strategy sought principally to induce foreign multinationals to shift 

relatively low- and moderate-value production to China.3 It used an array of unfair tactics, including currency 

manipulation, massive subsidies, and limits on imports. That strategy changed in 2006 as China moved to a 

"China Inc." development model ofindigenous innovation which focused on helping Chinese firms, 

especially those in advanced, innovation-based industries, often at the expense of foreign firms. Marking the 

shift was a seminal document called the "National Medium- and Long-term Program for Science and 

Technology Development (2006-2020)," the so-called "MLP," which called on China to master 402 core 

technologies, everything from intelligent automobiles to integrated circuits and high-performance computers. 

The MLP announced that modern Chinese economic strategy sought absolute advantage across virtually all 

advanced technology industries. It rejected the notion of comparative advantage: which holds that nations 

should specialize in the production of products or services at which they ate the most efficient and trade for 

the rest. Instead, China now wishes to dominate in the production of a wide array of advanced technology 

products and services including jet airplanes, semiconductors, computers, machine tools, robots, electric 

vehicles, artificial intelligence software, cloud computing and pharmaceuticals. Essentially, Chinese 

policymakers wish to autarkically supply Chinese markets for advanced technology products with their own 

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

foreign direct investment. 

In recent years President ){j has doubled down on this approach, through new promulgations such as the 

"Made in China 2025 Strategy," the "13th Five-Year Plan for Science and Technology," the "13th Five-Year 

Plan for National Informatization," and "The National Cybersecuriry Strategy," among other policies. The 

"Made in China 2025 Strategy," for instance, calls for 70 percent local content in manufacturing components 

in China, while policies enumerated in documents such as the "13th Five-Year Plan fur National 

Informatization" and "The National Cybersecuriry Strategy" effectively deny access to U.S. enterprises 

seeking to compete in emerging ICT industries such as cloud computing in China. The "National 

Cybersecuriry Strategy" further outlines a goal for 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 leader in, 

such as operating systems, integrated circuits, big data, cloud computing, large-scale software services, the 

Internet of Things, 5G wireless systems, etc., as the country increasingly pursues a strategy of shutting out 

foreign competitors in the interest of advantaging domestic enterprises and industries. As the Mercator 

Institute for China Studies in Germany writes, "Made in China 2025 in its current form [means that] 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."' For instance, with regard to 

ICT-enabled manufacturing (i.e., "smarr manufacturing") the strategy calls fur 80 percent domestic market 

share of high-end computer numeric controlled machines by 2025; 70 percent for robots and robot core 

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components; 60 percent for big data; 60 percent for IT for smact manufacturing; and 50 percent for 

industrial softwace.' 

Foreign Technology Acquisition Underpins "Made in China 2025" 

At the heatt of China's strategy is foreign technology acquisition. The Chinese leadership knows that if it just 

relies on macket forces few if any foreign technology leaders will provide them with the technology Chinese 

firms need. And domestic Chinese firms, while making progress, lag behind the global technology leaders. As 

a result, China has deployed a panoply of tools to unfairly obtain needed foreign technology. 

Intellectual Property Theft: 

Intellectual property theft is one important tool in the Chinese arsenal. China has deployed industrial spies to 

obtain foreign secrets. As the New York Times documented, a leading Chinese computer chip maker allegedly 

paid employees of aT aiwanese chip company working with the U.S. company Micron to steal valuable chip 

designs.' 

Another vector is cyber theft. Seven percent of U.S. firms operating in China listed cyber theft as a problem, a 

number that presumably would be higher if every firm that had faced an intrusion was awace of it? The IP 

Commission Report on the Theft of U.S. lntelkctual Property found that China accounted for neatly 80 percent 

of all IP thefts from U.S.-headquattered organizations in 2013, acnounting to an estimated $300 billion in 

lost business annually.' An updated 2017 Commission report put the figure at $600 billion.' Then NSA 

Director Keith Alexander has called Chinese IP theft, "the greatest transfer of wealth in history." 10 Even 

though President Xi made "commitments" to end Chinese cyber-theft, there is little evidence that the Chinese 

have followed through on this promise. As the China the National Counterintelligence and Securiry Center 

stated in its "20 18 Foreign Economic Espionage in Cyberspace" report: 

China has expansive efforts in place to acquire U.S. technology to include sensitive trade secrets and 

proprietary information. It continues to use cyber espionage to support its strategic development 

goals-science and technology advancement, military modernization, and economic policy 

objectives. China's cyberspace operations ace part of a complex, multipronged technology 

development strategy that uses licit and illicit methods to achieve its goals. 11 

Meanwhile, China still has one of the highest rates of unlicensed softwace usage in the world, with 7 4 percent 

of the softwace in use unlicensed and the macket value of unlicensed softwace usage exceeding $8.7 billion in 

20 13." Then-Microsoft CEO Steve Ballmer once estimated that as much as 95 percent of the copies of 

Microsoft's Office software and 80 percent of its Windows operating systems in China were pirated." 

240,000 Internet cafes in China rely on illegal copies of entertainment softwace." Chinese firms even sell 

technology to allow users to circumvent encryption protection so they can pirate video gacnes. In fact, China 

has factories that produce and sell video gacne circumvention devices acound the world. 

Another vector for purloined intellectual properry is to trick companies in the United States into thinking 

that a Chinese firm wants to invest in them. A seemingly independent Chinese investment fund will approach 

a small to mid-sized U.S. technology company and indicate a willingness to invest needed capital in the 

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company. But before the Chinese company can do this, they must do due diligence and they send in 

employees, who turn out to work for a state-owned Chinese company, to obtain key information about the 

company, including trade secrets. The firm never hears back from the investment company again. 

Another path is through exchange visits and student enrollments in U.S. universities. At least at one time, it 

was common for Chinese exchange visitors to the United States to use opportunities to visit factories and 

other facilities to engage in industrial espionage, including measuring equipment, taking photos and writing 

detailed technical notes to bring back to China. And as Daniel Golden writes in Spy Schools there have been 

cases where Chinese graduate students enrolled in U.S. universities use their access to valuable scientiflc and 

engineering information to bring that back and provide it to Chinese companies.15 

Chinese trade secret theft also represents an increasing challenge. A prime example is Boston-based American 

Superconductor (AMSC), which provides software, design, and hardware solutions for wind manufacturers 

and energy providers. American Superconductor's top customer, the Chinese-based wind turbine 

manufacturer Sinovel Wind Group, faced criminal and civil actions for paying an AMSC employee to steal 

proprietary power-converter and control-system software, which it then used illegally in its wind turbines to 

meet electricity grid standards.~' The employee, an engineer at one of AMSC's subsidiary's, was recently 

found guilty of industrial espionage in Austria. In another telling case, the global agriculture flrm Monsanto 

decided to open production and research facilities for advanced corn technology in China and proceeded to 

develop experimental flelds growing genetically enhanced corn. It wasn't long before the advanced corn was 

systematically stolen, clearly an effort by the Chinese government to gain access to the IP embedded in 

Monsanto's corn. 17 

Weak IP Enforcement: 

Weak enforcement of IP law is another vector. Chinese flrms can often copy and reengineer foreign 

technologies with impunity (what they call introducing, digesting, absorbing andre-innovating), even those 

technologies protected by patents. As a MIT Sloan Management Review article, "Protecting Intellectual 

Property in China," noted, "Intellectual property protection is the No. 1 challenge for multinational 

corporations operating in China."" According to the U.S. International Trade Commission, in 2009, U.S. 

IP-intensive enterprises conducting business in China reponed losses of approximately $48.2 billion in sales, 

royalties, or license fees due to Chinese IPR infringement. 19 In 2018, according to the American Chamber of 

Commerce in China, one-quarter of surveyed U.S. companies cited "Insufficient protection offered by text of 

IP-related laws and regulations," while 24 percent cited, "Difficulty prosecuting IP infringements in court or 

via administrative measures" as signiflcant challenges. 20 

Interestingly. there is new evidence that China favors domestic over foreign patent applicants when it comes 

to strategic industries. As the report "Technology Protectionism and the Patent System: Strategic 

Technologies in China," published in 2016 by Gaetan da Rassenfosse and Emilio Raiteri flnds, "Foreign 

applications in technology flelds that are of strategic importance to China (as deflned by being listed on the 

MLP) are 4 to 7 percentage points less likely to be approved than local applications, all else equal. "21 As they 

note, "While much analysis has focused on unequal enforcement ofiP rights in China, this is the flrst study 

to find systematic evidence of bias in the granting of patents against foreigners in China. Given the 

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importance of industrial policy in China and the country's strong focus on indigenous innovation and 

intellectual properry, the empirical results provide a case of technology protectionism by means of the patent 

.system. "22 

State-Backed Purchases of U.S. Technology Companies: 

An increasingly important way for Chinese firms to gain access to needed technology is to simply buy up U.S. 

technology companies or invest in high-tech startups. Indeed, until recently, a not-insignificant share of 

Chinese foreign direct invesrment into the United States was in technology induStries. According to Select 

USA, the top four industrial categories in terms of numbers of Chinese FDI projects from 2003 to 2015 were 

electronics, industrial machinery, software and information technology services, and communications.23 The 

Rhodium Group reports that over the last 16 years there has been roughly $18 billion of Chinese FDI into 

ICT 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. firms. 24 Of the 

$14.2 billion invested in ICT, 74 percent was made from 2014 to 2016, with more than 95 percent going to 

acquisitions.25 These numbers would have been considerably larger if the federal government had not 

informally or formally blocked some deals through the Committee on Foreign Invesrment in the United 

States (CFIUS). Fortunately, Chinese inward FDI has dramatically fallen in the last two years as it became 

clear that the U.S. government would take a harder look at their attempts to buy U.S. technology. And of 

course, the recent enactment of the Foreign Investment Risk Review Modernization Act (FIRRMA) will 

hopefully help even more going forward. 

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 know enough about the investing firm.26 This was evident for example in the attempted purchase 

of German semiconductor equipment firm Aixtron by a Chinese investor where there were "a web of relations 

among the customer, the buyer, and the Chinese srate."27 Moreover, the Chinese government channels funds 

to supposedly private investment bodies, making it look as if these deals are commercial. 

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 to upgrade their own technology capabilities. The Rhodium Group 

notes that in the aviation sector, "The dominant player is aviation conglomerate A VIC, which is looking to 

the US market to upgrade its technology and other capabilities. "28 Likewise, in the electronics and electrical 

equipment sector, "Chinese investors are drawn to the US electronics and electrical equipment sector for 

building their brands, expanding their sales and distribution channels, and upgrading their innovative 

capaciry and technology portfolios. "29 Investments in pharmaceuticals and biotechnology are "often driven by 

upgrading technology (such as Wuxi' s acquisition of AppT ec, a laboratory services firm). "30 As one study of 

Chinese FDI estimated, 30 percent of the private firm deals and 46 percent of the SOE deals are motivated by 

technology acquisition.31 The authors go on to state that Chinese acquisition of overseas firms "has become 

the most widely used methods [of investing overseas] for Chinese firms, largely because it provides rapid 

access to proprietary technology."" 

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China has also ramped up its efforts to buy into early-stage U.S. technology start-ups. A recent report from 

DOD's Defense Innovation Unit Experimental (DIUx) finds that "Chinese participation in venture-backed 

startups is at a record level of10-16o/o of all [U.S.] venture deals (2015-2017) and has grown quite rapidly in 

tbe past seven years. "33 And some of tbis investment comes from venture firms tbat are backed by Chinese 

governments (federal or provincial). For example, the Zhongguancun Development Group, a state-owned 

enterprise headquartered in Beijing has set up "Danhua capiral" to promote the strategy of"Zhongguancun 

capital going global and bringing in overseas advanced technology and talents."34 Likewise, Shenzen Capital 

Group, a purportedly private venture capital firm that has invested in at least one advanced U.S. technology 

company," has actually received about 80 percent of its invested capital from the Chinese government," and 

its investments are focused, not surprisingly, ro match tbe central governments key targeted industries. The 

firm even boasts a chart that compares the technology allocation of its investments and how it compares to 

tbe governments priorities." 

FDI acquisition is not the only patb to U.S. technology capabilities. For example, China is investing in U.S. 

research universities to gain access to their research, often with U.S. state government-backing. For example, 

Maryland is committing nearly $600,000 over three years to build up tbe Maryland International Incubator, 

in a bid to attract high-tech companies from China and elsewhere to collaborate with University of Maryland 

researchers. Of tbe 18 companies in the incubator, nine are from China, witb most of these being biotech 

companies." In addition, Chinese firms have become investors in early stage U.S. technology companies. 

These include the venture capital arms of Chinese Internet companies such as Alibaba or Tencent. The idea is 

to invest in start-ups and use tbat as a way to bring technology and knowledge back to China. Indeed, at least 

a few Silicon Valley experts report that tbey are seeing a significant uptick in Chinese venture investment in 

Silicon Valley. This trend could very well increase in coming years as China sees tbat its traditional 

acquisition route becomes more difficult. We see tbis pattern in other nations as well. 40 percent of venture 

capital in Israel in 2015 reportedly came from China." 

Forced Technology Transfer as a Key Weapon in the Chinese Arsenal 

Dwarfing these tools is forced technology transfer. Although China's World Trade Organization (WfO) 

accession agreement contains rules constraining it from tying foreign direct investment or market access to 

requirements to transfer technology to tbe country,'° China routinely requires firms to transfer technology in 

exchange for being granted the ability to invest, operate, or sell in China. 41 As Harvard Business School 

professors Thomas Hour and Pankaj Ghemawat document in "China vs the World: Whose Technology Is 

It?," Chinese technology transfer requirements as a condition of market access have affected scores of 

companies in industries as diverse as aviation, automotive, chemicals, renewable energy, and high-speed rail.42 

To be sure, because such conditions usually contravene China's WfO commitments, officials are careful not 

to put such requirements in writing, usually resorting to oral communications to pressure foreign firms to 

transfer technology." In 2011, then-U.S. Treasury Secretary Timothy Geithner laid such concerns about 

China's technology transfer requirements, stating tbat "we're seeing China continue to be very, very aggressive 

in a strategy they started several decades ago, which goes like this: you want to sell to our country, we want 

you to come produce here. If you want to come produce here, you need to transfer your technology to us. "44 

In 2012, 23 percent of the value of all foreign direct investment projects were joint ventures." And tbe U.S.-

China Business Council's "20 14 China Business Environment Survey" reports that 62 percent of companies 

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had concerns about transferring technology to China, while 20 percent reponed that they had been requested 

to transfer technology to China within the past three years. 46 

Forced technology transfer is not new. A 1987 Congressional Office ofTechnology Assessment report states, 

"Although most U.S.firms approach the China market with the intent to sell products, many find they must 

include technology transfer if they wish to gain access to the China market."47 But what is new are two things. 

First, there are more foreign companies seeking to get in the Chinese market, such that the scale of forced 

technology transfer is much larger than it was two decades ago. In 2015 for example, 6,000 new international 

joint ventures, amounting to $27.8 billion ofFDI inflows, were established in China!' 

Second, the sophistication and value of the technology the Chinese government is now demanding is 

significantly higher than in decades past when U.S. companies could afford to give their Chinese "partners" 

older generations of technology, confident that the U.S. firms could innovate faster. Now for many foreign 

advanced industry companies, doing business in China requires transferring ever-more valuable technology to 

Chinese joint venture partners. In 2013, 35 percent of U.S. business respondents in China said that tech 

transfer requirements were a concern, and 42 percent in advanced technology industries voiced this concern!' 

Fifty-six percent of survey respondents who gave a response thought that tech transfer requirements were 

increasing. 5° And as USTR points out in its 301 report on China, it is likely that these numbers are underreported." 

For example, the CEO of a large multinational telecommunications equipment company 

shared with ITIF that he opened up a large R&D facility in Beijing that employs over 500 scientists and 

engineers. When asked if he did this to access Chinese engineering talent, he responded bluntly: "Unless I 

promised the Chinese Government that I would open up an advanced technology lab there, I was told that I 

would not be able to sell to the Chinese telecommunications providers," (most of which are de facto 

controlled by the Chinese government). 

The Chinese government has employed the weapon of forced technology transfer to gain technological knowhow in a variety of industries. A well-known case in point concerns high-speed rail. Over the past 15 years 

China built the largest high-speed rail network in the world. That massive purchase of rolling stock, signal 

systems, and related equipment was something no foreign rail producer could afford to ignore. As such, the 

Chinese government had enormous leverage to pressure foreign producers to give the Chinese state-owned 

enterprise competitors key technology and IP. The Chinese term for this is "exchanging market for 

technology."" As Chen and Haynes document, in 2004 the State Council of China adopted a new railway 

development strategy that shifted from just subsidizing domestic producers in order to help them improve 

their technology to one where they "introduce advanced technology through joint design and manufacturing, 

[with an ultimate objective to] ro build a Chinese brand."53 After that the state Ministry of Railways (MOR) 

launched three tenders for foreign high-speed electric trains and in each one MOR stipulated that foreign 

companies had to collaborate with domestic partners in the competition and had to transfer key technologies 

to achieve localizarion. 16 The tender included two key conditions: to win, the bidder had to transfer 

technology to China and the final products had to marketed under the Chinese state-owned enterprise rail car 

brand. This was all in support of the government's "Action Plan for the Independent Innovation of Chinese 

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High-Speed Trains." As a result, multiple foreign train companies were pressured to transfer valuable 

technology to rhe Chinese companies (now principally one company due to the central government forcing 

the two main companies to merge into a powerful national champion, Chinese Railway Construction 

Corporation, now the largest rail producer in the world.) As Chen and Haynes write, "The result is a new 

HSR [high speed rail] industry in China has emerged which now serves the new vast HSR network and looks 

externally to export its new skill in HSR production and its new cutting-edge activity in HSR innovations." 

Not only are CRCC and related Chinese companies virtually guaranteed all Chinese rail projects, but CRCC 

is now aggressively exporting trains and train systems containing advanced foreign technology to other 

nations, backed wirh generous export subsidies from the central government. For example, the China ExportImport Bank (a state agency) announced in 2017 rhe equivalent of $30 billion in financing assistance for 

CRCC exports. 54 (Surprisingly, rhe U.S. Department of Commerce International Trade Administration, in its 

document promoting U.S. rail export opportunities to China, maltes no mention of rhe fact rhat the lion's 

share of rhese opportunities come with forced technology transfer requirements. 5

5

) 

The Chinese have employed different tactics to the same end in the biopharmaceutical industry, where 

various policies enable Chinese firms to get access to U.S. technology. For example, the relatively short sixyear term for data exclusivity, coupled wirh the lack of a formal definition of a "new chemical entity," means 

the Chinese government can pressure U.S. firms to turn over important data to Chinese generic drug firms. 

Similarly, the Chinese government requires that any drugs sold in China must go through Chinese clinical 

trials, even if rhey are approved in rhe United States. This extends the time for sales before a company can sell 

a drug by as much as 8 years, meaning that the company has only 12 years left of patent-protected sales in 

China before a Chinese generic company can copy rhe drug. Moreover, in China, unlike rhe United States 

and Europe, rhere is no extension of marketing exclusivity at the back end to talte into account long clinical 

trial delays. Moreover, China also issues compulsory licenses for the intellectual property for particular 

drugs. 56 Finally, it presses foreign biopharmaceutical companies to form joint ventures if they want rheir drugs 

more easily put on the government list of drugs to qualifY for reimbursement." 

We also see this in cloud computing. China requires companies running cloud-computing operations to be 

locally controlled. This means rhat if a company like Amazon Web Services or Microsoft wants to serve rhe 

rapidly growing Chinese market it must partner with a Chinese company and sell their services under the 

Chinese company brand. And as part of this partnership the expectation is that the foreign cloud provider will 

provide rhe Chinese firm with technology and know-how." Chinese cloud providers, like Aliyun, the cloud 

services unit of Alibaba, is able to establish its own data centers in the United States without any similar 

requirements. 

The Chinese have long had policies in place requiring joint ventures with local firms in order for foreign 

companies to produce automobiles in China." And many of those production JV requirements also include 

joint R&D facility requirements. The government is now doubling down on this approach in order to be the 

global leader in electric vehicles. For example, Renault-Nissan and Ford Motor have established joint electriccar ventures in China.60 Indeed, rhe New Energy Vehicles program under Made in China 2025 strategy 

requires foreign companies wishing to sell in China to rlisclose and share valuable technology with their local 

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joint venture parrner.61 We see this pattern in many other advanced technology industries, including wind 

turbines!' 

Tools to Force Technology Transfer: 

The Chinese have a host of tactics with which they use to pressure foreign companies to transfer technology. 

All involve "making them an offer they can't refuse." The first and most important is to set up industries that 

are off-limits to fully-owned foreign direct investment. China's "Catalogue oflndustries for Foreign Direct 

Investment" classifies industries based on categories: "encouraged," "restricted," "prohibited." Other 

industries are considered to be "permitted." It is in the restricted category, (which includes 35 sectors, such as 

automobiles, commercial aircraft, and high-value added telecommunications services) that foreign firms are 

legally required to partner with a domestic firm in a joint venture. 

China wields a host of other weapons to help foreign firms understand that it is in their interest to share their 

technology. One is to bring bogus anti-trust charges against foreign advanced industry companies and then as 

part of the settlement make it clear that they must transfer technology to local Chinese partners!' And with 

Chinese courts largely rubber-stamping the government's dictates, foreign companies have little choice but to 

comply. And, all too often, complying means changing their terms of business so that they sell to the Chinese 

for less and/or transfer even more IP and technology to Chinese-owned companies, often after paying 

substantial fines to the government. 64 

Another tool is to force foreign companies operating in China to store data about Chinese users in China and 

turn over encryption keys and source code for inspection. Likewise, in some industries companies must 

disclose trade secrets as a precondition for receiving regulatory approvals for investments. Still another is to tie 

regulatory and licensing approvals needed for operation in China to technology transfer. Still another is to tie 

purchases by the state, including state-owned enterprises, to technology transfer. For example, the 

Commercial Aircraft Corporation of China (COMA C) requires foreign suppliers to enter into JVs with 

Chinese suppliers if they want to sell to COMAC.65 

China's anti-monopoly law has been designed so the government can use it to force foreign companies to 

license technology at favorable rates to Chinese firms. Article 55 states, "This Law is not applicable to 

undertakings' conduct in exercise of intellectual properry rights pursuant to provisions of laws and 

administrative regulations relating to intellectual properry rights; but this Law is applicable to undertakings' 

conduct that eliminates or restricts competition by abusing their intellectual property rights. "66 Yet, for the 

Chinese government, "abuse" means charging market-based IP licensing fees to Chinese companies. This 

provision has been used to take legal action against companies whose only "crime" is to be innovative and 

hold patents. Indeed, the Chinese law allows compulsory licensing ofiP by a "dominant" company that 

refuses to license its intellectual properry (IP) if access to it is "essential for others to effectively compete and 

innovate. "67 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 transfer even more IP and technology to Chinese-owned companies, often 

after paying substantial fines to the government!' 

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Separately, there exists growing concern that "secure and controllable" measures mandated by China's 

National Security Law and Cybersecurity Law may force source code (i.e., intellectual property) disclosure 

and may also induce or force the localization of design or manufacturing processes of!CT products such as 

semiconductors or servers. Specifically, on November 7, 2016, China enacted a new Cybersecurity Law that 

introduces (further) restrictive requirements on foreign technology companies: The Economist aptly described 

it as a "techno-nationalist Trojan horse."69 China's new cybersecurity law-through discriminatory standards 

and forced local data-storage requirements-reinforces existing policies that segment its citizens and tech 

firms, in adtlition to its broader Internet ecosystem, from the rest of the world. The law is significant, as it 

represents China's first enactment of rules on the collection and use of personal data. The law forces 

companies in "critical information infrastructure" to store users' "personal information and other important 

business data" in China, a concept known as "forced localization.''7° 

China may use the law to expand an existing-and controversial-cybersecurity regulation that is highly 

discriminatory toward foreign tech firms and products. The cybersecurity law states that China wUI introduce 

a cybersecurity multUevel protection scheme (MLPS) for ICT products used in network security by CII 

sectors. This requirement is perhaps based off an existing MLPS that China has applied for information 

security (although this is unclear from the wortling in the law).71 This potential relationship raises serious 

concerns for foreign technology companies, as this earlier MLPS was highly discriminatory-it prohibited 

certain sectors from using foreign IT products and forced foreign companies to transfer IP and source code to 

China for review." 

Equally troubling is the potential for China to use the law to revive the use of a highly discriminatory 

standard for IT products-the so-called "secure and controllable" concept-and intrusive security audits, both 

of which can be used to discriminate against foreign firms and to force the disclosure of valuable intellectual 

property. The law calls for the use of "secure and trusted" network services and productions, without defining 

the term. Current deliberations by China's National Information Security Standards Technical Committee 

(NISSTC) on what this concept means (see below) and past Chinese government policy proposals point 

toward its mercantilist intent.73 This concept, along with its analogous "independent and controllable," 

"secure and controllable," or "indigenous and controllable" terms have been a part of Chinese technology 

policymaking debates ever since the country backed down on implementing such a rule as part of a banking 

law in 2015. (That proposed banking law used a "secure and controllable" provision as part of an explicit aim 

to replace foreign technology goods with local ones. China decided to "withdraw" this provision after it 

generated significant opposition from tech companies and trading partners, especially the United States.)" 

Essentially, China wants to force software companies, network-equipment makers, and other tech companies 

to disclose source code to supposedly prove their products can't be compromised by hackers?' Source code--

the instructions that make a computer program run--enable technology to do the amazing things it does. For 

companies developing software, protecting source code is necessary to prevent other entities from stealing and 

free riding on the large research and development costs associated with software development. Source code is 

at the heart of a company's competitive advantage, but being digital, it is at heightened risk of duplication. 

Given China's poor protection ofiP, not to mention its role in the cybertheft offoreign trade secrets, it's 

unsurprising that foreign firms and trading partners, such as the United States, have reasonable fears that such 

intrusive inspections are simply a way to access and steal valuable intellectual property. 

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Other Steps to Gain Technology Dominance 

Once Chinese firms gain access to needed foreign technology, the next step of the Chinese strategy is to 

ensure that they have the capital needed to scale up. This involves direct and indirect subsidies and also 

designing markets protected from foreign competition so the Chinese firms can accumulate capital. Once 

firms have the technology, competencies and scale to go global, the government often subsidizes global 

market expansion, such as through the China Export-Import Bank (an entity the World Bank has funded) 

and China's Export and Credit Insurance Corporation (Sinosure).76 Moreover, by leading to global 

overcapacity and selling below cost, China uses that overcapacity as a cudgel to disrupt the economics of 

innovation-based industries (i.e., subsidized competition prevents foreign competitors from earning 

reasonable profits from one generation ofinnovation to reinvest in future generations of innovation) and thus 

weaken foreign competitors, enabling Chinese firms to gain even more global market share. 

The Chinese government also works to limit foreign competition for its budding national champions. 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 60 percent Chinese-made components when producing 

intelligent manufacturing equipment.77 And despite the fact that China "clarified and underscored ... that it 

agreed that enterprises are free to base technology transfer decisions on business and market considerations" at 

a December 2014 meeting of the United States-China Joint Commission on Commerce and Trade OCCT), 

USTR notes that China has "announced two measures relating to [local procurement of] information 

technology equipment used in the banking services sector and in providing Internet- or telecommunicationsbased services more generally."78 

China also lavishes Chinese firms that have obtained foreign technology with massive subsidies. As George 

and Usha Haley document in their book, Subsidies to Chinese Industry: State Capitalism, Business Strategy, and 

Trade Policy, China's game plan has long been to "aggressively subsidize targeted industries to dominate 

global markets." As they document, in the 2000s, China provided almost $100 billion in subsidies to just 

three industries alone: $33 billion for paper, $28 billion for auto parts, and $27 billion for steeF9 China's 

share of global solar panel exports grew from just 5 percent in the mid-2000s to 67 percent today, with 

Chinese solar output turbocharged by at least $42 billion of subsidies from 2010 to 2012 alone.8

° China now 

wants to replicate this strategy in other advanced-technology industries, such as semiconductors and electric 

batteries." For instance, China's National Integrated Circuit (IC) Strategy calls for at least $160 billion in 

subsidies to create a completely closed-loop semiconductor industry in China, including explicit plans to 

halve Chinese imports ofU.S.-manufactured semiconductors by 2025 and eliminate them entirely by 2035. 

The "Made in China 2025 Strategy" is supported by some 800 state-guided funds to the tune of more than 

$350 bUlion, including advanced-battery manufacturing, wide-body aircraft, and robotics. 

China has also made the development of indigenous technology standards, particularly for information and 

communications technology products, a core component of its industrial development and economic growth 

strategy. China has committed to developing unique national standards for dozens of high technology and 

ICT products-in many cases where international standards already exist--developing homegrown standards 

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for everything from mobile telecommunications services and wireless local area networks to encryption 

technologies and the Internet ofThings.82 In some cases, such as with WAPI (the Wireless Local Area 

Network Application 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 would have to be 

WAPI-compliant and use its encryption method, in contravention of its commitment to let foreign 

enterprises use desired technologies in the provision of telecommunication services.83 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 3G and 4G telecommunications standards, Wi-Fi standards and information 

security standards. "84 More commonly, however, Chinese officials "pressure foreign companies seeking to 

participate in the standards-setting process to license their technology or intellectual property on unfavorable 

terms."" 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."" 

What is at Stake? 

Given China's Made in China 2025 plan, it is no exaggeration to suggest that, without aggressive action, the 

United States may face a world within two decades where U.S. jobs in industries as diverse as semiconductors, 

computers, biopharmaceuticals, aerospace, Internet, digital media, and automobiles are significantly reduced 

due to Chinese policies unabashedly targeting domestic and 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, for example, the value of the dollar was to fall significantly related to the yuan (and other 

currencies), it is possible that America could regain at least some of the production lost to China in industries 

like textiles and apparel, furniture, metal parts, and other similar low- and medium-value added products. 

Companies could simply buy machines, set up factories, and restart production domestically in a cost-effective 

way. But if America's technology companies were severely weakened or even put out business, no currency 

decline could bring them back because competitiveness 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 cannot simply buy 

some semiconductor equipment and start producing chips. To do that would require not just machines but 

deep and complex tacit knowledge embedded in the firm in workers (from the shop floor to scientists to 

managers) coupled with an innovation ecosystem (universities training the right talent, a network of suppliers, 

etc.). Once those capabilities are lost, they are essentially gone, and are very difficult to resurrect absent 

massive government intervention. 

There is an additional reason why losing advanced technology industries is problematic. Most technologybased industries have high barriers to entry. In contrast to the t-shirr industry where entry largely requires just 

capital to buy sewing machines, entry into innovation-based industries requires both physical and intellectual 

capital. In an industry like semiconductors, for example, firms spend hundreds 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, fixed costs are extremely 

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high, but marginal costs are low. In these innovation-based 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 are largely fixed (there is only so much demand for semiconductors, jet 

airplanes, and other similar advanced products), and if a mercantilist-supported competitor gains market 

share, the market-based competitor loses share. Second, because profits decline more than sales, it is now 

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

services, meaning that 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. 

A loss of advanced technology industries has two major negative impacts on the U.S. economy. The first is on 

prosperity, as the average wage in these industries is approximately 75 percent higher than average U.S. 

wages.87 The second is on national security and the defense industrial base. U.S. defense superiority is based is 

in large part on technological superiority. Our service men and women go into any conflict with the 

advantage of fielding technologically superior weapons systems. But maintaining that advantage depends on 

the U.S. economy maintaining global technological superiority, not just in defense-specific technologies but 

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 whither and Chinese ones strengthen. It is certainly a highly risky proposition to assume that 

the United States can continue its weapons systems superiority over the Chinese if. 1) the Chinese continue to 

advance, largely through unfair, predatory practices at the pace they are; and 2) the United States loses a 

moderate to significant share of its advanced technology innovation and production capabilities. As ITIF 

wrote in 2014, "The United States defense system is still the most innovative in the world, but that leadership 

is not assured and is in danger of failing. This decline is not only impacting defense innovation and 

capabilities, but also overall commercial innovation and U.S. competitiveness."" 

What the U.S. Government Should Do? 

The main approach currently to pressure the Chinese government to behave as a more responsible global 

actors is the imposition of tariffs under Section 301 authority. The Trump administration has placed tariffs 

on a wide array of Chinese exports in an effort to bring the Chinese government to the negotiating table. It is 

not dear if this approach will succeed. 

Regardless, there are additional tools the federal government should consider employing. But perhaps the 

most important step is to develop joint campaign with our allies. The United States should be doing much 

more to develop such a coordinated agenda with like-minded allies as that will help create pressure that will 

make it more likely that China feels like it has no choice but to play more by the rules. 

In any case, the U.S. government can and should take a number of steps on its own. And there are steps 

Congress could take to help roll back Chinese innovation mercantilism. 

The first relates to boosting the institutional capacity of the federal government to understand and address 

these issues. The House should introduce and pass a companion to the National Economic Security 

Strategy Act of20l8 (S 2757). By requiring the administration to develop a national economic strategy to 

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support the national security strategy, the legislation will not only help the administration malte stronger 

connections between economic security and national security, it will help identifY challenges and policy needs. 

By focusing attention not only on the strengths and wealtnesses within American industry related to national 

security broadly defined, but also on the threats from other nations, policymalters will be better prepared to 

talte the decisive steps that are required. 

Congress should instruct USTR to bring a WfO case against China over its ongoing failure to publish 

thousands of trade-related final measures, including subsidies, in a single official journal as it's 

required to do under WfO rules. One reason it's been difficult to bring subsidy cases against China at the 

WTO is that China fails to properly publish its subsidies. Getting the WfO to enforce China's publication 

requirements would malte it possible to bring additional WfO cases for subsidy or other violations, such as 

forced IP or technology transfer. 

The United States also needs a new regime to contest China's strict technology-licensing laws. Under Chinese 

contract law and technology import-export regulations (or TIER), a foreign licensor into China is obligated to 

offer an indemnity against third-party infringement to the Chinese licensee. 89 In other words, a foreign 

licensor licensing into China has to provide insurance that practicing the licensed technology does not 

infringe any IP held by a third party. But, under TIER, this legal obligation only attaches to "technology 

import contracts." That is, this obligation only attaches to a foreigner licensing technologies into China; the 

Chinese licensor has no such obligation. This discriminates against foreign licensors. The foreign licensor is 

legally bound to offer something that the Chinese licensee is not, making it difficult for small companies, 

companies which may experience high litigation risks in China's litigious environment, and companies 

engaged in collaborative research and development (such as cross-licensing, open-source licensing, and 

charitable activities) to arrive at mutually beneficial licensing agreements. TIER maltes it almost impossible 

for small companies, such as start-ups, to license their brealtthrough technologies in China, because no startups (due to their limited resources) would be able to conduct the complex analysis required by China's highlitigation environment and industrial policies that limit the value of foreign IP in order to offer insurance 

against third-party infringement disputes. While large multinational companies could avoid this issue by 

licensing technology (e.g., through their China-based subsidiaries), start-up companies cannot do so because 

they rypically do not have subsidiaries in China. Consequently, the impact of the mandatory indemnification 

requirement on small- and medium-sized companies, and especially start-ups, is particularly acute. 

Another provision in TIER mandates that in technology-import contracts, improvements belong to the parry 

making the improvements, which rypically is the Chinese licensee. Thus, foreign licensors, including U.S. 

firms, cannot negotiate to own any improvements or to share the improvements with Chinese licensees, even 

if both licensing parties desire for the improvements to be shared or owned by the foreign licensors. 

Moreover, TIER prohibits any technology-import contracts to "unreasonably restrict the export channels" of 

the Chinese licensee, thereby impeding the ability of the two licensing parties to allocate markers as they see 

mutually beneficial. Put simply, U.S. companies are obligated under TIER to let Chinese firms own the 

improvements and cannot freely negotiate with Chinese entities. 

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To address this discrimination, Congress should enact a regime whereby if Chinese entities seek licenses 

in the United States, then the Chinese enterprise must license on the same terms by which foreigners 

are required to license into China. Such legislation would specifically require the Chinese licensor to offer 

an indemnity against infringement by the U.S. licensee and to stipulate that the U.S. licensees are entitled to 

own the improvements they make and receive a reasonable market allocation under the licenses. Another 

possible approach would be for Congress to pass legislation requiring that the U.S. company whose original 

technology was improved by the Chinese entity receives an automatic exclusive license to use that improved 

technology [in the United States], such that the full potential of the original technology owned by the U.S. 

companies is not encumbered by improvements owned by the Chinese entity. Although technology-licensing 

law is usually a matter of state contract law, the legislation would be enacted pursuant to Congress's power to 

legislate international commerce. 

There are other ideas that are at least worth considering and developing further. 

Tighten the process of issuing student visas from students coming from China and strengthen FBIuniversity partnerships to limit inappropriate IP transfer. This would also serve the purpose of limiting 

intellectual propetty theft ftom U.S. universities sometimes carried out by Chinese graduate students sent to 

the United States for that purpose. At minimum, the FBI should engage in a stronger partnership with U.S. 

research universities to help them better understand how to take steps to better identifY students here for the 

purpose of intellectual property transfer and how to limit such access. The point is not to just limit access and 

transfer of sensitive militaty technology subject to deemed export controls, but also advanced technology that 

can help China compete with the United States. 

Limit ongoing science and technology cooperation with China. It makes little sense to engage in S&T 

cooperation with China, especially considering that much of that cooperation is lopsided with the United 

States contributing more than the Chinese. 

Take a hard line on limiting most Chinese investment in the United States, including in Chinesebacked tech accelerators.90 With the passage of FIRRMA and the Export Control Act it will be easier for 

the administration to do this, but Congress should use oversight to ensure that they are taking advantage of 

these new authorities. 

Prohibit Chinese firms that are stealing IP from accessing the U.S. banking and financial system. The 

administration could deny Chinese-headquartered enterprises access to listing on U.S. stock exchanges if they 

fail to provide financial statements in line with generally accepted accounting principles. 

Build an "inspection wall" against counterfeit and pirated Chinese goods, with the goal of stopping 

them all. China accounts for 87 percent of counterfeit goods seized each year, with costs estimated to be 

between $30 and $40 billion." Tougher border enforcement would harm Chinese exporters illegally shipping 

goods to the United States. 

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Prevent foreign governments from abusing America's "foreign sovereign compulsion" defense for 

mercantilist ends. China and other countries in recent years have abused the doctrine of"foreign sovereign 

compulsion" to justifjr anticompetitive behavior that has harmed U.S. interests even though it has passed 

muster in U.S. courtS. For insrance, the U.S. Second Court of Federal Appeals in 2016 threw out a case 

against Chinese vitamin C makers alleged to have conspired to ftx prices and limit supplies in international 

markets, including in the United Srates, on grounds that the behavior was directed by the Chinese 

government and thus wasn't actionable under U.S. antitrust law because deference must be given to the 

official policies of foreign governments (i.e., the foreign sovereign compulsion defense). While this verdict was 

recently reversed by the U.S. Supreme Court, Congress should curb foreign governments' ability to abuse the 

foreign sovereign compulsion defense for these kinds of mercantilist ends.92 One way to do so would be to 

require courts to give consideration to the implications for U.S. industries' global competitiveness in cases 

involving the foreign sovereign compulsion defense.93 Congress should also eliminate a regulation that 

exempts mergers involving Chinese state-owned enterprises from having to be announced in accordance with 

U.S. antitrust law. 

Pass legislation that allows firms to ask the Department ofJustice for an exemption to coordinate 

actions regarding technology transfer and investment to other nations. One of the key levers China has is 

that it's a monopsonist: its market is so large it can essentially compel foreign companies to hand over 

technology in order to sell their products in China. But if companies in a similar industry can agree that none 

of them will transfer technology to China in order to gain market access, then the Chinese government will 

have less leverage over them. The same would be true if companies agreed that they would not invest in China 

until China improved its IP protections. Such an amendment to antitrust law would be similar to the 1984 

Cooperative R&D Act, which allowed firms to apply to form pre-competitive R&D consortia. 

Stand up a new arm ofDOJ's antitrust division focused on foreign government-enabled and led 

antitrust violations. Currently, DOJ can bring actions against foreign firms if they are found to be acting in 

an anticompetitive manner. DOJ needs to not only be able to but be willing to bring actions against foreign 

firms if their actions are helped by their state in a way that leads to anticompetitive results. In the case of 

China, its subsidies, forced technology transfer, IP theft, and other unfair actions give Chinese firms unfair 

advantages that distort markets in an anticompetitive manner. DOJ should be able to investigate cases and if 

they found a violation, bring those to an administrative law judge who would adjudicate the case and the 

damages the U.S. government could impose on the Chinese companies that benefited from the anticompetitive Chinese government policies or practices. The challenge will be that not all Chinese companies 

likely to have cases brought against them are involved in the U.S. market. But some are, and for the ones that 

aren't such a ruling would effectively preclude them from entering the U.S. market. 

Take stronger actions to make the United States more competitive. Finally, it is important to note that 

while policies and actions to roll back foreign mercantilist actions are critical, the United States does need to 

do much more to boost U.S. competitiveness at home. Among other steps this includes expending lending 

authorities for the Export-Import Bank;94 increased funding for pre-competitive research, including for the 

Manufucruring USA program; increased efforts to develop STEM talent, a more generous R&D tax credit 

and other steps. For example, at least 26 other nations field a more generous R&D tax incentive, 21 other 

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nations fund more university-based R&D and many more nations invest more in industrially-relevant 

R&D." As such American needs its own Made in USA 2028 program where the federal government 

identifies the technologies most important to America's national and economic security and allocates at least 

an additional $25 billion annually to support their development." Moreover, the federal government should 

work to establish a deeper North American supply chain, as at least somewhat of an alternative to the Chinese 

supply chain. This would entail maintaining (if not improving) NAFTA and expanding it to other Latin 

American nations. 

In summaty, taking firms and strategic action against Chinese predatoty, mercantilist practices is long 

overdue. Whether or not such actions can be successful is an open question. But one thing is clear: not taking 

action will make it much easier for the Chinese government to achieve their goal of dominating global 

technology industries. 

References: 

1. Stephen J. Ezell, and Robert D. Atkinson, "False Promises: The Yawning Gap Between China's WfO Commitments and 

Practices" (Information Technology and Innovation Foundation, September 2015),-

https://itif.orglpublications/20!5/09/17/false-promises-yawning-gap-berween-china%E2%80%99s-wto-commitments-andpractices; Robert D. Atkinson, Enough is Enough: Confronting Chinese Innovation Mercamilism (Information Technology 

and Innovation Foundation, February 2012), http://www2.itif.org/2012-enough--enough-chinese~mercamilism.pdf, Robert D. 

Atkinson, Nigel Cory, and Stephen J. Ezell, "Stopping China's Mercantilism: A Doctrine of Constructive, Alliance-Backed 

Confrontation .. (Information Technology and Innovation Foundation, March 2017), 

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2. Robert D. Atkinson, "China's Strategy For Global Technology Dominance By Any Means Necessary," Forbes, November 12. 

20 I 5, http://www.forbes.com/siteslrealspin/201 5111112/chinas-strategy-for-global-technology-dominance-by-any-meansnecessary/# II b91 b207242. 

3. Atkinson, "Enough is Enough." 

4. Jost Wiibbeke et al., "Made in China 2025: The Making of a High-Tech Superpower and Consequences for Industrial 

Countries .. (Mercator Institute for China Studies, December 2016), 

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na_2025.pdf. 

5. Joseph Nahm, "China's Specialization in Innovative Manufacturing .. (power point, National Academies of Sciences Innovation 

Policy Forum, Washington, DC, May 23, 2017). 

6. Paul Mozur, "Inside a Heist of American Chip Designs, as China Bids for Tech Power," The New York Times, June 22, 2018, 

https:l/www.nytimes.com/2018/06/22/rechnology/china-micron-chips-thefr.html. 

7. Katherine Linton, Alexander Hammer, and Jeremy Wise, China:. Intellectual Property Infringement, Indigenous Innovation 

Policies, and Frameworks for Measuring the Effects on the U.S. Economy (U.S. International Trade Commission, November 

2010), http://www.usitc.gov/publications/332/pub4199.pdf. 

8. The Intellectual Property Commission, The ReportofThe Commission on the Theft of American Intelkcrua/Property, (United 

States: The National Bureau of Asian Research, May 2013), II, 

http://www.ipcommission.org/report/ip_commission_report_052213.pdf. 

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9. The Intellectual Property Commission, The &port of The Commission on the Theft of American Inulkctual Propmy, (United 

States: The National Bureau of Asian Research, May 2013), 11, 

hup://www.ipcommission.org!report/ip_commission_report_052213.pd£ 

10. Keith B. Alexander, "Cybersecudty and American Power" (conference presentation hosted by the American Enterprise Institute, 

Washington, D.C., July 9, 2012). 

11. National Counterintelligence and Security Cemer, "NCSC Releases 2018 Foreign Economic Espionage in Cyberspace Report," 

news release, July 26, 2018, https://www.dni.gov/flles/NCSC/documents/news/20180724-ncsc-press-release-foreign-econ-espcyber.pdf. 

12. Business Software Alliance (BSA), "The Compliance Gap: BSA Global Software Survey" (BSA, June 2014), 4, 

http://globalsmdy.bsa.org/2013/ downloads/studies/20 !3GlobalSurvey _Study _en. pdf. 

13. Mark Lee and Bruce Einhorn, "Microsoft's Ballmer Says China Piracy is a Problem," Business Week. May 24, 2010. 

14. Katherine Linton, Alexander Hammer, and Jeremy Wise, China: InteUectual Property Inftingnnent, Indigenous Innovation 

Policies, and Frameworks for Measuring the Effects on the U.S. Economy (Washington, DC U.S. International Trade Commission, 

20 I 0), http://www.usitc.gov/publications/332/pub4199.pd£ 

15. Daniel Golden, Spy Schools: How the CIA, FBI and Foreign lnteUigence Secretly ExpkiitAmericas Universities, (New York: Henry 

Holt, 2017. 

16. Joan Lappin, "American Superconductor and Its Rogue Employee Borb Duped by Sinovel," Forbes, Seprember, 27, 2011, 

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17. Robert Atkinson and Stephen Ezetl, Innovation Economics: The Race for Global Advantage (New Haven: Yale University Press}, 

202. 

18. Andreas Schetter and Mary Teagarden, "Protecting Intellectual Property in China" MIT Sloan Management Review, June 17, 

2014, http:/ /sloanreview.mir.edu/arricle/protecting-intellecrual-property-in-china/. 

19. Katherine Unron, Alexander Hammer, and Jeremy Wise, China: Intellectual Property Infringement, Indigenous Innovation 

Policies, and Frameworks for Measuring the Effects on the U.S. Economy {U.S. International Trade Commission, November 

20 I 0), http://www.usitc.gov/publications/332/ pub4199 .pdf. 

20. Ibid, 30 

21. GaCtan da Rassenfosse and Emilio Ra.iteri, "Technology Protectionism and the Patent System: Strategic Technologies in 

China," College of Management of Technology, Ecole Polytechnique Federale de Lausanne {EPFL), Switzerland, 

https://ex[ranet.sioe.orgfuploads/sioe2017/de-rassenfosse_raiteri.pdf. 

22. Ibid. 

23. Select USA. "Foreign Direct Investment (FDI) China," accessed January 10,2017, http://selectusa.eommerce.gov/counrry~fact· 

sheets/China_Fact_Sheet.pdf. 

24. Rhodium Group, "Chinese Investment Monitor," accessed January 4. 2017, http://rhg.com/interactive/china~investment~ 

monitor. 

25. Ibid. 

26. Bijiun Wang and Huiyao Wang, «Chinese Manufacturing Firms' Overseas Direct Investment (ODI}: Patterns, Motivations and 

Challenges" Rising China: Global Chalknges and Opportunities, (August 2011), 99, hrrp://ssrn.com/abstract= 1907170. 

27. Paul Mozur and Jack Ewing, "Rush of Chinese Investment in Europe's High-Tech Firms Is Raising Eyebrows," The New York 

Times, September 16, 2016, http://www.nytimes.com/20 16/09/17/business/ deal book! china-germany-takeover-mergertechnology.html?_r=Oi. 

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28. Thilo Hanernann, Daniel H. Rosen, and Cassie Gao, 'Two--Way Street: 25 Years of US-China Direct Investment" (report, US~ 

China FDI Project, Rhodium Group and the National Committee on U.S.-China Relations, in partnershipwith the American 

Chamber of Commerce in Shanghai and the China General Chamber of Commerce, 20 16), http:// rhg.com/wpcomem/uploads/2016/11/TwoWayStreet_FullRepon_En.pdf. 

29. Bijiun Wang and Huiyao Wang, "Chinese Manufacturing Firms' Overseas Direct Investment (ODI): Patterns, Motivations and 

Challenges" Rising China: Global Chalknges and Opportunities, (August 2011), 99, http://ssrn.com/abstract=l907170. 

30. Ibid, I 03. 

31. Ibid, 110. 

32. Ibid, 11 I. 

33. Michael Brown and Pavneet Singh, "China's Technology Transfer Strategy: How Chinese Investments in Emerging 

Technology Enable a Strategic Competitor to Access the Crown Jewels of U.S. Innovation, (Washington, DC: Defense 

Innovation Unit Experimental DIUx, January 2018), 

https://admin.govexec.com/medialdiux__chinatechnologytransferstudy_jan_2018_(1).pdf. 

34. "Zhongguancun Development Group," accessed July 3, 2018, http://www.zgcgroup.corn.cn/business/overseas_funds.html. 

35. "Shenzhen Capital Group Made 6 New Investments in March 2018," Shenzhen Capital Group Co, accessed July 7 2018, 

http://www.szvc.corn.cn/ english/a/20 !80409/2388.shtml. 

36. "Government Backed Funds," Shenzhen Capital Group Co, accessed July 7, 2018, 

http://www.szvc.eom.cn/english/OurBusiness/FundManagement/GovernrnentBackedFunds/index.shtml. 

37. "Investment Ponfolio, .. Shenzhen Capital Group Co, accessed July 7, 2018, 

http://www.sz:vc.corn.cn/english/OurBusiness/Investrnent/InvestrnenrPonfolio/index.shtml. 

38. "Maryland International Incubator," accessed January 10,2017, http://www.mi2.umd.edu/#companies. 

39. Hui Li and Jonathan Browning, "China Inc. Goes on a Buying Spree for Global Health Assets," Bloomberg, July 5, 2016, 

https://www.bloomberg.com/news/atticles/2016-07-05/china-inc-goes-on-a-buying-spree-for-global-health-care-assets. 

40. These steps were dearly laid our in the protocol on the accession of the People's Republic of China.: "China shall, upon 

accession, comply with the TRIMs Agreement, without recourse to the provisions of Article 5 of the TRIMs Agreement. China 

shall eliminate and cease ro enforce trade and foreign exchange balancing requirements, local content and export or performance 

requirements made effective through laws, regulations or other measures. Moreover, China will not enforce provisions of 

contracts imposing such requirements. Without prejudice to the relevant provisions of this Protocol. China shall ensure that rhe 

distribution of import licenses, quotas, tariff-rate quotas, or any other means of approval for importation, the right of 

importation or investment by national and sub-national authorities, is not conditioned on: whether competing domestic 

suppliers of such products exist; or performance requirements of any kind, such as local content, offsets, the transfer of 

technology, export performance or the conduct of research and development in China." 

41. Congressional-Executive Commission on China, "China's Working Party Report," (November 2011), 49, 

http://www.cecc.gov/pages/selectLaws!WfOimpact/wkptrptPRCWTO.php; Atkinson, Enough is Enough, 13. 

42. Thomas M. Hout and Pankaj Ghernawat, "China vs the World: Whose Technology Is It?," Harvard Business Review, December 

20 I 0, http://hbr.org/20 I 0/12/china-vs-the-world-whose-technology-is-it/ar/1. 

43. Wayne M. Morrison, "China-U.S. Trade Issues"' (Congressional Research Service, April2018), 38, 

https://fu.orglsgp/crs/row/RL33536.pd£ 

44. Tim Mak, "Geithner: China 'Stealing' U.S. Ideas," Politico, September 23, 2011, 

http://www.politico.com/news/stories/0911/64275.html. 

45. KunJiang, Wolfgang Keller, Larry D. Qiu, William Ridley, "International Joint Ventures and Internal vs. External Technology 

Transfer: Evidence from China," (Working paper, the National Bureau of Economic Research, Cambridge, Massachusetts, 

2018), http://www.nber.org/papers/w24455. 

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46. The US-China Business CnuncU (USCBC), "USCBC 2014 China Business Environment Survey Results: Growth Cnntinues 

Amidst Rising Competition, Poliey Uncertainty" (USCBC, 2014), 

https://www.uschina.org/sites/defuult!flles/USCBC%202014%20Chinao/o20Businesso/o20Environmento/o20Survey"k20Results 

o/o20%28Englisho/o29_0.pdf. 

47. U.S. Congress, Office of Technology Assessment, "Technology Transfer to China," (Washington, DC: U.S. Government 

Printing Office, July 1987), 6, https://www.princeton.edu/-otaldisk2/1987/8729/87290l.PDF. 

48 Jiang, Kdler, Qiu, "International Joint Ventures and Internal vs External Technology Transfer Evidence from China." 

49. AmCham China, "China Business Climate Survey Report, 2013,"' https:l/www.amchamchina.org/policy-advocacy/businessclimate-survey/2013-business-climate-survey. 

50. Thilo Hanemann, Daniel H. Rosen, and Cassie Gao, "Two--Way Street: 25 Years of US-China Direct Investment" (report, USChina FDI Project, Rhodium Group and the National Committee on U.S.-China Relations, in pannership with the American 

Chamber of Commerce in Shanghai and the China General Chamber of Commerce, 2016), 10, http://rhg.com/wpcontenr/uploads/2016/11/TwoWaySrreer_FullRepon_En.pdf. 

51. Office of the U.S. Trade Representative Executive Office of the President~ Finding.r of the Investigation into China's Acts, Policies, 

and Practices Related to T.chnology Transfer, Intelkctual Property, and Innovation Under &ction 301 of the Trade Act of 1974, 

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52. Zhenhua Chen, Kingsley Haynes, "A Shon History of Technology Transfer and Capture: High Speed Rail in China," 

(November 2016), 4, https://papers.ssrn.cont!sol3/papers.cfm?abstract_id=2872527. 

53. Ibid, 8. 

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https://economicrimes.indiatimes.com/news/international/business/chinas-high-speed-train-maker-to-get-30-billion-for-exporrpush/anicleshow/60924380.cms. 

55. "China- Rail and Urban RaU," Expon.gov, 2017, https://~.expott.gov/anicle?id=China-Rail-and-Urban-Rail. 

56. Daniel C.K. Chow, "Three Major Problems Threatening Multi-National Pharmaceutical Companies Doing Business in 

China," (working paper, Ohio State Public Law and Legal Theory, 2017), 

https://papers.ssrn.cont!sol3/papers.cfm?abstract_id=3029347. 

57. Angus Liu, "Riding on Booming Drug Sales, AstraaZeneca Forms $133M China Joint Venture," FierceBiotech, November 27, 

2017, https://www.flercebiotech.com/biotech/ riding-booming-drug-sales-astrazeneca-forms-133m-china-joint~venrure. 

58. Cate Cadell, "Amazon Sells Off China Cloud Assets as Tough New Rules Bite," &uters, November 13, 2017, 

hrrps://www.reuters.com/anide/us-china-amazon-cloud.lamazon-sells-off-china-cloud-assets-as~tough-new-rules-biteidUSKBNI DEOCL. 

59. Michael Dunne, American Wheels, Chinese Roads: The Story ofGmera/Motors in China, (Singapore: John Wdey & Sons, 2011). 

60. Keirh Bradsher, "China's Electric Car Push Lures Global Auto Giants, Despite Risks," The New York Times, SeptemberiO, 2017, 

hrrps://www.nytimes.com/2017/09/10/business/china~electric-cars.htmL 

61. U.S. Chamber of Cnmmerce, Made in China 2025: Glaba/ Ambitiom Built on Local Protectiom, (Washington, DC: U.S. 

Chamber of Commerce, 20 17), https://www.uschamber.com/sites/ default/flles/final_made_in_china_2025_repon_full.pdf. 

62. Keith Bradsher, .. To Conquer Wind Power, China Writes the Rules," The New York Times, December 14, 2010, 

https://www.nytimes.com/2010/12/15/business/global/15chinawind.html?mcubz=3. 

63. David Barboza. "How This U.S. Tech Giant is Backing China's Tech Ambitions," The New York Times, August 4, 2017, 

hnps://www.nytimes.com/2017/08/04/technology/qualcomm-china-trump-tech·trade.html. 

64. Hearing on Foreign Investment Oimate, Before the U.S.-China Economic and Security Review Commission (2015), 8, 

(statement of Robert D. Atkinson, Information Technology and Innovation Foundation). 

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65. United States Trade Representative, 2017 Report to Congr(ss On ChinaS WTO Compliance (Washington DC: Executive Office 

of the President of the United States, January 2018), 34, 

https://ustr.grrv/sites/def.mlt/fdes/fdes/Press/Repons/China%202017%20Wf0%20Report.pdf. 

66. Ministry of Commerce of People's Republic of China, • Anti-Monopoly Law of the People's Republic of China," August 3, 

2008, htrp://english.mofcom.gov.cn/anicle/policyrelease/Businessregulations/201303/20130300045909.shtml. 

67. James McGregor, "China's Drive for 'Indigenous Innovation' A Web of Industrial Policies" (working paper, APCO 

Worldwide), 15, htrps://www.uschamber.com/sites/ default/Hles/legacy/reports/1 00728chinareport_O.pdf. 

68. Hearing on Foreign Investment Climate, Before the U.S.-China Economic and Security Review Commission (2015). 8, 

(statement of Roben D. Atkinson, Information Technology and Innovation Foundation). 

69. Josh China and Eva Dou, "China's New Cybersecuriry Law Rattles Foreigo Tech Firms," The Wall Strut journal. November 7, 

2016, http://www.wsj.com/ articles/china-approves-cybersecuriry-law-1478491 064. "China Adopts Tough Cyber-Securiry 

Law," The Economist, November 12,2106, http://www.economist.com/news/china/21710001-foreign-flrms-are-worried-chinaadopts-tough-cyber-security-law. 

70. "China Passes Controversial Cyber Security Law," Baker McKenzie, November 15, 2016, 

http://www.lexology.com/library/ decail.aspx?g=d231 09be-661 d-4e90-a92c-32b7330e3a49. 

71. In 2007, the MLPS for information securiry was formally launched by the Ministry of Public Securiry (MPS), National 

Administration for Protection of State Secrets (NAPSS), and the Office of State Cipher Code Adminisrration (OSCCA), led by 

the State Council. 

72. This MLPS classifies information networks in China according to their relative impact on national security, social order, and 

economic interests if the system is damaged or attacked. The classification levels range from one to five, one being the least 

critical and five being the most critical. A level five ranking indicates extremely significant networks, such as for military and 

defense. According to MLPS reguladons, systems classified at level three or above must procure IT security products containing 

only domestic IP. "China~ Information and Communications Technology Equipment and Software" (Washington, DC: 

International Trade Administration, May 31, 2016), https://www.export.gov/article?id=China-Information-CommunicationT echno!ogy. 

73. The definition of what is involved is being considered by China's National Information Security Standards Technical 

Committee {also known as Technical Committee 260) under rhe Cyberspace Administration of China, which is the 

cybersecuricy standards maker, as part ofits efforts ro craft technical specifications for the new cybersecuricy law. Eva Dou, 

"Microsoft, Intel, IBM Push Back on China Cybersecurity Rules," The Wall Street journal, December I, 2016, 

http://www. wsj.com/articles/microsoft-inrel-ibm-push-back-on-china-cybersecurity-rules-1480587542. 

74. This law required domestic and foreign banks to progressively increase their expenditure on "secure and controllable" IT to 

reach the level of75 percent by 2019. Paul Mozur, •·New Rules in China Upset Western Tech Companies," The New York 

Times, January 28, 2015, http://www.nytimes.com/2015/01/29/technology/in-china-new-cybersecurity-rules-perturb-westerntech-companies.html?_r=O. 

75. Dou, "Microsoft, lnrel, IBM Push Back on China Cybersecurity Rules." 

76. The World Bank provided the Chinese Export-Import Bank (Eximbank) funding in 2006 to "formulate a medium-and-longterm development strategy ... including the strategic guiding ideology, the choosing of the medium-and-long-term development 

strategy together with feasibility analysis, the guidelines, policies and measures for the implementation of the strategic goals." 

The project funded experts to consult with the Bank as well as the travel of Chinese Eximbank officials overseas to study best 

practices, "such as export credit, trade financing, ship financing, ODA [overseas development assistance] loan and financing for 

small and medium-sized enterprises." World Bank, "Implementation Project of Chinese Economic Reforms: Fifth Technique 

Aid: Purchase Plan for Sub-project Consultation Service," November 27, 2007, 52-58, http://wwwwds.worldbank.orglexrernal/default/WDSComentServer/WDSP/IB/2007/11/27/000020953_20071127145624/RenderediPD 

F/41638.pdf. 

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77. United States Trade Representative, 2017 &port to Congress On ChinaS WTO Compliance (Washington DC: Executive Office 

of the President of the United Stares, January 2018), 12, 

https://usrr.gov/sites/defaultlfdes/fdes/Press/Reporrs/China%202017%20Wf0%20Report.pdf. 

78. Michael B. G. Froman, 2015 National Trade Estimate Report on Foreign Trade Barriers {United States Trade Represemative•s 

Office, April 2015 ), 72, hrrps:// usrr.gov/sites/ defaulr/fdes/20 15%20NTE%20Combined.pdf. 

79. Stephen Ezell, "China~ Induced Global Overcapaciry an Increasing Threat to High~ Tech Industries," Innovation Files, February 

27, 2018, https://itif.org/publications/20 18/02/27/ china-induced-global-overcapaciry-increasing-rhrear-high-tech-indusrries. 

80. Sherisse Pham and Matt Rivers, "China is Crushing the U.S. in Renewable Energy," CNN Tech, July 18, 2017, 

http://money.cnn.com/2017/07/18/technology/china-us-clean-energy-solar-farm/index.html. 

81. David M. Hart, •T o Build a battery Industry, New York Needs Help from Washington" (Information Technology and 

Innovation Foundation, February 2018), https://itif.org/publications/2018/02/06/build-battery-indusrry-new-york-needs-helpwashington. 

82. Stephen Ezell and Robert D. Atkinson, 'The Middle IGngdom Galapagos Island Syodrome: The Cul-De-Sac of Chinese 

Technology Standards (Information Technology and Innovation Foundation, December 2014), I. http://www2.iti£org/2014-

galapagos-chinese-ict.pdf?_ga= 1.46708324.211397598.1440087131. 

83. Ibid .• 17. 

84. Ambassador Michael Froman, United States Trade Representative, 2015 National Trade Estimate Report on Foreign Trade 

Barriers, Washington DC: Executive Office of the President of the United $[ates, January 2018}, 13. 

85. Ibid., 75. 

86. Mark Clifford and Supachai Panitchpakdi, China and the WTO: Changing China, Changing World Trade, (Singapore: John 

Wtley & Sons, 2002), 225. 

87. Robert Atkinson and Luke Stewart, "Just the Facts: The Benefits of Information and Communications Technology" 

(Information Technology and Innovation Foundation, May 2013), https://itif.org/publications/2013/05/13/just-facts~benefltsinformation-and-communications-rechnology. 

88. Information Technology and Innovation Foundation, "Defense Innovation and the Future of American Competitiveness," new 

release, November 25, 2014, htrps://itif.org/publications/20 14/11/25/defense-innovation~and-future-american-competitiveness. 

89. Article 40 of the TRIPS Agreement (as an effort to control abusive licensing practices) holds that Members agree that some 

licensing practices or conditions pertaining to intellectual property rights which restrain competition may have adverse effects on 

trade and may .impede the transfer and dissemination of technology. 

90. ZGC Innovation Center, accessed July l, 2018, http://zgccapital.com/. 

91. Aasociated Press," Counterfeit Goods Cost the U.S. $600 Billion a Year," Inc., February 27,2017, 

https://www.inc.com/associated-press/counterfeiters-cost-600-billion-a-year.html. 

92. Information Technology and Innovation Foundation, "ITIF Welcomes Supreme Court Ruling in Antitrust Case," news release, 

June 14, 2018, hrrps://itif.org/ publications/20 18/06/14/itif-welcomes-supreme-court-ruling-antitrust-case. 

93. Robert Atkinson, Nigel Cory, and Stephen Ezell, "Stopping China's Mercantilism: A Doctrine of Constructive, Alliance-Backed 

Confrontation" (Information Technology and Innovation Foundation, March 2017}. 

https://irif-:org/ publications/20 17/03/16/stopping-chinas-mercantilism-doctrine-constructive-alliance-backed. 

94. Stephen Ezell, "America Needs a Fully Committed and Operational Exportwlmport Bank," Innovation Files, December 18, 

2017, https://iti£orglpublications/20 17/12/18/america-needs-fully-<:ommitted-and-operational-export-impon-bank. 

95. Robert D. Atkinson, Luke A. Stewart, and )acek Warda, "We're #27!: The United States lags Far Behind in R&D Tax 

Incentive Generosity" (Information Technology and Innovation Foundation, July 2012): Robert Atkinson and Luke Stewart, 

"'University Research Funding: The United States is Behind and Falling" (Information Technology and Innovation Foundation, 

23 
60 


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May 20 11), http://www2.irif.org/20 12-were-27 -b-index-tax.pdf?_ga= 1.194858285.180464888.1488305556 aod 

https://itif.org/publications/2011/05/19/university-research-funding-united-states-behind-aod-falling. 

96. Robert Atkinson and Dennis Blair, "Overcoming the China Challenge," The American Interest, September 17, 2018, 

https://itif.org/publications/20 18/09/17/overcoming-china-ffiallenge. 

24 
61 

Mr. HURD. Thank you, sir. 

I would now like to recognize the gentleman from California, Mr. 

Issa, for his opening rounds of questions. 

Mr. ISSA. Thank you, Mr. Chairman. 

And what wasn’t said in this open hearing is much of what you 

know directly about China’s espionage and their successful effort to 

gain huge amounts of technology by stealing it systematically over 

the last probably four Presidents, so this is a bipartisan problem. 

I am going to start with Mr. Neuffer. You said something—look, 

I come from your industry. We go back a long way. I watched us 

systematically sell out to the Chinese. I watched us systematically 

move our fabs to China. Now, I appreciate your discussion of exports, but exports and imports, we could net them and that statistic would probably disappear. 

But I think the important question is isn’t one of the effects, 

positive effects of the tariff the fact that virtually every one of your 

member companies, if they are exclusively in China, are looking for 

a second location, either a U.S. location if they don’t already have 

one, but even if they do, they are likely looking at the Philippines, 

South Korea, any number of other places. 

So I am not here to defend, and I would like a short answer of 

the fact, isn’t it true that the current activity is causing your companies to second-guess having all or most of their fabs at least for 

some product lines in China? 

Mr. NEUFFER. Great question. First of all, just as a percentage 

of our global production around the world, the amount of production we do in China is quite small. 

Mr. ISSA. How many fabs does —— 

Mr. NEUFFER. I don’t know the —— 

Mr. ISSA.—Intel have in California by the way? 

Mr. NEUFFER. I don’t know the —— 

Mr. ISSA. The answer is zero. So I appreciate —— 

Mr. NEUFFER. Well —— 

Mr. ISSA.—your talking about Silicon Valley —— 

Mr. NEUFFER. Well —— 

Mr. ISSA.—but your industry left California for the most part because of unreliable sourcing of electricity and water. Isn’t one of 

the challenges that we have to be more business-friendly in the 

U.S. for at least those two assets or we are not going to bring those 

fab plants back here? 

Mr. NEUFFER. So, I agree that we need to be more businessfriendly, and this is something that we’ve talked about a lot. 

Mr. ISSA. Okay. Well, this administration is —— 

Mr. NEUFFER. And —— 

Mr. ISSA.—accomplishing that part, but could you just answer 

the short one? Isn’t it true that your members are, as a result of 

the current situation with China, actively looking and moving if 

possible assets that they have been producing a China to at least 

have a second source outside of China? 

Mr. NEUFFER. I’m not going to second-guess what’s happening in 

the boardrooms —— 

Mr. ISSA. Okay. Then if you are not —— 

Mr. NEUFFER.—of my members, but my answer is —— 


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Mr. ISSA. But wait. No, I was talking about action. I just came 

back from Beijing. 

Mr. NEUFFER. My answer is —— 

Mr. ISSA. I was there for four days —— 

Mr. NEUFFER. My answer is —— 

Mr. ISSA.—and yes, they are. 

Mr. NEUFFER. I don’t think so. 

Mr. ISSA. Okay. Well —— 

Mr. NEUFFER. Yes. 

Mr. ISSA.—unfortunately, your counterparts in China made it 

very clear to me that that is what is happening on the ground. 

You know, I am hearing that systematic tariffs don’t work. I am 

going to ask a question. And I will go over to the other end and 

ask this question. You said in your opening comments or remarks 

that Google should go into China. I will paraphrase Ronald Reagan’s quote when he was talking about people who gave him 

money, somebody questioned whether the contribution that Ronald 

Reagan got from some group tainted him. And he said people who 

give me money, I don’t sign onto their values, they sign onto mine. 

Isn’t it true that if Google goes into China, complies with Chinese 

regulations, effectively, they become a Chinese company? So is 

there really a net gain if you have to play by Chinese rules? 

And I will just give you the example. If I go into Africa and I 

ignore the Foreign Corruption Practices Act, don’t I become an African company and essentially lose my U.S. identity? 

Mr. ATKINSON. So, to be clear, what I intended to say if I didn’t 

say it was I think we should support or not criticize Google if they 

want to go into China. If they want to go into China for —— 

Mr. ISSA. But you said they should comply with—Ms. Cook—he 

said —— 

Mr. ATKINSON. Yes. 

Mr. ISSA.—specifically they should comply with the Chinese 

rules. In other words, they should change to fit an unfair trade 

partner. Ms. Cook, you seem to have a comment on that. 

Ms. COOK. I think in those —— 

Mr. ISSA. Or Ms. Code, I am sorry. I am —— 

Ms. COOK. Oh, sorry. 

Mr. ISSA. Or Cook. No, it is. 

Ms. COOK. Cook, yes. 

Mr. ISSA. You can tell my glasses need to be put on. 

Ms. COOK. I think the question that—the issue Mr. Atkinson 

raised related to market share—and I think it—we’re cheating— 

we’re deceiving ourselves if we think that the Chinese Government, 

with its indigenous innovation policies, promoting global giants like 

Baidu is really going to let Google get any kind of serious —— 

Mr. ISSA. Well, and let me —— 

Ms. COOK.—market share —— 

Mr. ISSA.—ask a closing question —— 

Ms. COOK.—so you’re compromising your values. Sorry. 

Mr. ISSA. The Chinese premier at the World Economic Forum 

made a speech that any Republican would be proud of, talking 

about lowering the burden, tax cuts, and so on, but he also said 

that, in fact, his tax cuts were going to have to replace subsidizing, 

that he could not subsidize his economy back into working. Does 


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anyone here really believe that they are going to stop the subsidies 

that are absolutely pushed toward their indigenous companies and 

even away from our companies if they are operating in China? 

Hopefully, this is an easy one, Mr. Atkinson. 

Mr. ATKINSON. Their subsidies, I would argue, are WTO illegal, 

many of them. And if we brought a case —— 

Mr. ISSA. We do have cases in the WTO and have for some time, 

along with the Europeans —— 

Mr. ATKINSON. Not on—excuse me. Not on overall catalog subsidy disclosures. Under the WTO session agreement, they were 

supposed to do that every six months. They haven’t done it. 

Mr. ISSA. Okay. The chairman is going to take back the time because he should. I’m going to close just by saying that what I like 

about the WTO process is that it gives plenty of time for people to 

think about it because it is slow as can be. Thank you. 

Mr. HURD. Thank you, Darrell. 

I would now like to recognize Ms. Kelly for her first round of 

questions. 

Ms. KELLY. Thank you, Mr. Chair. 

Mr. Atkinson, your organization released a report in March 2018 

on the impact of tariffs on United States economy. In your report 

you wrote ITIF estimates that a 10-percent tariff levied on Chinese 

information and communication technology imports would slow the 

growth of U.S. output by $163 billion over the next 10 years, and 

a 25 percent tariff would slow output by $332 billion. You argue 

that, and I quote, ‘‘Applying tariffs would needlessly harm the U.S. 

economy.’’ And then just last week the administration imposed tariffs on $280 billion of Chinese imports. How will last week’s tariffs 

affect the U.S. economy? 

Mr. ATKINSON. The—we haven’t done a thorough analysis of all 

the tariff lines in that $250 billion, but clearly—I think it’s important to differentiate between what are called producer goods and 

consumer goods. So if you put a tariff on shoes, let’s say, the impact is someone has to pay more for shoes. If you put an impact 

on a machine or a piece of software or a device that a company or 

an organization uses or the Federal Government uses to become 

more innovative and more productive, we’re going to slow down innovation and productivity. So there are a number of—there are a 

number of products in that new regime of the $250 billion that 

would do that, and the result would be slower productivity and innovation in the U.S. because of that. 

Ms. KELLY. Okay. And then you said that you weren’t going to 

say—I am paraphrasing quotes—are good or bad but if used, they 

just need to be used strategically. And I am just back to the WTO. 

I have steel industry in my community, and they go to the WTO 

often to settle dumping or low prices and things like that. And I 

don’t know; it seems like, in listening to them, I don’t know. Maybe 

it is effective, but as someone said, it is so slow. But they are extremely frustrated. And what do you think in this field how, you 

know—do you think it would really be effective and efficient or— 

I don’t get that impression from some of my steel people. 

Mr. ATKINSON. Sure. This is why I argue we need to treat China 

differently with regard to trade policy. So must other countries we 

have a process-oriented trade policy. If they violate something, 


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there’s a judicial process called the WTO. There’s negotiations. We 

go through that. Yes, it’s a little bit slow. It generally works, and 

it deals with the fact that many countries, including the U.S., have 

some protection. There’s policies for other reasons. 

China’s different, and that’s why really fundamentally I don’t 

buy the notion that the WTO alone could solve this problem. I use 

that as one example of something we should do, but it’s got to be 

part of a much broader arsenal if you will because the Chinese 

know how to play—they know how to play the WTO to their advantage. One of the key advantages they have is they don’t have written rules and laws. So to go to the WTO and win, we point to a 

law in Argentina that says X, and we can win that case, but there’s 

no law in China on tech transfers, and therefore, they deny it. It 

doesn’t mean it doesn’t happen. It happens through administrative 

guidance and forcing in a meeting that you had to do this, so harder to prosecute those in the WTO. 

Ms. KELLY. Okay. So we need a lot of tools in the toolbox. 

Mr. Neuffer, when President Trump announced tariffs last 

month, he included the semiconductors from China as one of the 

products, and you stated at that time, and I quote, that the semiconductors imported, like you said today, from China were hurting 

American chipmakers, not China’s, and will do nothing to stop China’s problematic and discriminatory trade practices. How do tariffs 

on imports from China hurt American chipmakers? 

Mr. NEUFFER. Thanks for that question. I just want to set the 

record straight from a question from Representative Issa. 

Ms. KELLY. Yes. 

Mr. NEUFFER. I just want to underscore that 50 percent of our 

production is still here in the U.S., and while most of the manufacturing in the U.S. started in California over the years, it’s spread 

out through the country, like I said, in 19 States. Intel, for example 

has massive fabs in Oregon and Arizona —— 

Mr. HURD. And Texas. 

Mr. NEUFFER.—and New York and in Texas, exactly. So it was 

just a natural maturing of the industry. 

And I also want to state for the record that if you look at American companies’ global fab production are—quite a small portion of 

that is done in China. Most of it is done in the U.S. and other parts 

of the world. 

As for your question—thank you. The reality is the tariffs on 

semiconductors only hit U.S. semiconductor makers and makers of 

our allies like Japan, Taiwan, and Korea. The semiconductors— 

most of our semiconductors we make that go to China, they go 

there for some backend low-value assembly test and packaging. Basically, you take these wafers, you chop them up, you test them, 

you put them in these little things with leads. That’s low-value 

stuff that adds about 10 percent of the value. 

Some of those chips come back here. Some of them go to other 

parts of the world. It’s the ones come back here that get hit with 

the tariff. Chinese semiconductor manufacturers sell almost all of 

their chips in China and none or almost no chips to the U.S. So 

while we applaud the administration’s effort to try to shut down 

the forced tech transfer and shutdown the illegal theft of IP that 

we’re having with China, this is just a very blunt tool, and the 


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semiconductor industry has gotten caught in the dragnet. And it’s 

us getting hurt by this, and there’s—it’s not building leverage on 

the Chinese to potentially draw them to the negotiating table to get 

other outcomes. 

Ms. KELLY. Are they aware of this, that it hurts? It doesn’t help —— Mr. NEUFFER. The administration —— 

Ms. KELLY.—in your particular —— 

Mr. NEUFFER. I believe so. 

Ms. KELLY. Okay. One common stipulation for American companies doing business in China, as has been talked about, is forcing 

them to engage in joint ventures or technology sharing. What are 

the dangers of a Chinese company with connections to the Communist Party appropriating American technology through joint ventures or other business deals? And is there real concern that American technology could be reverse engineered for military use? 

Mr. NEUFFER. Yes, so these are all real concerns for sure. Joint 

ventures, we do them all over the world. We do them here and we 

do them in China. And the thing to keep in mind is, you know, we 

have regimes in place through export control that ensure that sensitive technologies do not seep out into regimes like China. And our 

companies are very careful about adhering to those export control 

regimes. 

The other piece of this is IP has been the lifeblood. Intellectual 

property, process technology has been the lifeblood of the semiconductor industry. The leaders of these companies are obsessive with 

trying to ensure that IP stays in their companies because if it ends 

up outside of their companies, their business disappears. Thank 

you. 

Ms. KELLY. We all agree China must be held accountable for IP 

theft and other unfair trade practices, but it is very concerning that 

this trade war is escalating and causing real harm to Americans. 

Can the members of the panel describe what the effects of fullblown trade war would be for the technology industry in the United 

States? And whoever wants to start is fine. 

Mr. ATKINSON. Sure. So I think there’s only two things that can 

happen out of this. One is eventually the Chinese will give. They’ll 

cry uncle and they’ll come to the negotiating table. I am still—I 

don’t want to say I am optimistic but I’m open-minded to that. I 

really think that’s a possibility, so we don’t know what’s going to 

happen. 

The other possibility is they just dig their heels in and they say 

forget it, we’re never going to do this. And then the question for 

the U.S. becomes do we really want to have a really bifurcated 

global trading system almost going back to the Cold War era where 

you had a communist block that traded with itself and a non-communist block. And I think the cost of that would be quite significant for the U.S. It would be in two kinds of costs. One would be 

transition costs, so companies would have to move their facilities 

out of China. And we should be realistic; the vast majority of them 

are not coming to the U.S. They went there for a reason, oftentimes 

cost, so they would go to places like Vietnam or, as Mr. Issa said, 

the Philippines or maybe India or places like that. So I don’t think 

we’re getting—it’s not like we’re going to get much back. 


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The other thing would be companies are there for a reason, and 

so if they have to go somewhere else, the costs will go up, and that 

would end up, again, hurting our ability to be global leaders because some of those products we sell in third markets. And so 

there’s very good research on this that shows that when U.S. technology companies sell overseas, even when they don’t produce that, 

a lot of those benefits come back to the United States in the form 

of high-wage jobs of designers, of R&D folks, of marketing, of sales, 

and all of that. So we depend a lot in our economy on jobs that— 

where the manufacturing isn’t here, and so if we lose some of that 

because we have to have higher prices over, let’s say, the Japanese 

or the Germans or something, it could hurt U.S. jobs. 

Ms. KELLY. Thank you. 

Ms. COOK. Tariffs are a little bit outside of my usual area of expertise, but I think I would just mention that, you know, if we’re 

looking at the cost of the Chinese Government’s internet censorship, especially the Great Firewall imposes on the Chinese—on 

U.S. companies, they already actually—it’s a huge act of protectionism essentially that costs billions and billions of dollars. I 

mean, the reason companies like Google consider sacrificing their 

values is because they think they’re going to be able to get access 

to 800 million internet users. That’s more—almost triple the population of the entire United States. 

So I think, you know, again, not trade wars and tariffs are necessarily the answer, but I think it is worth keeping in mind that 

the starting point right now in this sector of online services is that 

the Chinese Government has imposed an enormous and very costly 

restriction that has huge economic implications, not just human 

rights implications, on U.S. companies. 

So I think anything the U.S. could do—again, I’m not sure tariffs 

are necessarily the answer to counter that—is a good—including, 

you know, funding the scaling up of circumvention tools to allow 

more Chinese people to access the services without having to get 

the approval of the Chinese Communist Party gives leverage in 

other areas of negotiation as well and is—would—could be a very 

important investment of taxpayer money —— 

Ms. KELLY. Thank you. 

Ms. COOK.—so a little bit of a different perspective. 

Mr. CHENG. Like Ms. Cook, I am not a trade specialist, so—but 

I would suggest that there are several questions that need to be 

answered in order to address the Representative’s question. For example, I think that when it turned out that banning sales of all 

U.S. inputs to ZTE would effectively kill that company, that came 

almost certainly as a surprise to Chinese decision-makers, probably 

to even some American decision-makers. It highlights the lack of 

clarity regarding actual vulnerabilities in Chinese companies. 

Now, let me emphasize this is not an argument for tariffs whatsoever. What it is an argument for is a desperate need for us to 

better understand how supply chains work in both directions. What 

are actual Chinese vulnerabilities whether in the IT realm or perhaps in the petrochemical realm, in land reclamation, which has 

applications for the South China Sea? Because it may well be that 

there are more Chinese vulnerabilities in less-identified key subsectors than is generally widely recognized. 


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The other question that remains also unclear is the Made in 

China 2025 program, which is to say what happens if China actually succeeds? We are here concerned about the potential impact of 

American tariffs on the global trade system, and that’s a very reasonable question. But do we think that if China succeeds in in 

truly becoming self-sufficient in key IT areas, that China will all 

of a sudden then say but we support a global trading system, or 

will they now be insulated like their information ecology and environment behind in an industrial equivalent of a Great Firewall to 

basically say now that we’re safe, bye. Thank you very much. 

Ms. KELLY. Thank you. 

Mr. NEUFFER. Can I take a shot at that —— 

Ms. KELLY. Sure. 

Mr. NEUFFER.—that question? Thank you. So just, again, for us, 

tariffs on us is puzzling because Chinese company enterprise don’t 

send semiconductors to the U.S., so there’s no leverage built. The 

other thing I’d like to say is 80 percent of our sales are overseas, 

China and other markets. Our customers are overseas, like most 

American companies, multinational companies, so anything that 

depresses trade is a risk for us financially, commercially. 

We do hope that these tariffs draw the Chinese to the negotiating table so we can get some beneficial outcomes, but until we 

get to that point, we are all at risk of hurting our economies. And 

after that, we hope—if they come to the negotiating table, they get 

strong outcomes, you know, all great, but if they don’t come to the 

negotiating table and we don’t get strong outcomes, where do we 

go from here? So a lot of questions about this. 

One thing we have been looking at in particular is what these 

tariffs do to IT spend, so tech products become more expensive, so 

IT spend becomes more expensive. And if IT spend is depressed, 

given that tech products—what you call them, Rob? Super technology —— 

Mr. ATKINSON. Super capital. 

Mr. NEUFFER. Super capital. Tech products are super capital that 

drive growth throughout the entire economy. If the IT spend starts 

dropping, that has an exponential multiplier effect throughout the 

entire economy, and this is something we’re worried about. Thank 

you. 

Ms. KELLY. Thank you. And I am done. 

Mr. HURD. I just finished 38 town halls in five days, and I am 

in Cotulla, Texas, which is part of south Texas. Most people know 

Cotulla as part of the energy boom. And the first question I got was 

actually on China. And a young woman asked me—and I know this 

question is slightly outside of our talk today. I know we are talking 

about IT, but I promised this constituent that I was going to be 

with a bunch of smart people and I would ask this question. How 

did China become the manufacture of millions of drugs that Americans take every day, right? And did they use predatory practices 

similar to those that we are seeing in the IT space? I would just 

welcome does anybody have a quick answer to that? Mr. Cheng, go 

ahead. 

Mr. CHENG. I am even less of a drug person than I am a —— 

Mr. HURD. Tariff person? 


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Mr. CHENG. Yes, sir. But my understanding—and this is without 

the benefit of having stayed at a Holiday Inn Express—is that 

China does produce a great deal of fentanyl. Fentanyl is a key component for opioids. Whether that was predatory or not is much less 

clear. My very, very limited understanding is that, as with these 

other technology areas, that it’s a complex mix of domestic demand 

due to everything from changing views of what should be prescribed under what circumstances, legal coverage, all those things, 

to, you know, the Chinese taking advantage of a market that appeared without necessarily indulging in predatory practices. 

Mr. HURD. Good copy. Ms. Cook, do you have any opinions? 

Well, the constituent of the 23rd thanks you for that question, 

Mr. Cheng. 

Project Maven, DOD contract to work with commercial companies to do artificial intelligence along moving video, recently, 

Google made a fairly large statement about not participating in 

this project because, ultimately, the information that they were 

going to potentially identify could lead to a terrorist being identified and eventually the U.S. Government doing with terrorists 

what we generally do, kinetic strike. The area that I haven’t seen 

enough conversation on—now, you juxtapose that with Google’s potential decision of getting involved in a search engine in China that 

violates, you know, freedom of expression, right, another value 

issue. 

The beneficiary of both of those decisions is China. You have an 

important American company involved on the pointy end of the 

spear when it comes to artificial intelligence breaking from Department of Defense, which arguably has the most data available to 

train algorithms. That is a strategic win for the Chinese. Have we 

seen—and we know that Chinese spy agencies do everything from 

stealing information and trying to influence. 

So my question is are we concerned or have we experienced or 

have we, you know, seen what I would call Chinese active measures when we talk about active measures using disinformation, influence operations? We talk a lot about how the Russians are doing 

this; why shouldn’t China do this in our elections? But we don’t 

talk enough about Chinese use of active measures when it comes 

to achieving a strategic goal like separate—driving a wedge between American companies and the U.S. Government. Opinions, 

thoughts, suggestions? I open it up. 

Mr. Atkinson, would you like to start us off? 

Mr. ATKINSON. Yes, just a couple things to clarify. I actually believe that it is not in the Chinese interest to have Google come in. 

They’re going to do whatever they want to do with information, 

blocking—doesn’t make any difference whether there’s a foreign 

company there or not, so I think that’s in our interest, as I said 

before. 

There’s a new book by a colleague of mine Darren Tromblay, who 

is now at GW who used to be in the FBI for many, many years in 

commercial counterintelligence. And this book is a—it just came 

out maybe four months ago, and it’s a very good history of how foreign governments have used active measures against us, Russia, 

and China. And in that book there are many, many, many examples of how China is doing that. I can’t say whether they’ve been 


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doing that in the Google case that you alluded to with Project 

Maven, but they do that. And they use, you know, active measures, 

passive—and they use all sorts of measures to try to get our—to 

influence us and our companies to make decisions that aren’t in 

our interest. 

Mr. HURD. Ms. Cook, any opinion? 

Ms. COOK. I’m not privy to I think the kind of information that 

would address whether that happened in the Google case, but to 

echo Mr. Atkinson’s comment, in general, the Chinese Communist 

Party uses a variety of measures to influence the United States, 

through media, through pressures to create censorship here in the 

United States, through various ways of recruitment and gaining access to information. 

And I think I would just comment that if you flip it on its head 

and you look at the area of artificial intelligence, it’s one of the 

areas where Chinese companies are emerging at the forefront using 

very questionably ethical methods. A lot of the AI Chinese companies are heavily invested and have lots of government contracts in 

Xinjiang that’s being—and their information is essentially being 

used to catch Muslims to send them to reeducation camps. 

They’re able to use the massive amount of data they have access 

to to gain a more competitive edge internationally as well in the 

sense of both issues related to racial bias and artificial intelligence. 

They now have a contract with the Zimbabwean Government that 

will actually turn Zimbabwean citizens’ data over to a Chinese 

company that will allow them to further improve their algorithms 

so they have access to Uighurs who ethnically look, say, Middle 

Eastern or central Asian, Chinese who look East Asian, and now 

Africans who—South sub-Saharan Africans that gives really potentially a competitive edge in an industry. They’re anticipated to take 

a 44-percent market share by 2023. 

One point is that one of those companies, a major investor is actually U.S. chipmaker QUALCOMM. So you have a situation where 

U.S. investors in general tend to reward problematic behavior like 

that because it can be very profitable but also where you have U.S. 

companies, potentially rather than investing in U.S. artificial intelligence firms to gain a competitive edge, are investing in a Chinese 

firm with very questionable, you know, practices. 

So I think some of the recommendations related to developing a 

comprehensive artificial intelligence strategy, as well as something 

like the Global Online Freedom Act that would hold companies to 

certain ethical standards, could be a way of pushing back both 

against other restrictions but also potentially, you know, suspicions 

and other ways in which the Chinese Government tries to gain influence in the U.S. tech environment. 

Mr. HURD. And then, Ms. Cook, I would agree with you that we 

do need a national artificial intelligence strategy. Robin and I and 

our teams just put out a report this week highlighting, you know, 

some of the things that we have learned in our various hearings 

on artificial intelligence. I think you and I have done half of the 

hearings in Congress on artificial intelligence, and I believe that is 

important, as well as the need for a national strategy on quantum. 

I would say artificial intelligence right now is dumb, but the way 

it is going to get smart is once we achieve quantum. And I think 


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these two things are connected, even though the science behind 

both are very different. So I agree. 

And this is why we do these things. The suggestion of the Global 

Online Freedom Act, hearing about this, getting this feedback on 

other initiatives that are out there is something that we are able 

to continue to sink our teeth and to go. 

And, Mr. Cheng, the previous question on, you know, Chinese active— and I would even welcome the comments on—are U.S. companies prepared to defend against state-sponsored actors? I think 

I know the answer, having been in the private sector to help some 

companies do this, but are we seeing a recognition of all these, you 

know, issues that— and Mr. Atkinson eluded to and probably that 

are mentioned in this book that was quoted. Mr. Cheng? 

Mr. CHENG. Sure. Three issues: one, the broader issue of Chinese 

influence operations ties into the Chinese view of political warfare. 

This is part of their doctrine. This is part of the specific missions 

assigned to the Chinese military. It includes a—so-called three 

warfares, public opinion warfare, which is a constant ongoing activity which is going on right now. It is not necessarily tied to a specific armed conflict, psychological warfare and legal warfare, manipulating both Chinese and foreign laws, regulations, treaties in 

order to achieve given political ends. 

One can imagine in the context of both public opinion and psychological warfare that the Chinese may well be inquiring of any 

foreign company, do you really think we will allow you into our 

markets if you are participating in a potential adversary’s defense 

contracts? Whether or not that has occurred is not open to public, 

you know, open-source information. I would obviously defer to 

those who have access to far better data on that. But I simply 

throw out there the Chinese doctrine, which is publicly available, 

talks about the importance of employing the three warfares constantly against all potential adversaries. 

With the—on the issue of Google in China, I’m afraid I need to 

disagree with my fellow panelists. In the first place, the presence 

of Google in China would be a de facto endorsement of the Chinese 

information environment, that a company that specifically left after 

Chinese attack would then reenter would be spun in the context, 

again, of that public opinion warfare as proof of one of two things: 

Either China’s market is so important that you will put up with 

almost anything we do to you; or two, that China’s environment 

has improved to the point where you would voluntarily come back. 

As for the issue of market share, the Chinese in other areas have 

been very, very clear. There is a market share that they will allow 

you, and if you should pass that, then in that case, per Darth 

Vader in Empire Strikes Back, ‘‘I am changing the terms of the 

deal. Pray I do not change them further.’’ 

And the way the Chinese go about this in terms of the issue of 

defending against attack too often takes pathways that we are— 

some take pathways that we are familiar with, direct cyber intrusion, et cetera, but particularly in the context of joint ventures and 

the things, they often involve, for example, staffing the H.R. department. If I decide who the joint venture hires, then in that case 

that creates a very different set of potential vulnerabilities. 


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The other aspect here is whether or not companies themselves 

recognize—I think IT companies, ICT companies, semiconductor 

companies may well be aware of the vulnerabilities that are entailed. Banking companies are very much aware of the need to protect information. But it’s the midsize company that feels it has to 

go into China that often has a small IT department to begin with 

that is far more likely to therefore say, well, but we do mid-level 

chemicals, we do paints, we do agricultural seedlings. Why would 

the Chinese attack us? I mean, obviously, you know, if we are a 

major defense contractor, of course they’ll go after them, but why 

would they go after the makers of new headlamps? That—the Chinese have this voracious maw for all types of IPs, sometimes not 

recognized within the broader American corporate —— 

Mr. HURD. Mr. Cheng, you have mentioned earlier about trying 

to understand real actual vulnerabilities of Chinese companies, and 

you used the ZTE example. And I agree with you. I think we 

should have gone forward and not allowed the U.S. components to 

be used in ZTE, and that would have sent a clear message to the 

Chinese that we are being serious. Do you have any examples—I 

know you said one of the things we need to do is actually understand that, and I am going to take that back to some of my friends 

to help ensure that we have a better understanding. But do you 

know of and can you ID a couple of current vulnerabilities in some 

of these Chinese companies that may be some items that this committee can take up or even other legislators take on and move 

with? 

Mr. CHENG. I don’t know if this is within the purview of this 

committee, but let me give a different example. CCCC Dredging, 

CCCC is a Chinese state-owned enterprise. The Chinese, as they’re 

doing South China Sea land reclamation, which of course has also 

been in the news, as they’re building these new islands, it is not 

the Chinese military that’s going out there, it’s not the Chinese 

Ministry of Interior. They go to their own state-owned enterprises 

and say you, go and dredge up all the coral—it doesn’t matter what 

the environmental impact is, dredge up thousands of tons of coral 

and build this new island. Many of those companies are using specialized dredging equipment that has not been manufactured in 

China, so therefore, they are going to European, American, foreign 

companies buying specialized equipment, dredger hoppers, equipment like that to basically destroy the environment of the South 

China Sea and build strategically important islands. 

Operating in a maritime environment, as any maritime engineer 

will tell you—also, I should note here I am not one of those either—is a very harsh environment. Things break. That means 

spare parts have to be purchased from abroad, which means CCCC 

Dredging is basically employing imported equipment to alter the 

situation in the South China Sea. Why we would allow that to continue given the strategic importance of that region is problematic 

in my opinion. 

A third area is basically speaking—and this goes directly to monetary issues—why do the Chinese list on foreign stock exchanges? 

They list on foreign stock exchanges for two reasons: one, obviously 

access to capital; but two, because it is a de facto, again, endorsement of the company. The Chinese play up the idea that if they are 


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allowed to list on the New York Stock Exchange, then they have 

fulfilled U.S. SEC requirements. The bizarre part is that sometimes these companies are partly state-owned enterprises, which 

have an opacity to them. But again, they are nonetheless at times 

allowed to list on our stock exchanges. 

Mr. HURD. Mr. Neuffer, we are going to get back to in round two, 

but I’m going to defer now and recognize Robin Kelly for a second 

round of questions. 

Ms. KELLY. Thank you. Something that has always been a concern to me—and part of it is when I go back to my district and I 

visit my companies. They always talk about the lack of a qualified 

workforce. And can you guys talk about this in that arena, that because of immigration or because of lack of investment in education 

or training and those kind of things, how—I know we feel it now, 

but it seems like we are going to feel it even more in the future. 

I don’t mean to look at you but you —— 

Mr. NEUFFER. Can I start? Thank you. 

Ms. KELLY. Yes. 

Mr. NEUFFER. So a couple of things. First of all, electrical engineers drive the semiconductor industry. These are the guys—electrical and chemical engineers, these are the guys who make semiconductors. A lot of these young kids coming into this profession 

like to go off and make the coolest app and work for big internet 

companies, so there’s a bit of a problem there. But a bigger problem is that we don’t—our government does not have big enough 

emphasis on promoting STEM education and our immigration policy is broken so that we can’t get the numbers of STEM employees 

from overseas that we need. 

And if you go to any semiconductor company, there are dozens 

if not hundreds of job openings for STEM applicants. So there 

needs to be a remedy. These are huge, systemic problems and riven 

with controversy, but until we get to the bottom of this, our industry, the semiconductor industry is at risk because you’ve got to 

have the talent to build these incredibly innovative semiconductors 

and stay at the tip of the technology spear. Thank you. Yes. 

Ms. KELLY. I am on the board of trustees of the college I graduated from, and then I am on an advisory from the other college 

I graduated from, and it is amazing. When I was at the graduation 

for one of the colleges, the lack of international students in engineering. I mean, it was unbelievable the change in both colleges. 

We talked about how they just haven’t been getting the applications. 

Mr. NEUFFER. Interesting. 

Mr. CHENG. When it comes to foreign students, one source that 

you probably do not have a shortage of is Chinese. China represents probably one-third of the current foreign student population of the United States, many of which are in STEM. The problem is that many of these students, the question becomes what is 

that they are coming here to study? They are studying STEM obviously, but are they staying —— 

Ms. KELLY. Right. 

Mr. CHENG.—or are they here particularly focused on programs 

which will have dual use and military benefit and then going 

home? 


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We have seen a generational shift within the context of Chinese 

students. In the past, many of them tended to stay here. This is 

also true abroad, that is to say in Europe and elsewhere, but more 

and more of those students seem to be going home. Whether that’s 

due to economic opportunities at home or due to pressure is much 

less clear. 

I certainly would not disagree that this country needs more engineers and more STEM students in general, but I would highlight 

that simply because you are getting an education in the STEM 

field does not any longer mean that you are in fact getting STEM 

education. There are professors who apparently are teaching math 

courses whose focus is on the fundamental underlying racism and 

sexism of math. Now, how that will help produce better electrical 

and aerospace engineers is beyond me, but I do think that if we 

are going to focus on STEM, that we need to be focused on actually 

producing people who can produce 5 nanometer circuit wafers, who 

can produce better rocket engines for Blue Origin or ULA, who can 

produce, you know, better systems engineering and quantum computing and not necessarily engaged in whether or not, you know, 

a focus on math is somehow giving way to some of our worst historical habits. 

Ms. KELLY. Thank you. 

Mr. ATKINSON. Thank you. I just also would be remiss if I didn’t 

use this opportunity to thank you both for this excellent report that 

you both released I guess yesterday on AI. We at ITIF really applaud it and think it’s exactly in the right direction, so thank you. 

Ms. KELLY. Thank you. 

Mr. ATKINSON. I just want to quickly come back to the prior comment from Congressman Hurd. I think one of the challenges with 

this—and I—one of the challenges with this issue is we—our—I 

don’t want to say complete but pretty serious lack of knowledge in 

the U.S. Government, we don’t know the answer to your question, 

and we should know that. And it’s partly because we simply don’t 

have an institutional home for that level of global supply chain 

analysis, and I think we have to have that. 

Congresswoman, with regard to your question, I actually think 

this is a much easier solution than people think. It tends to be 

framed as how do we convince a bunch of fourth-graders to somehow like STEM. We’ve done a lot of research on this. We’ve come 

up with a fairly comprehensive strategy. There are lots of kids who 

like it. We don’t give them enough of the right opportunities. 

So one of the things that we’ve proposed and supported, more 

specialty math in high schools, particularly in disadvantaged communities. They play an incredibly effective role in getting kids who 

might not otherwise be into that. They go to college—a good example of that is the San Antonio Math and Science High School— 

sorry, the Dallas Math and Science High School, 90 to 95 percent 

Hispanic and black students, almost 100—in fact, I think their rate 

of getting AP exams—5s on the AP exams exceeds most high 

schools in the country right now. 

Secondly, at college level, we know that one of the big problems 

is colleges could take more and have more students go through 

that, but they intentionally limit the slots in commuter science and 

engineering. They force people to leave the discipline who want to 


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stay and are good students, and that’s a budget issue and an incentive issue. And I think the Federal Government can provide more 

incentives to get universities to focus on—University of Washington, a good example, the C.S. department head I talked to, I 

asked him how many slots they could add without reducing ability— without quality? He said we could double the number of 

Washington State students in our C.S. department, but we aren’t 

given the budget to do it. 

Ms. KELLY. We actually started a STEM academy in my district 

just with my office exposing sixth, seventh, and eighth graders to 

different things that they could do with a STEM career, but of 

course it is hard to keep up because we are just a little office, but 

I know we piqued the interest and just trying to give opportunity 

and broaden their horizons, so thank you. Thank you. 

Mr. HURD. Picking up on the issue of education, roughly 40 percent of the people that are actually in STEM education, in master’s 

and Ph.D. programs in the United States, are Chinese. And so my 

question is the United States has benefited from the brain drain 

of every other country for the last couple decades. Let’s continue 

that. When you are at 3.8 percent unemployment, that means 

every industry needs people, whether it is agriculture or artificial 

intelligence. 

When you are at multiple quarters of 4 percent growth, of rising 

wages, you know, rising average income, the thing that can stall 

the economy is not having the proper workforce to take advantage 

of these opportunities. Two ways to do that, grow our own, we have 

talked about that, something that we have got to continue to do, 

but it is also through immigration. And you have people that are 

coming here and getting Ph.D.’s, master’s, and they are having difficulty in getting the right visa in order to stay here and continue 

to work for U.S. companies. 

And so my question is, is the opportunity of having a smart person from somewhere else stay here and start a company here and 

be involved here, does that outweigh potential counterintelligence 

concerns about this being something directed by the Chinese Government? Who would like to start that out? Mr. Atkinson, let’s go 

ahead and go with you. 

Mr. ATKINSON. I don’t think we know the answer to that honestly. You’re right on both sides of that. The Chinese students who 

come here, get a STEM graduate degree, and then stay are of value 

to the U.S. economy and to our innovation system. 

I think one thing we could do and should do more is I think our 

universities tend to have a blind eye towards threats. There’s a famous case at Duke University where they—Chinese students came, 

enrolled in the Ph.D. program, and essentially took the cloaking— 

this was Defense Department—the cloaking technology, they took 

it. And this was a few years ago, and so the—Duke wasn’t aware 

of it and they hadn’t thought about it. We need to make sure— 

through the FBI counterintelligence efforts, we need to make sure 

that every university has procedures and processes in place to at 

least limit that so they’re aware of it. 

Mr. HURD. So going on that, Mr. Atkinson, I am going to ask a 

broader question. Look, when you look at the amount of venture 

capital that has been deployed in Chinese companies, the amount 


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of Chinese capital being deployed in let’s call it broader Silicon Valley, do those companies recognize the national security threat of 

the investments that is coming from potential Chinese investors? 

Mr. ATKINSON. No. 

Mr. HURD. There it is. 

Mr. ATKINSON. The lion’s share have no concern or interest. 

They—you know, they just want the money. 

Mr. HURD. Ms. Cook? I know there are two questions there —— 

Ms. COOK. Yes, I —— 

Mr. HURD.—answer them both, one, either. 

Ms. COOK. I would just go back to Mr. Cheng’s previous point 

about the way the Chinese Government looks at foreign political influence. It doesn’t always necessarily separate the kind of military 

counterintelligence or things that we would look at as being more 

aggressive with softer forms of influence. And I think from that 

perspective a lot of the Chinese students here are victims themselves in many ways of pressures, of consular officials sitting in on 

meetings of the Chinese student associations at U.S. universities. 

If you look especially at the —— 

Mr. HURD. You are saying Chinese —— 

Ms. COOK. Consular officials well —— 

Mr. HURD.—officials in the United States at a U.S. student group —— Ms. COOK. At a meeting, so—yes, for —— 

Mr. HURD.—with Chinese students at a U.S. university? 

Ms. COOK. Yes. So it —— 

Mr. HURD. Okay. 

Ms. COOK.—might not be the full meeting. It might be just—certainly—well, one specific anecdote that I heard from a Chinese student, this was a number of years ago. This is getting a little more 

attention now related to elections within a university and one of 

the women who was trying to stand for election at this Chinese 

student’s scholar associations happen to practice Falun Gong. And 

the consular officials basically went around the table of the specific 

officers or students and applied other pressures basically to pressure the students in that association not to elect her. 

And other ways in which—there’s been a series of articles and 

investigations recently, especially in foreign policy I think, about 

the way the diplomatic—the Chinese diplomats influence Chinese 

student associations in the United States. Some of it’s with funding. Some of it is with actual like reporting requirements and 

things like that. And again, these students—this is not without 

force behind it. I mean, I think we have to—again, it’s very tricky 

because a lot of times the students are themselves—they have family in China, and the Chinese Government is very adept at pressuring family to get people abroad to do things. And so I think 

that’s a threat to the safety and well-being of the Chinese students 

in American universities that our American universities aren’t 

dealing with. 

But also it comes back to this bigger question of the way in 

which the Chinese diplomats and Chinese officials exert pressure 

on individuals here in the United States and potential actions that 

the U.S. Government could do because the same diplomats will also 

go and pressure an advertiser who they see advertising in the local 


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dissident Chinese newspaper in New York City or will go and 

threaten the—a journalist who has family back in China who’s 

working for Radio Free Asia or things like that. And the U.S. Government has been—in some cases there’s real evidence about this 

and there isn’t a strong response. There isn’t a demarche. There 

isn’t—I mean, these are violations of diplomatic conventions. 

So, I mean, I think that—again, this question of the way in 

which the Chinese embassies and consular officials are able to have 

communication, exert pressure on Chinese students ultimately can 

have very important counterintelligence ramifications because it’s 

not necessarily that Chinese students are coming here ahead of 

time deciding to try to steal technologies. They can—the Chinese 

Government has the avenues and the power to put them and their 

families under tremendous pressure. 

Mr. HURD. Sure. 

Ms. COOK. So being able to find a way in the United States to 

actually enforce our laws and stop that type of behavior has both 

national security implications and student welfare implications for 

the Chinese students as well. 

Mr. HURD. Ms. Cook, you and many of your panelists have commented on something that I have seen. The U.S. intelligence community views intelligence differently than the Chinese view intelligence. And I would say using our vernacular, the intelligence bar 

for China is significantly lower than what it is for us, and therefore, even though the Chinese believe they are involved in intelligence operations, people on the U.S. I do not believe it is intelligence operations because that is not how we see or view that. And 

that is a disconnect from being able to have the information and 

collection on some of these behaviors of Chinese diplomats in our 

country, and so highlighting this is important. 

Mr. Cheng? 

Mr. CHENG. So, several points, sir. With regards to the very different view of what intelligence constitutes, we have interesting examples of ship visits to China where a series of fourth-graders each 

went up to American sailors and asked interesting questions, not 

like what’s it like to be an American sailor, but what is the sonar 

frequency of your dipping sonar, a fourth grader, who would then 

promptly go back to the schoolteacher who led them and say, oh, 

the sailor said it was this. And after about four questions along 

these lines, the American sailors are finally told you should stop 

answering their questions, that these are not just innocent questions from fourth-graders. 

I do want to emphasize here that there is a danger of course in 

viewing every Chinese student as a potential agent —— 

Mr. HURD. Sure. 

Mr. CHENG.—that we do not want to go to a point where we are 

simply concluding based on ethnicity or —— 

Mr. HURD. Sure. 

Mr. CHENG.—national origin that people are —— 

Mr. HURD. And thank you for making that point, and I would 

add—and correct me if I am wrong—not all Chinese investment is 

necessarily a, you know, indication that this is going to lead to 

some draconian issue in the motherland. 


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Mr. CHENG. No, I would agree with that as well because there 

is absolutely a profit motive also at work. Chinese entrepreneurs, 

like entrepreneurs everywhere, want to make money, want return 

on investment. That being said, of course, the government is more 

than happy nonetheless—and it has a vast array of tools—to pressure students, entrepreneurs, venture capitalists to pony up information, whether it’s on projects that a professor—you know, an advisor’s working on or whether it’s new technologies that you’re investing in. 

This goes to a broader CFIUS-related issue. CFIUS of course is 

vital, but CFIUS is a gatekeeper. It is our guard at the perimeter. 

And the problem, whether it’s Confucius Institutes, whether it is 

students working for professors on advanced projects at universities, whether it is venture capital in Silicon Valley, the Route 128 

corridor in Massachusetts, or outside Austin, all has the same 

issue, which is if you’ve made it past that, there is much less internal policing if you will. It’s not that CFIUS is bad or is not 

enough—it’s that CFIUS is not enough but it—we should not be 

adding to CFIUS’ burden. We probably need a new approach to 

thinking about what happens —— 

Mr. HURD. So do you think FIRRMA was adding more burden to 

CFIUS or was that a move in the right direction? This is the legislation we recently passed in order to give CFIUS deals over transfer of critical technology—of potential investments in critical technology. 

Mr. CHENG. I think the idea behind it is vital and essential, sir. 

I have to admit that I’m not sure whether or not making CFIUS 

the party responsible is the best approach, not without expanding 

its staffing —— 

Mr. HURD. Sure. 

Mr. CHENG.—and purview, but that—you—I think that that effort identified a key shortcoming, not in CFIUS per se but in our 

broader technology defense if you will. 

The last aspect here is simply to note that the issue of active interference within universities, we have seen this by Confucius Institutes, we’ve seen this by Chinese agents. You know, the previous 

administration admonished the Chinese about the improper activity of various officials. That was at best tepid but it was at least 

a first step. We do need, in terms of reciprocity, making very clear 

to the Chinese that their actions will have serious consequences, 

not just an admonishment, but whether it means PNG to officials, 

whether it means curtailing their activities and where they can 

travel, much like we have the—still imposed on Russian officials 

and counterparts. 

But again, going to the broader information-related issues, not 

just IT, why is it that the Chinese can limit the presence of VOA 

and other reporters to one or two—to cover an entire country the 

size of the United States, but there can be a good dozen Xinhua 

bureaus with freedom of travel across the United States? 

Mr. HURD. Mr. Neuffer, staff is getting uncomfortable, which always means we have been going on too long, so let me end. And 

this is a question for all of our panelists. You got one more? 

Ms. KELLY. Just one. 

Mr. HURD. I am going to yield to my friend, Ms. Kelly. 


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Ms. KELLY. It just takes a one-word answer from each of you. I 

know we are talking about China, but what country is behind 

China? With the concerns we have about China, what other country would you say we need to be concerned about? If there are two, 

that is fine, but —— 

Mr. ATKINSON. India. 

Mr. HURD. Ms. Cook? 

Ms. COOK. I think still probably Russia for the issues that we’re 

looking at, Russia and Iran. 

Ms. KELLY. Okay. 

Mr. CHENG. I’d agree with Ms. Cook, Russia and Iran. 

Ms. KELLY. Okay. 

Mr. NEUFFER. And I’ll say Russia and India to mix it up. 

Ms. KELLY. Okay. Thank you. I am just curious. Thank you. 

Mr. HURD. So, Mr. Neuffer, and we will start with you and we 

will end. Mr. Atkinson, you can have the last word, so make it 

good. One statement on something else we can be doing other than 

tariffs, Mr. Cheng has given us several. Don’t allow Chinese companies on the New York Stock Exchange. We have Ms. Cook’s comments about reintroducing and passing the Global Online Freedom 

Act. What is something that I can turn to our teams and say, hey, 

can we get this done? What do we need to do to make this happen? 

That is what I am looking for, something short, something tight. 

All of our staffs’ pencils are sharpened and ready. Mr. Neuffer? 

Mr. NEUFFER. Excellent. One, as Rob said, it’s not the only solution but we should be driving more of our problems into the WTO. 

It takes time, but we usually win in in that fora, and the Chinese 

respect and are desperate to keep the WTO alive these days. 

Two, let’s get more regional trade agreements. The TPP was very 

important for our industry. We were sad it didn’t go forward, and 

it plays a very important role of setting a model for how China and 

others should behave in the trade arena. 

Three, we need to be embracing our allies much more often and 

much more deeply, as Mr. Atkinson says. 

I’ve been involved in a number of very contentious issues with 

China, and we worked with our allies very closely and were able 

to push China back. 

Mr. HURD. Okay. 

Mr. ATKINSON. China does not like to be isolated. And three, we 

have to have a very, very strong affirmative agenda, and that affirmative agenda for us needs to focus on peddling faster, and to 

pedal faster, we need this U.S. Government investing more heavily 

in basic research, in tech and our sector. 

Mr. HURD. Good copy. Mr. Cheng, you are now—and you don’t 

have to repeat the ones you have already said because I have gotten those down. 

Mr. CHENG. Okay. On the issue of stolen technologies, we should 

be treating stolen technology like stolen technology, which is to say 

you are trafficking in stolen goods; we will therefore punish you for 

doing so. That opens the door then to RICO, to basically criminal 

conspiracies, which then places the onus on American subsidiaries 

and their executives to demonstrate that they are not engaging in 

the trafficking of stolen goods, which puts them then on our side. 

I want these people to be doing good business. There’s nothing 


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wrong with competition. But if you are trafficking in stolen goods, 

then it’s not just, you know, your company that will be punished. 

You’re going to lose that nice house, the three cars, and the horse. 

Mr. HURD. And we know a few people that are pretty good at 

handling RICO cases. 

Mr. CHENG. Yes, sir. The other thing is just an area of importance, the Internet of Things. If you’re worried about artificial intelligence, if you’re worried about that that is a giant data swamp, 

and the IT security associated with IOT at this point is beyond 

primitive, I mean, pretty much nonexistent. We need to be thinking 

about setting standards. We need to be thinking about also limiting 

the amount of data flow from IOT, your coffeemaker, your refrigerator, back to China. 

Mr. HURD. Great. Thank you. Ms. Cook? 

Ms. COOK. I think we need to and I think we actually can punch 

quite a big hole in the Great Firewall. We work with circumvention-tool developers to get some of our content on censorship that 

we translate into Chinese to Chinese users, and we see—we get 

from the data millions of people every—in a week’s span, and that’s 

just one tool accessing it. 

Another tool that’s on actual mobile phones which are becoming 

more—which is the main way Chinese people work, also they get 

to a landing page and content related from Freedom House, content 

from Radio Free Asia, Voice of America, but also of course Google, 

Google ads, Facebook, those are the first places people go. 

And the U.S. Government has invested tens of millions of dollars 

in internet freedom projects around the world, and if you look generally, you know, working on circumvention tools isn’t necessarily 

the answer in every country because the tactics are different, and 

even in China it goes through waves, but right now, there is a real 

demand after VPNs have been taken off of Apple’s iPhone store, 

the—I spoke to before this hearing a number of circumvention-tool 

developers who have received U.S. funding in the past but for various reasons it seemed to indicate a level of—a certain degree of 

mismanagement, to use their words. They’re not being used as effectively. 

There is emphasis in some cases on developing new tools as opposed to scaling up tools that are being effective and could be 

scaled up more widely, and so what we—that’s why I would urge 

the committee—and I can connect the staffers to relevant people— 

to take a look, to speak to people at the BBG, people at the State 

Department specifically regarding the China portion because for 

other countries that don’t have a firewall, you need other solutions. 

But in China, I think there’s a real question how this funding 

has been disbursed, whether it could be—should be increased but 

could be managed and get to people more effectively because if— 

you know, one of the developers was saying that these Chinese 

companies are spending billions of—like the amount of money per 

user on censoring people, if he had even the fraction of that, he can 

actually provide, again, access to so many more people. 

And so think about what alternative future would be if you have 

innovation in that area. And one of the ideas he said was don’t just 

have separate circumvention apps. Have circumventions programmed into existing apps. Then you’ve got Chinese users going 


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and visit—Google doesn’t have to compromise its values because 

you’ve got a least a certain market share of Chinese users jumping 

the firewall. And again, this is—you know, I think there are reasons to believe why this could be possible from a technological perspective without an enormous expense necessarily on taxpayers. So 

that—I think that’s what we would urge to really look at. 

Mr. HURD. That’s good copy and very helpful. Mr. Atkinson, you 

have the final word. Make it tight, make it good. 

Mr. ATKINSON. I can make it tight; I don’t know about the—making it good. We issued a report last year where we laid out a very 

comprehensive nontariff agenda. There’s a whole lot of ideas in 

there. Let me address three quickly. 

One, enact a regime where Chinese entities who seek technology 

licenses in the U.S. have to essentially get that license on the same 

terms that they force our companies to license in China, so reciprocity around technology licensing. I would just limit and end 

most U.S.-China S&T cooperation. I don’t see any reason why we 

have any cooperative agreements with the Chinese when it comes 

to science and technology. 

And third, I would build a—I would spend more money on customs enforcement. There’s a lot of Chinese counterfeit goods that 

still get in this country, and that’s a good way to make them suffer 

pain. They go to make—produce the product, they send it all the 

way over there, and then we burn it or throw it in the ocean, and 

that sends them a very clear message so —— 

Mr. HURD. That was very good. Thank you. 

And I want to thank all the witnesses for appearing before us 

today. The hearing record is going to remain open for two more 

weeks for any member to submit an opening statement or questions for the record. 

And if there is no further business, without objection, the subcommittee stands adjourned. 

[Whereupon, at 11:43 a.m., the subcommittee was adjourned.] 

Æ 


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