U.S. GOVERNMENT PUBLISHING OFFICE

30–708PDF WASHINGTON : 2018

CHINA’S PREDATORY TRADE AND

INVESTMENT STRATEGY

JOINT HEARING

BEFORE THE

SUBCOMMITTEE ON TERRORISM, 

NONPROLIFERATION, AND TRADE

AND THE

SUBCOMMITTEE ON ASIA AND THE PACIFIC

OF THE

COMMITTEE ON FOREIGN AFFAIRS 

HOUSE OF REPRESENTATIVES

ONE HUNDRED FIFTEENTH CONGRESS

SECOND SESSION

JULY 11, 2018

Serial No. 115–149

Printed for the use of the Committee on Foreign Affairs

(

Available: http://www.foreignaffairs.house.gov/, http://docs.house.gov,

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

(II)

COMMITTEE ON FOREIGN AFFAIRS 

EDWARD R. ROYCE, California, Chairman 

CHRISTOPHER H. SMITH, New Jersey 

ILEANA ROS-LEHTINEN, Florida 

DANA ROHRABACHER, California 

STEVE CHABOT, Ohio 

JOE WILSON, South Carolina 

MICHAEL T. MCCAUL, Texas 

TED POE, Texas 

DARRELL E. ISSA, California 

TOM MARINO, Pennsylvania 

MO BROOKS, Alabama 

PAUL COOK, California 

SCOTT PERRY, Pennsylvania 

RON DESANTIS, Florida 

MARK MEADOWS, North Carolina 

TED S. YOHO, Florida 

ADAM KINZINGER, Illinois 

LEE M. ZELDIN, New York 

DANIEL M. DONOVAN, JR., New York 

F. JAMES SENSENBRENNER, JR., 

Wisconsin 

ANN WAGNER, Missouri 

BRIAN J. MAST, Florida 

FRANCIS ROONEY, Florida 

BRIAN K. FITZPATRICK, Pennsylvania 

THOMAS A. GARRETT, JR., Virginia 

JOHN R. CURTIS, Utah 

ELIOT L. ENGEL, New York 

BRAD SHERMAN, California 

GREGORY W. MEEKS, New York 

ALBIO SIRES, New Jersey 

GERALD E. CONNOLLY, Virginia 

THEODORE E. DEUTCH, Florida 

KAREN BASS, California 

WILLIAM R. KEATING, Massachusetts 

DAVID N. CICILLINE, Rhode Island 

AMI BERA, California 

LOIS FRANKEL, Florida 

TULSI GABBARD, Hawaii 

JOAQUIN CASTRO, Texas 

ROBIN L. KELLY, Illinois 

BRENDAN F. BOYLE, Pennsylvania 

DINA TITUS, Nevada 

NORMA J. TORRES, California 

BRADLEY SCOTT SCHNEIDER, Illinois 

THOMAS R. SUOZZI, New York 

ADRIANO ESPAILLAT, New York 

TED LIEU, California

AMY PORTER, Chief of Staff THOMAS SHEEHY, Staff Director

JASON STEINBAUM, Democratic Staff Director 

(III)

SUBCOMMITTEE ON TERRORISM, NONPROLIFERATION, AND TRADE

TED POE, Texas, Chairman 

JOE WILSON, South Carolina 

DARRELL E. ISSA, California 

PAUL COOK, California 

SCOTT PERRY, Pennsylvania 

LEE M. ZELDIN, New York 

BRIAN J. MAST, Florida 

THOMAS A. GARRETT, JR., Virginia 

WILLIAM R. KEATING, Massachusetts 

LOIS FRANKEL, Florida 

BRENDAN F. BOYLE, Pennsylvania 

DINA TITUS, Nevada 

NORMA J. TORRES, California 

BRADLEY SCOTT SCHNEIDER, Illinois

SUBCOMMITTEE ON ASIA AND THE PACIFIC

TED S. YOHO, Florida, Chairman 

DANA ROHRABACHER, California 

STEVE CHABOT, Ohio 

TOM MARINO, Pennsylvania 

MO BROOKS, Alabama 

SCOTT PERRY, Pennsylvania 

ADAM KINZINGER, Illinois 

ANN WAGNER, Missouri 

BRAD SHERMAN, California 

AMI BERA, California 

DINA TITUS, Nevada 

GERALD E. CONNOLLY, Virginia 

THEODORE E. DEUTCH, Florida 

TULSI GABBARD, Hawaii 

(V)

C O N T E N T S 

Page

WITNESSES 

Derek Scissors, Ph.D., resident scholar, American Enterprise Institute ............ 11

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

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

Mr. William Alan Reinsch, Scholl chair in international business, Center 

for Strategic and International Studies ............................................................. 50

LETTERS, STATEMENTS, ETC., SUBMITTED FOR THE HEARING 

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

of Florida, and chairman, Subcommittee on Asia and the Pacific ................... 6

Derek Scissors, Ph.D.: Prepared statement ........................................................... 14

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

Mr. William Alan Reinsch: Prepared statement ................................................... 53

APPENDIX 

Hearing notice .......................................................................................................... 76

Hearing minutes ...................................................................................................... 77

The Honorable Brad Sherman, a Representative in Congress from the State 

of California: Material submitted for the record ............................................... 78

Written responses from the witnesses to questions submitted for the record 

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

State of Florida, and chairman, Subcommittee on Asia and the Pacific ......... 86

(1)

CHINA’S PREDATORY TRADE AND 

INVESTMENT STRATEGY 

WEDNESDAY, JULY 11, 2018

HOUSE OF REPRESENTATIVES,

SUBCOMMITTEE ON TERRORISM, NONPROLIFERATION, AND TRADE

AND

SUBCOMMITTEE ON ASIA AND THE PACIFIC,

COMMITTEE ON FOREIGN AFFAIRS,

Washington, DC. 

The subcommittee met, pursuant to notice, at 2:00 p.m., in room 

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

the subcommittee) presiding. 

Mr. POE. The subcommittees will come to order. I want to thank 

everyone for their patience. As you know, we were in the middle 

of votes when this scheduled hearing was supposed to start. Without objection, all members may have 5 days to submit statements, 

questions, and extraneous materials for the record, subject to the 

length limitation in the rules. I now recognize myself for my opening statement. 

No nation on earth has benefited more from the post-war world 

order than China. From freedom of the seas to free markets to free 

exchanges of ideas, China has harnessed the international system 

built by the U.S. and its allies to become a major world power. 

In the last 30 years with the global economy, more than 800 million in China have come out of poverty. But despite these achievements, China does not want to play by the rules. Rather than help 

preserve the global system that allowed China to grow rapidly, it 

is exploiting its vulnerabilities to gain a strategic edge over competitors. 

China has no intention of becoming an equal partner in the 

world community. They do this by cheating. Just as the Chinese 

Communist Party does not want rivals at home, it wants to fix a 

global system that ensures its dominance and no other country. 

This includes surpassing the United States as the leading economic, political, and military power. 

To achieve economic dominance, China has resorted as I have 

said to cheating. This includes enacting policies such as stealing intellectual property from the United States and other countries, 

forcing transfers in exchange for market access to technology, imposing discriminatory licenses on foreign companies while subsidizing competing Chinese companies that try to operate throughVerDate 0ct 09 2002 10:57 Aug 21, 2018 Jkt 000000 PO 00000 Frm 00007 Fmt 6633 Sfmt 6633 F:\WORK\_TNT\071118\30708 SHIRL
2

out the world, and intentionally investing in American companies 

to acquire sensitive U.S. technology. 

Beijing is also intentionally overproducing steel and aluminum to 

drive down prices—we call that dumping—to make it harder for 

competing producers to remain profitable. Ultimately, billions of 

dollars and millions of jobs in the United States have been lost because China cheats. China has shown no sign of changing its 

course. Instead, it has launched two major schemes to strengthen 

its economy and expand its control of the global economy. 

First, through its Made in China 2025 plan, China is attempting 

to become the leader in high tech industries. To do this China is 

subverting the free market by imposing quotas and state subsidies 

to prevent competition and gain self-sufficiency. It is also 

prioritizing the takeover of foreign tech companies through stateowned enterprises. Combined with state-sponsored cyber theft, 

China hopes to monopolize high tech innovation and production at 

the expense of the United States’ national security and its allies 

and their national security. 

Second, China has launched the ambitious Belt and Road Initiative. Chinese officials claim the project is intended to strengthen 

trade across Africa, Asia, and Europe to revive and modernize the 

ancient Silk Road. But in reality, the Belt and Road is a debt trap 

for—debt, D-e-b-t—for vulnerable economies that only benefit 

China. By providing massive loans to high-risk markets China fools 

developing nations desperate for investment into believing it’s a 

win-win deal for everybody. 

However, 89 percent of the construction contracts go to Chinese 

companies, not the company or country in which the investment is 

made. Chinese workers and Chinese materials are involved. Meanwhile, the host country is left paying the debt when the projects 

go bust. Meanwhile, Beijing bribes and coerces local governments 

ensuring Chinese influence. Bribery is a national policy by the Chinese. This results in countries being forced to side with Chinese interests are accepting a Chinese military presence. Additionally, this 

practice fuels corruption in struggling democracies. 

China does not share our values. We have long since seen this 

in their human rights records and now it is obvious in their trade 

policies as well. We could spend a whole hearing talking about the 

abuse and human rights violations of China with its own people 

and different religious groups in China. In 2001 we encouraged 

China’s inclusion in the World Trade Organization. We thought 

China was evolving from the backward political theories of the past 

and opening up a free market and rule based. We were wrong. The 

liberalizing economic reforms we expected never came, instead the 

government increased its intervention in the economy. 

So it is time we adapt our trade policies while working with our 

allies to confront China’s bad behavior. Beijing has proven it is not 

a responsible partner and a fair player in the global economy. It 

should suffer the consequences. This hearing will help us decide 

what those should be. 

China does have enormous potential as a massive population, its 

history of innovation and trade dating back thousands of years. It 

doesn’t need to cheat. And then there is the issue of the South 

China Sea where China is building islands to control the comVerDate 0ct 09 2002 10:57 Aug 21, 2018 Jkt 000000 PO 00000 Frm 00008 Fmt 6633 Sfmt 6633 F:\WORK\_TNT\071118\30708 SHIRL
3

merce. China needs to be held accountable for its behavior, not rewarded. 

And I will now recognize the ranking member, Mr. Keating from 

Massachusetts, for his comments. 

Mr. KEATING. Thank you, Mr. Chairman, for convening this hearing today. It is timely. 

For months now, tensions have been escalating with China 

around their unfair trade practices and less than a week ago, the 

Trump administration triggered a trade war. China’s trade and investment tactics have long been a major problem for U.S. industries and American workers, and there hasn’t been a whole lot of 

success in reining in their multidimensional tactics for taking advantage of American businesses and those of our allies. So it is a 

tough problem. China has become the most important trading partner of over 100 countries and they have aggressively pursued investments around the world that will link China with these countries for decades to come. 

So today I hope to focus on what our options are. What do we 

do to control and deal with this challenge and how can we do a better job of doing more with what we can actually control? What can 

we do to support our businesses that are under siege by China’s 

unfair tactics? What can we do to expand our own economic opportunities around the world for American businesses and American 

workers? 

How we should use our multinational institutions to curb the unfair model being applied by China around the world and instead reward rules-based economic practices that the U.S. and our own allies adhere to and which give businesses and communities greater 

certainty and reliability for their investments? We should take firm 

actions against China, but we can and should also be advancing 

our own interests and making the most of our own strengths. 

This brings me to the role of our allies. The most recent hearing 

we had in the TNT Subcommittee focused on Russia and China and 

their nuclear arsenals. A consistent theme of that hearing was that 

a major advantage that we have over both countries is the strength 

of our alliances, an advantage they don’t have. And that is true in 

both the economic and security arenas. We will be stronger the 

more we turn toward our friends around the world and offer them 

alternatives to Chinese investment. And the more that we foster 

economic ties that can support shared values like labor rights, environmental protections, and the rule of law, the better off we will 

be, the better off the global economy will be. 

Whether it is joining with our allies and responding strategically 

to China’s unfair practices or in being actively engaged around the 

world to promote good governance, rule of law, and responsible investments to spur growth in emerging economies, we are stronger 

when we bring our own resources together with those of our allies 

who are also committed to the same ideals and goals that we share. 

This is just one reason why I have been discouraged by President 

Trump’s penchant for imposing tariffs as the sole means of trying 

to extract what he wants from other countries. It is a blunt instrument that brings along with it a near guarantee of retaliatory tariffs that simply turn around and hurt Americans here at home. He 

has used them against our allies and now he is using them against 

4

China. And, frankly, I am skeptical this strategy will yield the results that American workers and families deserve. 

Americans don’t deserve just any action, they deserve a comprehensively strategic action that maximizes the possible impact 

and brings with it the greatest possibilities of likelihood of success. 

Where is this coordinated strategy with our allies? What is the 

plan when hardworking Americans are feeling the consequences of 

a trade war with China? What is the plan when China is able to 

weather the tariffs longer than Americans can absorb in those consequences? 

China put together a comprehensive plan a long time ago for how 

it is going to undermine U.S. business aggressively and strategically and how it is going to invest in countries around the globe 

including here in the U.S. And while it manipulates the rules, it 

does so as the game goes on. The Trump administration should not 

be pursuing one-dimensional trade wars with China. If we are 

going to protect our own economic and national security interests 

that are so vital to the well-being and success of American families 

across this country, we have to do so with a coalition. 

So I look forward to hearing from the witnesses today because 

it is critical that we think beyond this approach to also consider the 

range of options the U.S. can employ to level out the playing field 

and better protect U.S. interests in light of China’s unfair economic 

tactics. 

And I yield back, Mr. Chairman. 

Mr. POE. I thank the gentleman from Massachusetts. I recognize 

the chairman Ted Yoho from Florida, chairman of the Asia and Pacific Subcommittee, for his opening remarks. 

Mr. Chairman? 

Mr. YOHO. I would like to thank Chairman Poe, Ranking Members Sherman and Keating, and all the members of the subcommittees for coming together to hold this joint hearing. Ensuring that 

the United States can compete fairly with China is one of the most 

important tasks in our shared jurisdiction and it is good that we 

have come together today to give this challenge the attention it deserves. 

After years of growing concerns and months of heated rhetoric, 

the tariffs unleashed on China on Friday marked a definitive turning point in the U.S.-China trade relationships from decades of 

failed attempts at constructive engagement to coercion and confrontation on both sides. While the same can’t be said for other 

areas of the budding global fight over trade, when it comes to U.S.-

China trade many agree that the status quo can no longer be held. 

The problem has been diagnosed correctly. China has crafted industrial policies designed to benefit them at other countries’ expense instead of providing mutual benefit. Trade is not a zero sum 

game, but that is the approach that China often takes. Beijing has 

implemented these policies through trade and investment tactics 

designed to leach the benefits of the global trading system without 

accepting its obligations. 

This committee has played a role in highlighting this threat. In 

one of the first hearings I convened as chair of the Asia Pacific 

Subcommittee, Dr. Atkinson summarized the challenge before us, 

testifying that rather than reform China has doubled down on its 

5

unfair mercantilist strategies and is now seeking global dominance 

in a wide array of advanced industries that are key to U.S. economic and national security. The threat is no longer a matter of debate but an accepted fact. 

Our hearing today turns on one of the only remaining areas of 

disagreement, which tools should be used in response. The imbalance in U.S.-China trade is about much more than the trade deficit. The deficit was caused by a combination of market forces and 

unfair practices in the past and present. The United States and 

many other nations have been cheated for too long. 

But now the biggest threat from China’s predatory trade and investment policy concerns the future. China’s only response to U.S. 

concerns has been an offer to buy more U.S. goods. We should 

speak plainly. This is a ploy and a trap in an attempt to trick the 

U.S. into claiming an easy but ultimately false victory. A brief reduction in the trade deficit will do nothing to solve the main challenges of the trade relationship. It won’t reduce long-term threat to 

the U.S. competitiveness in advanced technologies. It won’t reduce 

market access restrictions. And it won’t stop forced technology 

transfer or blatant IP theft. 

Xi Jinping and his cronies have made clear that they do not intend to make any good-faith efforts to address these valid concerns. 

Instead, they have decided to punish innocent U.S. citizens and 

workers. Whether or not they are the right tool for the job, U.S. 

tariffs are based on longstanding wrongdoing from the Chinese 

side. China’s tariffs are pure retaliation designed to do nothing 

more than inflict pain. 

Because Xi in China refused to do the right thing, that is, compete fairly or begin to offer real structural changes in their negotiations with the U.S., it appears that we will be forced to use coercive 

measures which we don’t want to do. Targeted tariffs may well 

have a place in the suite of these coercive measures, but tariffs 

alone won’t counter Chinese industrial policies, and untargeted arbitrary tariffs may well end up being counterproductive and harmful to Americans. 

China recently placed $34 billion worth of tariffs on U.S. ag products that will hit soybean, beef, pork, and dairy particularly hard. 

It is likely more will follow. A complete response will require more, 

probably a comprehensive combination of targeted economic sanctions on bad actors such as the export ban on ZTE and maybe 

Huawei that Congress is seeking to enforce through an NDAA provision, investment and export restrictions, and upgraded protections for U.S. intellectual property and innovation. 

It is critical for the United States to address the full scope of 

China’s predatory trade and investment policies and this hearing 

will help us make sure that the U.S. response does not leave any 

critical tool by the wayside. I thank the chairman for having this 

timely meeting and I yield back. 

[The prepared statement of Mr. Yoho follows:]

6


30708d-1.eps

China's Predatory Trade and Investment Strategy 

Subcommittee on Terrorism, Nonproliferation, and Trade 

Subcommittee on Asia and the Pacific 

House Committee on Foreign Affairs 

Wednesday July 11, 2018 

Opening Statement of Chairman Ted Yoho 

Good afternoon. T'd like to thank Judge Poe, Ranking Members Shennan and Keating, and all 

the Members of the Subcommittees for coming together to hold this joint hearing. Ensuring that 

the United States can compete fairly with China is one of the most important tasks in our shared 

jurisdiction, and it's good that we've come together today to give this challenge the attention it 

deserves. 

After years of growing concerns and months of heated rhetoric, the tarim; unleashed on China on 

Friday mark a definitive turning point in the U.S.-China trade relationship- from decades of 

failed attempts at constructive engagement, to coercion and confrontation on both sides. While 

the same can't be said for other areas of the budding global fight over trade, when it comes to 

U.S.-China trade, many agree that the status quo could not hold. 

The problem has been diagnosed correctly. China has crafted industriaJ policies designed to 

benefit at other countries' expense, instead of alongside us. Trade is not a zero-sum game, but 

that is the approach that China often takes. Beijing has implemented these policies through trade 

and investment tactics designed to leech the benefits of the global trading system without 

accepting its obligations. This Committee has played a role in highlighting this threat. 

In one of the first hearings I convened as Chair of the Asia-Pacific Subcommittee, Dr. Atkinson 

summarized the challenge before us, testifying that "rather than reform, China has doubled down 

on its unfair, mercantilist strategies and is now seeking global dominance in a wide array of 

advanced industries that are key to U.S. economic and national security interests." The threat is 

no longer a matter of debate, but accepted fact. Our hearing today turns on one of the only 

remaining areas of disagreement-which tools should be used in response. 

The imbaJance in U.S.-China trade is about much more than the trade deficit. The deficit was 

caused by a combination of market forces and unfair practices in the past and present. The 

United States and many other nations have been cheated for too long. But now, the biggest threat 

from China's predatory trade and investment policies concerns the future. China's only response 

to U.S. concerns has been an offer to buy more U.S. goods. We should speak plainly: this is a 

ploy and a trap, an attempt to trick the U.S. into claiming an easy but ultimately false victory. 

A brief reduction in the trade deficit will do nothing to solve the main chaJlenges of the trade 

relationship: it won't reduce the long term threat to U.S. competitiveness in advanced 
7


30708d-2.eps

technologies; it won't reduce market access restrictions; and it won't stop forced technology 

transfer or blatant IP theft. 

Xi Jinping and his cronies have made clear that they do not intend to make any good faith etl'orts 

to address these valid concerns. Instead they have decided to punish innocent U.S. citizens and 

workers. Whether or not they are the right tool for the job, U.S. tariffs are based on longstanding 

wrongdoing from the Chinese side. China's tariffs are pure retaliation designed to do nothing 

more than int1ict pain. Because Xi and China refuse to do the right thing, compete fairly, or 

begin to offer real structural changes in their negotiations with U.S ofticials, it appears that we 

will be forced to use coercive measures. 

Targeted tariffs may well have a place in the suite of these coercive measures, but tariffs alone 

won't counter Chinese industrial policy, and untargeted, arbitrary tariffs may well end up being 

counterproductive and harmful to Americans. China recently placed $34 billion worth of tariffs 

on U.S. agricultural exports that will hit soybeans, beef, pork and dairy particularly hard. It's 

likely more will follow. A complete response will require more-probably a comprehensive 

combination of targeted economic sanctions on bad actors- such as the export ban on ZTE that 

Congress is seeking to enforce through an NDAA provision- investment and export restrictions, 

and upgraded protections for US intellectual property and innovation. 

It is critical for the United States to address the full scope of China's predatory trade and 

investment policy, and this hearing will help us make sure that the U.S. response doesn't leave 

any critical tool by the wayside. I thank the witnesses for joining us, and look forward to hearing 

their testimony and recommendations. 
8

Mr. POE. I thank the gentleman from Florida. The Chair recognizes Ranking Member Brad Sherman from California for his 5-

minute opening statement. 

Mr. SHERMAN. Before I get tagged with being anti-China, I will 

remind the subcommittee that I have been the least hawkish member of the committee on issues of maritime items in the South 

China Sea. 

Now let’s look at our trade deficit with China. Some $375 billion 

in goods, an 8 percent increase over what it was in 2016, a 450 percent increase over what it was 18 years ago when we unfortunately 

granted it most favored nation status. That is right. The trade deficit has grown $28 billion in the first year of this administration. 

Back in May 2000 when I voted against most favored nation status for China, I said that the agreement was going to have a terrible impact on American working families and on the balance of 

trade. It turns out, for once, I was right. I also said we needed an 

agreement that set targets for reducing the trade deficit. We didn’t 

get them. We are now told that this is Trump’s trade war. No, 

China declared war, trade war, on the United States 18 years ago. 

And before Democrats get carried away with the desire to repudiate our position, remember that 65 percent of Democrats voted 

no on MFN for China. We should not abandon that position just 

because some Republicans or the White House have embraced it. 

And I would point out that we should withdraw MFN—that in 

2010, I introduced the Emergency China Trade Act which revoked 

MFN for China with 6 months’ lead time. It directed the President 

to come back to us with a new trade agreement that would reduce 

the trade imbalance to zero over a 4-year period. 

Compared to that bill, Trump’s efforts on China are timid, weak, 

haphazard, and unplanned. And while Wall Street pays economists 

to tell us that the trade deficit isn’t a problem, in fact we have lost 

2 million American jobs. That is opioid. That is alcohol abuse. That 

is suicide. That is abandoned counties and small towns. And that 

is the election of Donald Trump as President of the United States. 

Those are the harms of our trade policy, a policy in which China 

is allowed to have a 25 percent tariff on American cars going into 

China while we have only a 21⁄2 percent tariff on Chinese cars coming into the United States. No wonder Tesla feels that it needs to 

open up a factory in China. 

And now, as the latest insult to the American people and attack 

on American workers is this new social score detailed in the Foreign Policy magazine. I would like to enter it into the record. 

Mr. POE. Without objection, so ordered. 

Mr. SHERMAN. China is going to give every one of its citizens a 

social score. Bad social score you don’t get a passport. Bad social 

score you don’t get a loan. Bad social score, a host of other things 

can be taken away from you. There will also be a social score for 

businesses, and lo to be a business with a bad social score. What 

does it take to get a good social score? You have to buy Chinese 

products. 

So they are literally intimidating their citizens into increasing 

the trade deficit with the United States and the devastation that 

that causes, not to mention their theft of technology and their demand for coproduction agreements. The WTO rules are not well deVerDate 0ct 09 2002 10:57 Aug 21, 2018 Jkt 000000 PO 00000 Frm 00014 Fmt 6633 Sfmt 6633 F:\WORK\_TNT\071118\30708 SHIRL
9

signed to deal with a country that has a host of ways to increase 

the trade deficit with the United States that are outside the WTO’s 

purview. Whether it be the social score, whether it be coproduction 

agreements, whether it be theft of intellectual property, whether it 

be the fact that the Chinese Government doesn’t need to pass a 

regulation or law which the WTO might look at, when they actually control the boards of the major companies that might otherwise import American machinery. 

So, all of the decisions, major economic decisions in China, are 

government decisions. The WTO doesn’t deal with that and the 

trade deficit increases, as does the harm to America. And I haven’t 

even had time to talk about how they repress workers’ rights in 

order to suppress labor costs and to manipulate the currency. And 

I would need another 5 minutes, Mr. Chairman, to review all the 

ways in which we do not have a fair trading system with China. 

I yield back. 

Mr. POE. The gentleman yields. The Chair will not grant you an 

extra 5 minutes to give your opinion. The Chair recognizes other 

members for their opening statement. Each member may have up 

to 1 minute. 

Mr. Rohrabacher from California? 

Mr. ROHRABACHER. Thank you very much, Mr. Chairman. It is 

a little disconcerting to hear our President be called weak and 

when he is trying to do something that no other President has tried 

to do, especially Bill Clinton who was President when you voted for 

WTO and I was against it. Or did you oppose your President? 

Mr. SHERMAN. No, I didn’t. I wish you would familiarize yourself 

with my record. 

Mr. ROHRABACHER. Oh, I am sorry. You didn’t oppose your President then, or you did? 

Mr. SHERMAN. On everything affecting China trade I have opposed all administrations. 

Mr. ROHRABACHER. And also let us note that was 2000. I only 

have 1 minute here. So that was 2000, it was Clinton who gave us 

that free trade. And did Obama do anything for the last 8 years? 

Nothing like this President is doing. This President has been getting right in their face and he is being aggressive on the issue of 

everything you just brought up, but the fact the guys on your party 

never brought it up. 

So with those things said, let me note that China is——

Mr. SHERMAN. Will the gentleman yield? 

Mr. ROHRABACHER. I only got one—I have less than—I am out 

of time right now. If you will grant me 5 more seconds because of 

the interruption, China is a country of 1 million oligarchs, no freedom, and they are corrupting the world. And those million 

oligarchs who control that country with an iron fist mean to do us 

harm and I am glad we have a President now who is confronting 

that, unlike Clinton and Obama. 

Mr. POE. The gentleman’s time has expired. 

Mr. ROHRABACHER. Thank you. 

Mr. POE. I suspect this will be a lively hearing. 

Mr. KEATING. The witnesses haven’t even started. 

Mr. POE. Yes and you haven’t got your turn yet. 

Mr. Chabot recognized for 1 minute, the gentleman from Ohio. 

10

Mr. CHABOT. Thank you. This committee, the Foreign Affairs 

Committee, has been very engaged in responding to China’s nefarious activities and the more we examine the worse it really looks. 

And over in the Small Business Committee, which I happen to 

chair, we have examined Chinese cybersecurity threats and probed 

the problems created by firms like the Chinese telecom giant ZTE. 

Whether we discuss intellectual property rights, the so-called 

Belt and Road Initiative, technology transfers, trade, or the Made 

in China 2025 plan, it is clear that Beijing continues to enjoy the 

blessings of the rules-based international order while routinely 

flouting its rules to gain a competitive advantage. This is deeply 

unfair and also a direct threat to our national security. 

It has also come to my attention that Intel Corporation is in 

talks to transfer advanced semiconductor technology to Tsinghua 

Unigroup, which is a subsidiary of Tsinghua Holdings, which itself 

is a wholly-owned subsidiary of Tsinghua University and a public 

university with, oh by the way, direct ties to the Chinese Government. 

I have the NDAA conference so I will be in and out here, but if 

the witnesses are able to address it I would love to hear what they 

have to say. I yield back. 

Mr. POE. The gentleman yields back. The Chair recognizes the 

gentleman from Virginia, Mr. Garrett. 

Mr. GARRETT. Thank you, Mr. Chairman. I want to associate myself with the bulk of the remarks of my colleague from California, 

Mr. Sherman, which I know is surprising to some people. But I 

have to say that candidly, while certainly the expected partisan 

barbs are in there and probably they would have been had the shoe 

been on the other foot and I was speaking to the other administration, that I think he is right on the bulk of this and I think that 

Brad Sherman also gave an incredibly insightful analysis of the 

Iran nuclear deal, the JCPOA 5, 6 years ago to a mosque or to a 

synagogue in California. 

We need to stop with the partisan rankle for just long enough to 

recognize that our job is to represent our constituents in our respective districts but also the United States of America, collectively, through our responsibility as members of a Federal Government. 

Now, ironically, I met with Virginia farmers before this committee hearing and the farmers are taking it on the chin as it relates to this whoever-you-want-to-blame-it-on trade war that has 

been going on for generations by virtue of the fact that that is one 

of the few areas where in fact we have a trade surplus. 

But the reality as stated by Mr. Sherman and candidly echoed 

by the chairman and others is there is a 10 to 1 disparity as it relates to automotive tariffs, there is a 5 to 1 disparity as it relates 

to which direction the money is going by virtue of the trade relationship between us and China, and while I am reflexively anti-tariff when that is the tool that has been used to bludgeon our workers for years, it seems the most likely remedy might be found by 

virtue of having used such tools ourselves. 

So let’s try to work across the aisle together and find commonality and not ways to argue and get this right because it matters to the people who we represent. 

11

Thank you Mr. Chairman. 

Mr. POE. And the Chair finally recognizes the gentlelady from 

Missouri, Mrs. Wagner. 

Mrs. WAGNER. Thank you, Chairman Poe and Chairman Yoho, 

for organizing this hearing. And I thank our witnesses for being 

here. 

I am deeply concerned about the effect China’s retaliatory tariffs 

will have on farmers and ranchers and pork producers and dairy 

producers and consumers all over my home state of Missouri. Missouri is a trading state. Exports support 88,000 Missouri jobs and 

one out of every three rows of crops is grown to export. China’s 25 

percent tariff on American soybeans will hit Missouri hard. Our 

local newspapers and press are already reporting that soybean 

farmers expect to sell their crops at a loss. 

It is abundantly clear that these tariffs will hurt good, hardworking men and women and their families and I worry that the 

escalating trade war will create winners and losers in communities 

across Missouri. While I commend the President for standing up to 

China’s bullying trade practices, we need to keep these things in 

mind as we go forward. I welcome your thoughts on these concerns 

and I yield back. 

Mr. POE. The gentlelady yields back. I will introduce each witness and then give them time for opening statements. Each 

witness’s written remarks will be made part of the record. 

Dr. Derek Scissors is a resident scholar at the American Enterprise Institute. Previously, Dr. Scissors was a senior research fellow in the Asian Studies Center at the Heritage Foundation and 

adjunct professor of economics at George Washington University. 

Dr. Robert Atkinson is the president of the Information Technology and Innovation Foundation. Previously he served as vice 

president of the Progressive Policy Institute. 

And Mr. William Reinsch holds the Scholl chair in international 

business at the Center for Strategic and International Studies. He 

is a senior advisor at Kelley, Drye and Warren, LLP, and previously he served for 15 years as president of the National Foreign 

Trade Council. 

Each of you will have 5 minutes. When you see the red light 

come on in front of you, remember, stop talking. 

And Dr. Scissors, we will start with you. 

STATEMENT OF DEREK SCISSORS, PH.D., RESIDENT SCHOLAR, 

AMERICAN ENTERPRISE INSTITUTE 

Mr. SCISSORS. Thank you, Mr. Chairman. I apologize in advance 

for being more boring than the committee has been to now. It is 

a high bar for me to try to reach. 

My written testimony is about Chinese investment and construction in the U.S. and around the world. Last night we got the first 

set of $200 billion 10 percent tariff list which, you know, we will 

be talking about for the next few months. I welcome any questions 

along those lines however you see fit, but my time now is going to 

be spent on the Chinese economic picture as it pertains to our relationship with them going forward. 

The first observation I want to make is that people talk about 

China as still growing rapidly, basically because a dictatorship in 

12

charge of the country says it is growing rapidly, and I would urge 

you to be suspicious of that. China is in fact an aging and highly 

indebted society at the moment. To keep people happy when they 

will probably never become rich, the party is cleaning up air, land, 

and water. They are making some progress in that effort. They will 

pay good money and for decades to come for environmental technology and for food imports. 

So there is an opportunity and we need to remember that as the 

Representative from Missouri just reminded us. There is less of a 

problem in one sense that for about 35 years the Chinese Communist Party has emphasized jobs and it did so by subsidizing its 

production to draw jobs from everywhere else. It was predatory economic action for the sake of jobs in China. 

Now the labor force is shrinking and aging and the Chinese will 

be willing to import more and export less. Unfortunately, they will 

only do that up to a point and the reason is they have a very serious debt problem. I would say on a bipartisan statement that our 

debt performance from 2009 to 2017 was bad and China’s was 

much worse. China keeps its domestic finances, and this can be 

very technical and dull, but it keeps its domestic finances walled 

off from its international finances because if it doesn’t money will 

pour out of the country even faster than it is now. 

Getting back to my first point about people who think China is 

a powerhouse and is growing really rapidly, then why is money 

leaving the country on a net basis every year? So because of this 

risk the Chinese need money from a trade surplus and this is 

something that many of my colleagues don’t recognize. Chinese say 

they are not trying to run a trade surplus. That is not true. They 

need the foreign exchange from a trade surplus to stabilize their 

balance of payments and without it they have a possibility of a financial crisis of a certain kind. Therefore, they are going to continue to run a trade surplus and we are going to continue to have 

some of the problems that we have with them now. 

The worst situation with regard to China’s economic future concerns innovation. Growth is not going to come from China’s damaged land. It is not going to come from an aging population. It is 

not going to come from their debt-ridden financial system. It has 

to come from innovation. The party recognizes this, but the party 

also really doesn’t like competition as several members have already stated. And in my opinion, without competition you are not 

going to get much innovation. 

So what do we get from that? We are going to get the Chinese 

trying to buy technology to upgrade their innovative capabilities 

and steal it whenever they can’t buy it. I used to think Chinese IP 

practices would get better over time, but their economic mismanagement means I think they have more incentive to steal technology and their practices are going to get worse. 

You know, to qualify this a little bit, China is not taking over the 

world. The Belt and Road is something I know a fair amount about, 

is far smaller than its hype but it has been harming the U.S. The 

main harm used to be subsidies to take American jobs. I think that 

will lessen over time. But the coercing and stealing of American intellectual property, which is the core of our comparative advantage, 

13

the core of what we get benefits for in trade, is going to get worse 

because the Chinese need that innovation quite desperately. 

And I am going to make a statement which I wasn’t going to 

bother because the U.S. responses are long overdue, it sounds very 

vague but here is a way to put it into context. I am pretty sure I 

sat in this room 6 years ago when Chairman Ros-Lehtinen held a 

hearing on Chinese IP practices and we all agreed in a bipartisan 

fashion that we needed to respond to Chinese IP practices. And 

here we are 6 years later and we all agree again, but we haven’t 

done anything that has worked. 

My own recommendation at the time and continues to be that we 

target Chinese companies specifically who have gained from coerced or stolen IP and we target them internationally. Not just 

banning them from U.S. business but applying global financial 

sanctions. My concern with tariffs is that it targets the guilty and 

the innocent together so you have no reason to stop stealing. Go 

after the people who really commit the crimes and go after them 

more strongly than perhaps a 10 percent tariff, which I don’t think 

is particularly effective in light of Chinese subsidies. 

There are many other possible steps we could take. I am happy 

to talk about them, but I am actually going to stop here and yield 

back my last 15 seconds. 

[The prepared statement of Mr. Scissors follows:]

14


30708a-1.eps

Key Points 

"" China is rilvestrng rncch ir u-·e US ~~'12n i~ diu just d year Jqo. It has never ~nvested 

much Belt a:1d Road. Yel Chi·kJ,'.::. ~;lobe! r~;';estmef1t sve'lcJrno;J rernairrs nea!ihy 

\·vit:l irTpressive divc;sif:cution 0cross coJnt,·ic;s zmd the rc€'mergc1c2 of ;:::rivGte fi~ms. 

* Corstl'uctior anc; engi:"'eer'ng is co1sirlerJble bvt un!ikely to expand much, 

ch3in Chma's forCICJn ress-rvl.'S. Con.str~JcliOt' ir' ~h(;; tk:;1 unci Poad ulor'c i~ 

pro_:ccts 

be~~ause 

ti1e n:.;rnber dcOLd'tries is rrsing, "10t Cfw~a actrve. 

Tne US is about to change :ts investr;1ent :eview new legislation. T'1is a 

lhr!vr;~s or, CCTLJi'lty. 1 he CornmiUc·e or~ ~oreign !;wcoslr ne'l!. Stau~s 

r'lust be pr·oper!y :·esour·ced o:· refonr 'Nil' rTeanrr'g'ess 

American headlines stress coming ~·estrictions on 

Chinese activity in the L'S~ Global heacEines stress 

transfopnarlc'n wrought by the Belt and Road Iaitiati\Te/ Actual measurement sh\J\YS Ch:na has not 

CS since enr1y 2017 and never 

the Belt ;md Road (BRT:. 

Several large eansactions havL' dr~vcn China 't> 

J,OIR our bound investment> featuring a '1-9 hi! !ion 

transport play in <~ermanyJ plus a <>eries of health 

care acquisitions. The top five invc~tmcnt targets 

in 2018 tn Clare s;r nn H·vc different continents. China's 

nverse~-.._s spending habits are more diverse than macy 

ob:::<Cf\'CfD bdi~:vc. 

The China Global Invcstmcnr Traclzcr 

from the American Enterprise Institute 

tully public record of China's outh:xmJ investment 

or a map, all3,000 traJrtsacticms 

l.ic data set. The CGI'l' es::im_ates the number of lnve::;tments in the first half of 2018 dropped 

from the tirst ha1fof20l7. nascd on the m.:rnbcr (1{ 

tn:ms~-.._clions and total amount f1pent, the Grst :-talf 

of 2018 strongly resembles the first 1Mlf of 2n15, 

before the }_')ace of capital exit first so::Lred and then 

was ct~rbed by Beijing. 

'l'hf're are encmm1g!ng signs. 'Cr8nsport, energy, 

and met,ils inve:,tment !ed in the tlrst half but, contrary to Beijing's insistcucc\ cntcrtaimn\.'Ct and real 

c<::tatc a:-c nor dead. Perhaps the "inglc best dcvdopmem ic, prlva:.e Chlne,c,e firms are spending again 

this year. '.Vhllc the ravv quantity is lmTv·cr, the pr:Yatc 

share of invc::::tn1Cnt ls back to its 2016 leveL If 2mR 

continues !::J follm:vthe pattern of 2015, LoL.ll investment volume will be ln tb.c $us~S130 billion r:mge 

for the year. Another $1 trillion globally could be 

added hy the end of 2.024. 

Lnvestmer:_t hy the eop1es Republic nf China 

(PH. C) it-: often conf1ated \Vith constructio:a of rail 

line~, pmvcr plants, and so fo:·th. Construction docs 

not involve owr:__ershlp, as investment does. Since 

2005, 11Je1 E:' are mort- construction contr.:tcts worth 

S1oo n~illion t)f more than invcstmct1ts, thou~;h the 
15


30708a-2.eps

average constmctiou dc<"J is smaller. In the fi1 st half 

of 201B, t~lC PRC' initiated at lcac:;t one large construetim contract in over 40 countries, chiefly in ener.s; 

and transport. 

Chinese engineering and construction is the core 

of Lhe RRL Csing the hte::.t, 76-member \'er~ion of 

the BJ-n !D~ the largest accoum:o: 

tion sir:ce inaug"Gration in the fall of ?.013, '"·ith 

th2t pace iwlding in 2017~18. On rh:s tally, in not 

qui~t' BRi cunsrruction ha~ been worth 

more set 

of BRI countries accounts for less than 25 percent 

oft he PRC's o:nbotmd investment over the pe-riud, 

a bit more than $150 billion total. 

BRI investment ;,:vcakncss is especially t::oubling 

for Beijing hecau~e the prekrred location fm Chi-· 

ncsc cornpa11ies "is clo8ing off. The PRC's ~nvcstn1cnt 

in the CS exceeded Sso billion m 2016, fell by more 

than half in 201], and \\'as only $4.5 hillion in rhe 

flrst half of 20HL Congress ha" been crafting legislation to tighten oversight d. Chinese venture::; s:LTKe 

the 2016 surgc,1 but there is less 3n6 ks~ to ovcrH'C. 

Cilinese enterprises exist at the suffennce of the 

Communist PaTty and mu~t be treated ""''"""m~iv. 

The Amedcan goal should be to do 

dear, stable policies to \vclcomc investment when 

natlonnl security is not involved. 

CGITvs. MOFCOM 

The CGn contair:.s all documented investment 

and constmction tran~:.xticms \\~orth $wo million 

(rounded) more, swrring i.n 2oos and ~1pdaced 

every sL"{ months. This features 1.400 inv~stmcnts 

\\fOrth ~l.9 tril~ion. 'l'he .;:im:::>truct:on dataset inclt1des 

~780 billion <.tnd ~s still inccmactions worth ~;350 billion, in which investme-nt or 

construction was ;mpaired (lr failed aiter <'i. commercial agrc(;'ment wc~s struck. 

The CC1T docs nnt include loan:::: or hnnd purchases, lt measures g;·oss cap1ta! outlay, excluding 

depreciation and disinvestment. Disinvestmea1 \-1;as 

:Js private tlrms 

D~sinvesnnent 

fadf! by 2.019, as :retrenchment h:1s :Uready eased. 

Finally, the CGIT relics on corporate smm:cs, 

Companies frequently disclose a tn::nsactlon and 

then later describe it at> occurring at an e;wlier time. 

For this reason, isolat:ng tdr;_g1e-ycar n:sult~ can b:: 

misleading. 

China's \'Iinistry oi' Commerce (1\IIOfCOI\T) publishes t:1e official data on uutbound investment There 

is at present a bJt:.e series on ''equity and othern investments, whlch moves h1 similar fashion to the 

CGl'I' and is subject to revisio:1s MOFCOJVl does 

not explain. 

Chinese enterprises exist at the 

sufferance of the Communist Party 

and must be treated accordingly. 

lfnfi:.1ttunme1y, there is 1·nore. 1\10i·'(XJ~1 <lUk',lner:ts 

the b:tsc series vvith rd::-rvcstcd emtJ ings. Only it docs 

not measure this sclics; it just assumes a dollar va1uc 

for tach mont.h. There is also ~l "'finar,c-iat inve.-:tmer.C 

series, \\'hkh is added clfterthe f~Ktbut is typi<.:cJ11y 

not published and difficult to verify. The various 

moving parts mean d1at, when the commerce minis~ 

ter reporterJ to the Natinnal Peopie's ( :ongress that 

20t7 (mtbound investment\\Tas $124.6 billion, it >,vas 

unclear exactly \\'hat he vvas referring to.:> 

After ~umost a decade in ''vhkh the CGlT 1vas compiled first and MOFCOt•1 figt1n:::; puhllshed later 

matched 2013 vvhen 

poqcnt m~c. A nnc~ycar gnp is not it~clf rcmcn-kablc, 

but it d!d coincide V•/ith Communist Party (~eneral 

SccrctaryX1 Jinping's brand1tgofthc BRl. MOFCOM'B 

2014 fig.:J:""es built ctf this base. In 2015--16, China :;;mv 

hem;t capital outflow and eventually imposed tighter 

controls.0 Bt.:ljiugwas thus obligcJ to :mnouucc '::iUC-

<'Css in the fonn oflm.vcr 2.817 spending. 

Private tlrn:s indeed spent less in .:..oq, but 

~\110HCOM simply exduded (ne vast bulk cfthe $43 

is deceptive. /\t best, it n"~eans moneyv~,<;.JS either not 

transparent as investmem or ·not recorded .at :~dl vvhen 

originally sent out of the PRC-antl definitely not 

recorded 1;~,rhcn it was act:1ally spent m:crscas. The 

PRC's largest-e\·er acquisit:on was made Lo vanish. 
16


30708a-3.eps

If 2013 did no;: reprc~cnt politidzation of the data, 

7.017 certainly did. 

j\lOf·COM indic:ates ]ess th:Jn ~~3 biHion of the 

Syngcnta acquisition \vas cmmtcd. Against tha, the 

assumed pace of reinvested car:1ings und cpa que 

f1n:mcial investment, QL ~R7 hi ilion and $79 billion 

over 2013-17 re.spect!vely, coP~tltute dubious spending daims. The MOFCOM column in Table 1 represeilts replicable figures, excluding reinvestment 

~n 2013-17 but including The total 

1::, likely too 

of dollars. 

Regardless of which numbers arc used, 2017 ;,vas 

\veaker than 20:6 in .-Jt leatit one important respe::t.: 

The number ofhrgc transaction~ declined sharply. 

That dcdlnc "vas arrested in the first half of 2018. 

R~nmse !L m;J.nufilcLllred .1lov..' base f()r 2017, :i\!fOFCX)lvi 

~s n:porting investment volume as rapidly dim bing 

this year. The CGIT shmvs a drop, but this may just 

be due to the limits ;-:~f corporate di&closure. Both 

measurement$ pcntray 201B as thus far similar ;,_o 2015. 

Beyond anm~al se1ies, the CGlT has at least t\;llO 

cnxial advc:_ntagcs over J\IOFCOM's data. Fir:-t, il1-

divid'.lal transac~ions are disclosed. Second, national 

polic~'requires :\10FCOM to treat ! Tong Kong as ::m 

t:xtenJuJ cu;;toms port. Tt \]wret\xe i~ said ro receive 

mor.: than h'-11£ of Chinese outbound spcndJng. Ftmds 

flow through Hong destinations, but 

the mird~try doe~ not them further. Hence 

~t5 bilateral figures, such as for Brazil, can be much 

teo lcnv. Th1~ CG1T follmYs mo11ey to the true rccip-

:em. providing far more accurate bilateral figu:es, 

China's Global Footprint 

T1 1 e CGJT's far superior b~lateral figures rm1ke clear 

that neither the nRT nor Hong Kong dr-:.1ws the bulk 

of Chinese spending. The tep 10 inv('stmenr recipients f"e~1ture onlytvi:-o RHJ memhers and none in the 

top :c.even (TVf::1p 1;. \\11ile the US easily leu.ds in tenus 

of totalluvc::tmcnt attracted, the Americar, figure 

is not nc2rly as impressive after adjusting fnr popu-

:~ttlon or economic sl/..e, and the LTend is rapid decline, 

For 2018 to date, Cerm:'l:ny leads, bat on the basis 

rhis is common \vhen c~)n.sldering 

anc half-yeJr numbers 

seriously. One tt:ntat:vc 

Table 1. Two Views of Chinese Outward 

Investment($ Billion) 

200~ 10.2 12.3 

2006 ;g_g 21.2 

2007 30.1 20.5 

2008 'JS.7 JJ.9 

2009 S6.0 5fJ 5 

2Cl10 65_0 58[\ 

20<~ 09.8 74.1 

7012 80.3 87.8 

2013 80.5 90.4 

2Qiil 10J.l ;06.3 

2015 I Li.6 :28 9 

.:?OlfJ '!O.l '78; 

20l7 ·:77.:1 -

1:05.2 

?OlfJH1 :>6A 61.8 

Total 1,090.5 1,124.3 

result to ><:atcb: The Russian federaticn lost~ large 

0e:1l and BS yet has dravvn nothing at a11 to compensate for that. 

Ano:lwr int;:iguing development is MOFCOI\'I 

depicting invcstn:cnt in the BRI as a wh0lc a~ ·weak. 

Tracking the H.R.! over time is dlfficulL becau<;e the 

number of participants ccntinw:s tc• dse. And the 

BRI \Vould be immediately mt~ch larger if a country 

such af, Britain jlJined. But :\10FCON! pu!:~' the HRI 

invesnn-::nt shan: at lest> than ,;_ 5 ]Jl'tccnt through May 

and falling~ as grm";th lagged the rest of t:1c \Vorld. 

CGIT inYestment numbers zxe ncrrem:ly more favor'lble to the BRl, perhaps because :VlOl-''CO.Yl is 

t:..sing only the ~et of member countries. 

China may ovm 

sig,Tt contracts worth bildnd m~ne. '!'he PRC 
17


30708a-4.eps

Map 1. Top Recipients of Chinese Investment, 2005-18 ($ Billion) 

Map 2. Top Countries for Chinese Construction Activity, 2005~·18 {$ Billion) 

has far less in the \vay of investment than construction in .:\.ngola, for example. Even at $780 billion., the 

value ( lf constn.lct1cm l.'Ontracts that 1 he CG 1' f' e<tpt~wes 

Js too kw .. '. 1:a:r1yycars \vcre undcneportcd, 3.1ld ;1evv 

projects trickle in slovdy. Moreover, construction 

activity is concentrated in pnnrcr coCJ nLries where 

information on Chjnl'SC activity may nor be sufficiently documented ":o appca~· in the CGIT. 

The mos1 about the constnJction 

oftlw total captures, <-wly 

3S percent ....-crsus 60 pc·,:cnt in invcsm1ent (?vlap 2 ). 

This ls bee c1u,-;;e the e,:nnomies are smaller; there 
18


30708a-5.eps

arc no rich ..:ourllrics in the wp 10. Eight arc BRI 

mcmhcrs. The totals differ, hut TviOFC:0.\1 contirnl,c: 

the CGl'f' result that the BRl construction share is 

la::- larger than its investment sha.cc.~ Observers of 

the BRI should focus 0~1 constmction and cngu:ccnng. 

Because construction contract<: appes.r more 

slm;~,'ly than invei>tments, :::n-ailahle 201~ numherf' 

may be mi~sing up to ,$20 billion v•..-orth of deals. 

Over the past lR months, Argentina, A:lstralia (primarily thro·;1gh Chinese--owned John Holland), !he 

r:gypt, and the .Russian Feder<1tion saw the 

Lnost PRC coastlllction and engineering activity. 

!u1 iraportanr dlffercncc bcn.vccn investment 

and L'om~truction lies bek11.V the quantities involved: 

Ttc rc•k of private Chlncs·: \"(Jmp<m~cs iu investment 

Map 3. China's Worldwide Reach 

is now ccmsidcntblc, \vhik statc-u;,vncd enterprises 

(SOEs) such as China National Bmldlng ;\1atc,·ials 

~tterly domkate cor.srruction. 'l'hest: sor:s have a 

pwven record in difficult settings at home and ovrrscJs and arc massively aided by concC"ssionary finance 

from slate-controlled banks. Given the state role, it 

money 

rro±lt. 

/'1 dollm ~nvested and a dollar received for engin~ering ~mel construci:ior1 do not have the ~ame v:J1ne 

or irn?JCt. ::'-Ioncrhdcss. invee:.tmcnt and cunsrruction can be uscfc1Hy combined simply to tmdcrstand 

the scope of the PRC\ <tctivity (;'\1~tp 3). Throt1gh one 

or the uthc~·, PRC enterprises h<hT a truly global 

Since 2005_, the combined value of China's g!abaf investment and construction is neatly $1.9 triUion More developed ccu.mtries 

draw the butk of Investment, with Europe as o whole the leading region. Developing countries such as Pakistan and Nlgeria 

see the mast consintdioo activity. 

Saifdt Arobin $31 I 

l...lAE $27.4 

EID.,Pt -. $25~9 
19


30708a-6.eps

foo!.piint, indl<ding inJ..·om1tlics that most IJ.mltir:ationals shy a\vay from. Chim1 has not only 1mcrna0:1 all six populated continents. They exceed S:wo 

billion on a11 hut South /-\me rica and Australia. 

The PRC' s Priorities and Problems 

IP/hile son:e Chinese investment and construction 

~.s J_imed at \vinning dip1omatk influence. mo~t is not 

the form of pmv..:-r generation). Since zoos, oil and 

gas plays alnne are larger ln size than ali metal;:; 

invcstmcm. Real estate just broke S1oo billion.~ 

Technology is t:ontrO\Trsial but barely half that 

size. For .'.018 to date, tronsport and metals investment are outperforming their ili:::torica: Lrend, and 

finance and Clb"Ticulture are W.1derperf(trming. 

In con~truction, energy and power sh;u-~; th~ spotiight with transport. Coal and hydropmver plants 

drmv the most ener0':'-· contracts, about onequarter of the total. l.,~-ornritlw~-mldjilg the mtenticn 

-paid to the PRC's presence in global po:ts, r2.il and 

ro:Jds easily lead transport con~truction. Rcai estate 

Table 2. Sector Patterns, 2005-17 ($Billion) 

J>i;)(:tO!'c~>i > 

no.: 

IV\e:ab '30./ 

Agric1lturc 80.4 

Fir:anl:e 

40.7 

39.3 

logistics 

'5.7 

Other 

242.4 

80.6 

17.3 

:6.0 

is large-scale low-income hou~ing plE~ s:sKcialty 

buildings for host gcn.rcrnmcms, and the pace of 

-ac'tivicy there hts picked u_p over the past H3 months. 

iviany uf the munbt,TS arc impt'('Sslvl', but the gtOVI'~i1 

trajectory from hue is uncertain. On the positive 

siJe for investment, the ~1eavy capital outflow that 

hegan in !aLe 2.015 is now <vvell in the reandew mirror. 

Formal controls and detention ofumuly CEOsq 

combined tc basically :-:t:o,bilize foreign exch:Hge 

outt1mvs by the second half of 2017, and that has 

held ~ince. 1 • Huvvt'ver, the days of ~ver-r:sing foreign exdmngc rc~~crvrs arc even farther i_n tbc rcarvicvor n:.:rror, an C. Beijing V\ill continue to gu..:·trd agmnst 

a repeat of 2015-16. !\'l;JUa11nvestment volume i~ 

likely capped at Sns billion tor the next tev ... •ycars, 

less if the CS remains hostile. 

The determining factor forhorh the US and glnh:Jl 

totah: may be h(Y•N much prh.-ate com panics spend. 

00Es \Vill of cm1.rsc cominuc to make large purchases 

\Vith lhf' backing of the central government as long 

as hos"... countrie') permit. But hostility tmvard SOE 

acqnisi:-ions i:s gn.n:\'ing ::1mong tich connrries since 

their multiu::rtionals cannot acc;uirc the same SOEs. 

Large SOE im·estments illESt be spaced over tia1e 

to avoid a b<:~d:L:~~,. 

Private companies, esped;1Hy those not relylnt:~ 

on state bar..k financing, can gcncr;;.lly acquire assets 

\Vlth le-ss onposition. It i'l thus encouraging, il as yet 

only suggestive, that the 

private share has rebounded 

in ;;.m8 from a sharr drop in 

130.9 

46.9 

'7.8 

LO 

2.\.? .. 2 

2017 ('fable 3). Private flnns 

·~~o not dictate the PRC's inTotal 1,090.5 780.2 370.8 

/\nother positive deyeJopment is more of a surpri~e and 

even ruvrc tcntdtivc: The 2cn8 

share of grccnfidd spending 

has climbed back to 201_:;; levels after being minor compared 

to mergers and accmr,awlns 

in 2016 -17.Ll Tl'.is serves 

to boost host C'ountry receptiveness. AcquisirioDs carry 
20


30708a-7.eps

fear of1os::. of compctitivcrcess and tcchnolq.,'y and 

the posslhlc relocation of job:-.. Greenfield ir.vcstment C1'.'oids these problems, if it can be sustained. 

Construction activity averaged a hcity $wo bii.Hon 

annually in 2.015 17. (It is too early to assess 2018.) 

The :._rend is for ~t<."--bilily r::tther than gro1..Hh. The 

PKC no longer needs to engage in overseas projects 

for the sake of employing its O\Vn peop1t', since the 

la!Jor force is shrinking cmd aging.?vtoreove-r, because 

SOBs dmr:.inate constmction and rnany projects are 

unpnlfitable, their tinancing com:t1~utf'S another 

drain on tixc.i.g:1 n.:~ervcs, which Bcljing ·will seck 

to conmin. lz 

'l'he 111\1 ha.'> C< minor impact on investment. BRI 

constmction ;md cntf ..nccring appear~ to be g1uwinp:, 

but that may just be a function Jf adcling co·umncs 

and, ~n is no-:: e10ugh to rai"e overall activ· 

ity. The BRT is in h1lt largdy a branding of engineering and constnlction Chinese firms >tvcrc already 

undertaking for y~ars. But it 1vas announced by and 

politically to Xl Jinping. 13 As a re~uk there 

:~s heaYy pressure to hide failure1::, though ftil:Jres 

arc u.mwoldabk when building highway~ across 

pteviously dosed borders or acqulring contested 

1and. 

The PRC fails the basic 

test; it vvan~s SOEs to be able to 

control giants yet never be 

acquired themselves. 

\Vhcn noncommercial i'actnrs impalr a commcr· 

ch;] agreemt'nt, thit- qua.!itles a;,; a ''troub(ed'1 transaction. PRC constmction and engim:cring companies 

f2cc f-,6-~\7 billion in such i~npairrncnt annuas severa] road contracts Bangladc:t:.h. 

Because investment involves indefinite 0\Vnership, 

:t faces more obstacles than construction, to the 

tune of ;~25 hlllion or so in a.nn:Jal io~-;se::; of some 

sort, despite the ceorninercia~ p~Ytners \.\Ianting to 

proceed. 

Beijing has either diTable 3. The Private Share of Investment 

Since 2010 (Percentage) 

20ll 11.5 

20':2 

70~3 )7.!~ 

J0.9 

frontatlons have made continuing husine:::s impossible. ~Iultiycar O?erati..'lg losses or valuation declines 

also 

maln issue, though, IS hast ccuntries inhibiting or ~1utrlght barring investment. The PRC f3.ils 

the bat.ic reci.?rocity te~t; it wants SOEs to be able 

to control foreign t,>iants yet m:vcr be acquired themThis imbalance is rnore stark in sectors deemed 

strategic, such at> i11. the nov.r infarnous Made in China 

20::15 prugram. Lt AnU this current round is hardly the 

fir;:;t set ofindtlstri.al polices. Bcij:ng likes compc-·· 

tit ion e\•eryv..rl:.ere except at home. 

A s~cond concern ofhost governmer:..ts has grown 

in importance over the past 18 months: a 

PRC economic presence bringing 

and ro1itic8] influence camp8igw>. Developing COl'ntrles h::we lor..g fretteC. over being ovenvhelmed 

Chinese firms. The 

with accumtions of extensive Chinese lntcdcrcncc 

and graft in Amtr<JJ:a;mJ JVI<l1aysla.'s Some l·~uropean 

Union member states fca:· Beijing is buying votes 

on certain :ssuC's, especially frcm cast E1rropc.'6 A::;: 

\Vith hick of reciprocity, concerns abuuf inappmpriatc influence engender bwau hos;ility in hos'c: 

countries, including t'b..ose just '\Yatching. 

The top twn redplentf. of the PRC:'s investment 

hy \;clt1me are unsurprisingly by far the tor; n..vo in 

terms of troubled trant:.acticns (Table The 

technology i:-Ive::otmems: iHJsu·ana is more carLtious in rejecting China. 

lr,m and Germany are present due to ok~er event-s. 

The m;iin event in troublcJ transactions in 2018 
21


30708a-8.eps

the collapse uf private 

crgy, \.Vhich attempted to 

Russia :.md C(lU!d not evt;l complete much s:11aller 

transactions in the Czech Rcpubli:..: and Rorl2ania. 

It usuaEy takes rime for a t:!:"a~snction to unravel 

comrletelv) so there wiH eventu~clly he more ror 

2017-1R. . . 

The US Needs to Be Clearer 

Since 201!, ··the CGJT has come p<Hl and parcel Yvith 

a call for rcforr:1lng th~ Committee on Foreign Invcstn1C!1t in the Cnitcd States (CFICS). 

past nonth, ref(Jrm bills ha\'e passeJ 

and Senate, leaving on~y n:condE3.tiun. and ha\T 

been blessed by President TrumpYl Problem solved? 

Only partly. 

There b little Cllin.::sc Jnvcstmcnt ir1 the C S at 

present} bur Beijing could easily nigger another rush 

\Yith supportive financing . . A mrn·elenc,llc• "nri 

nicaliy capable CFI US is entirely in that 

sense. A controversial point is \Vhetl:er tbe unreformed. CFIUS ht'Ls failed to protect <Jdvanccd technology Lmtil now. The CGIT does not sho'.."-' successful 

This t~1Ct 

cmph:osizing transactions that arc hard to monitor, such 

as ~,mall acquisitions of emerging tcchno:ogy or deals 

in which Chinese participation is imentionalh ohscur;;d.·9 ·· 

Both bills also expand CFIUS's 

:1reas. 

American lo<::set< trorn Chinese theft of intd1ecrua1 

property (IP), by cybcr means and otherwise, run 

at least ir1 the t<.~n~ of billions of dolh1rs annuaHv:w 

c'''"""b.,l~-~· through TP theft is ... 

tor~ J wit}~ uo 

stealing. 

A nu mher 0f Chinese fir:ns ;:tre interested in entlties holding Americans) personal data. This cctn be 

seen in the rise of PRC ht:alrh care investments. The 

danger lieo; in the these 

data. The absence oflmv means previously 

lee,i-::-imate Chinese transactions "ivould immediately 

nrrn lnto security risks. In 2.<Jl?, CFIUS blockf.:d the 

Table 4. Most Troublesome Countries, 2005-17 

($Billion) 

:25.2 

P.uss1an Fcdcrat:on 

L1byo 12./ 

Subtotal for Top Six 197.9 

jV1oneyCram zl:quisition on the.se grocmd:;, but it 

to buy health insurer 

This leaves a series of challenges still t::tcing CF!CS 

and ; or TP rheft 

should be developed CFIUS. Rc:gan.:.ing 

personal data) the US needs a 2lcar and ronsl.stcnt 

posit ion to emerge, so that f1rms do not neeJ to 

<'lnticirate 'v\c.tllch side of the :\1oney-Gram/Gen\·Vorth 

The CF1GS biJls thcrn<>clves arc 

ofcom-

··mm"';,,,,h., have :1rovcrl. their 

value to the US f(1r decode:-. CFTCS ther~fon- needt> 

both mon: and highly capable slaff, \vhich of course 

requires mo~1cy. 

Th~ :o;ingle most importanl question for C:F1US 

staff is identif),ing who is im'olved in a de-al, which 

lfidenti5cation b not do11e 

CFTl~S reform goals cannot be achicYed. 

The higgest PRC acquisition in the l:S :n 2017 was 

routed through lre~and. The most controvers:a.l deaJ 

saw Lattlce Semiconductor briefly pretend it wa~ 

beiilg bought bv an ;\merican firm. The money '-"ras 

Chine!:'e. 2::\ Mo;ley ultimately rr·e<ms intl;,Jen:~, nl; 

mancr the compa.ny name or hcadqnartns location. 

Shell companies mca:rc any minimum O\Yncrship 

s:_anda::·'-~ can he g,lrnf(.L so the be,st \V3\' ln dei.erminc contro; of a fit m 1::; to Lr3<.:C f111311~ing. 

It is reassuring that the CFIUS bills sidestep 

Sf'\'erallargely false concerns. Reciprocity is a longstanding sore spoL 'J'he Chinese market :s certainly' 
22


30708a-9.eps

lcs~ open tlmE the Amcri;,.:arr, ~ut calls for simple 

reciprocity in invcstm{'nt arc misguided. The CS 

will H.:Jt open advanced technology 

bccau::;c the PRC 

be any value in Beijing opcnjng indust.·ics :hat already 

see enormous (Wercapacit)·· AP- tempting as calls for 

t~1irne;;.:s are, they would make for trad pol;c:y 11 applied. 

Another cornmonly misundert>tood matter is 

state ov .. -nership. \Vhile SOEs accounr-10~· most of 

China's g!ohallnvestn:ent, their L S qhare is belmv 

40 percent and falling. i\'fore important, tl-jere is little 

difference in Cummtnisr Pmty control of private 

f1rms and SOEs. The absence of rule oflmv means 

priv<-~te Chine~,e comp~~nies have no to appeal 

party ordcrs.2.:1 VYhcn considcri~g commc1Tlal compct~tiYcncss, pri\·r:tc Chinese companies ;mbsidi:-.:ed leD'> thJ.n SOEs and hence art superior inve«tors. 

RlJt they as bchoklcn tc the party fur their survival as SOEs arc/·,: ar:d there is no justification to 

treat thf:m dif!erently regarding national security. 

A Goal :ssue is dormant 'cmt could reappear after 

tJ1e next e;ection. GFJ US shodd remain fixnsed :Jn 

About the Author 

national scnllity, not be used to evaluate ccor:omic 

clitcria. As dcr:1onsrratcd, protecting secur-ity is 

dauntit:g er~ough on its {_W.m. Mc~reover, notions of 

"net ccono1nk benefit" and the Eke \'V'Ould lead immediately to domestic htcrcsts seeking to avoid 

competltlon. Foreign investmenl brings johs, and 

competition brings innovati~.m. Netther should Oe 

curbed, by CFlUS or another body. 

In :-;um, PRC entiries should be sanctioned for 

l.P theft. Because there ls n~) rule of 

Chjnese firmt. generally cannot be trusred 'With 

personal data. As has CLJvi·:::tys been tmc, Amclic:m 

dual<Jsc technology must be p:otcctcC.. These arc 

the priorities, but they Jo not cover8l1 Ghir,e-:::e yenturcs or dose to it. Lr.._ng-standing American polit.:y 

is to wdco:.nc foreign in\rcstmcnt. This polh.J' sf~ould 

be eMended to the PRC, subj~ct to the needed limitations. China has shuwn it'-"' 111 Jnvcst and build 

globally regardless of'\vhat the US does. The best 

American response is clear and consistent policy 

that draw'l the Ch~nese Rpe;1ding we wanL 

Derek Scissors (Uereksc:issors·~(t\leLorg) is a re::::idt>nt scholar at .'\In :.md the immodest creator of the Cilina 

Glcbal Investment Tracker. 

Notes 

1. C.\.\, ''('lrim:, :'\n\ \\ qrld_ (/nkr;' ,\Ll)- 201';,llttp: ·\\ \-\ \\,c:111.C1J'1l intcnt.._·tiv·:::./'~Y,"•',.,S W()rld, ~:hin:l~ nc\\ \\Orld l'rtkr•. 

2. _-\me;·ican Intcrprise Jnsrimtc,1nd ITo..::ritage T'uundation, ''China C1oha! Im·c:.rmcnrTr.1ch;;:r.'' https:, '>''\\\\.acLorwchim 

~lob~rl-lrn c~\ rncll\ -I r:1ckc'f, 

3· Tkh .1•1d H(J<td Port<tl. <.t('t:c:.-.;c-(j] ul) 8. 2.()1/i.lntp..,:·. l'n[!.~ idai~ ilu.gi>\ .cn·inf{l·il-i::;t.jc,p?t·;Jt_id-ln{l'7"h. 

!· Financial ;-;lT\ icc'> (~1Jl11llli!tcc, ''Huu::;c 1\J:,)l'" Foreign lm C)tmult lkf•Jrm Bin' l-l1T:-:.:-.rdcac,e,.Junc .!(i,201N,http~: 

flnJnda]<;e:> iccs.l-:o~Jse.g:m·l~e\\'S documcnrsinglc.a<>p\.:Do ... ·umcntiD 

:;;. ZlH1 PonRttlfl., "Cltion Seck~ Rnional D,·,dupnwnt ofO<,tbntm(l Tn\C'ilnwm." 

pcPpl\'.ltl ·q:,.:.o;,'-!.o_;;;(J_ '-'9()000 9+.~7.".+.).1-~tnl!~ !\·opk'~ 

fnr('ign~nkkCiJ\•pt'ration :~rl!H<l ~ 

.::017,'' (,hin~t Ecotmmic \ct. T"\_h'Ll<ll') 1 i. 2Dlk, 11lt ~1: cngl·~h.cc.cn. tna•nhc~c~l '2olt~o.l.'tt :U.iJIH02!1_2:'\15."3~~ >.:-1,tm1. 

(,, \inhlt<', "(:hi·l<t tu Limit Chl'J ~c<ts ltlll'SUluJt in Rcnl Ec.lnJC . ...,puns f:Jul.x:.,''l'bJJJcJ/Jnih, \uf!.u-.• 19. 2n1H. hltp·. 

>.:hln:.H11lly.cnm.cn:bu:.ln~:-':.~ 2017 -OI),; 9 \'<'ntcnt -3')~17 -J6;.htm · 

llf{ ~cml:ll·.:'rcc, ··TTIVCStl•Jcrt :.ukl (~IHlpcr~:ti011 \\-ith t :IRilltTic:-. .\lilll[; Be!t :tnd RrwJ 

. \p,'ii ::.8, ..::.<J 1B. http .. ·, english J'10fconE.g<JY.cn·,wrick:o.tati<>~ic·foreip-nt·"GdcnJnpcrarion 2\llRt:s· 

0. Thi-., fig;n.._· indwks Lcrgc ll<l:l:.;KtJ(Jn~ :mly,l'ot the many sm,111JXT:.<m,tl honw pun h;J::,(''>. 

t,J. Lba !\iuna;-, "China's ::'crk:tCapit~d Cont··ob An.' \\"<.11·ki11!;;· ;--in,mdal IkYit'\\, \Uf!:U~t 8, ~m:, l\tt~J;' '"'-qv,at1-.l'um ne\\-s 

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fi,lnrnir:hSdid w !.k Dct<tim:d; }'m~md;;! 'l'irnc:.. Fdxu~tn .~o~B. http~;,:, \\'\\''\.:t c0m ~untcnt·YC6ca~:b,,-1cft;-llc8-cul·a­

-+S-:.id7dahtl)fl 
23


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10. \i11hmr. "(·;hi IE'-'.;\ u;uJ Funl~'i fu•· L"orc!g:l 

o.;.17 c_l_"l./ltltJ6_i0.htm. 

: t. Thcrr is a tcdwlca1 

a.<:.gn'cllfidd 

tkJ: wil! be rcprc·;L'ntcd a~ a c:hicc:oc 

"'"''"'Pir'tc.O'l. :-'~1C CClT dncc; not bbcl t!1c~e 

.\:inhtLt. ··chbd\ GJ\JI\ ing Sldlcd Fopu::\tion to t!ff-.ct Sh;inLing \\ orlJon;c,'' J,muary 2,1, _:mt<.. http:: I\ ww :.:.Jr,hll~Hk"t.i."l.lrl\: 

~:ng1i-,h·:•.OJ8-,"Jl -~+. c_l3~1C):\Lf.J8.htm:aml i :ccilia]m·f'Clt"Z~m~l Den:lz ~ci.-,~or~, "TI1c (:ilmc.c:c :-.tcttc .,.,und:-. Bclt~md f<.IKid.hLtt Doc;> 

"\i't Ilaxc Trillioi1'> tl) Sp.trc,'' ,\mer~un E11tcrpri~c 1'1.sti-:urc, T\'l::trch 2.:\, 2CJ 18, http:':\\ \Y\Y.:1Ct.nrg, publication:rhc-cloincsc-f,t:Ltcl\rcmh1 ( ;p:~ and.hl'ln l~mnt~h, ''l'rc~surc on a:-: A!':-. "Bclt<IHd [i(nd· f·.mhnncd in Chmc'>(' l';trty (_ hmtcr" 1\cur-:r::-, Octnbcr 

? • .J • . W L -;, htcp~:: <\"\YVY.rcukr:::,.con L artiCle u:--china-cPn!:!;J·c~::,-~1! h.n:ud:pn:~SLJJT-lm-a:-,-;.j~-bclt -~tnd-J o.Ki--(·w-:llril~cli-in -chJJKS1;-

party-c11arte!'-icll. ·s:\W\, CT 1 f\\ ·. 

·4-- L ~ (~immbcroi"( :otnmuu<, Jtndc in C"hi1w 10-::_-:;: ( ,)ob;JI :irnViUons Uuil! f,ocll 1-'rou·c·liuns, :u,-;,lHl!lS:,/~>1\ w.u<.chatnlwr 

~ccrct Rl:'port-- :\BC, ):ay 29,:01S, 

ch'•18s-hccn-hltc<tcdn,-in-c<csr'·ali;m-rxJ iilics-tnr pas;r _,,,xa<k \>h "'''''' and \'la!::.> ~;i:l 

T<>day, ''Guan ~:Jg \ccusLs C:1w!aCom\l<ll1lc~ lii"O!r•·u:Jtilif!,·'.Tunc (2(liFl, http ', hY~II-.InakL~-;·~HuJay.ncL.2(!18,o6,-o6 guan·CIIgcompanic~-or LonupLioll. 

H1. ~11chaei f'cel,Jamcs !-\}1lt:;c, and L'.lcy TTnrnhy, "China's fL1ikan 1m·c:-,tmc1it f'led§!:t'S :;roi.;c 1:1.: Concern:' rinanciili Times, 

Jntp~:. -\n\.\\ .1 t.cc>m :contrn1 6chJ.(·n:;,·--;-, l::-.9-11 eS-!x·s.:::-sodaJJl b-;-zod. 

''/. lk',·d Sc::-~ur~. "Chinc::,c Clutw.tni Jnvcs~·mcnt: :\f,llT \ Jpportumt~ Th<m 1htngcr," HtTit.JfK ~·uur,d,1riun . .ld) "i.J, ::,ort, lnt:)~: 

\\\\\\.~let itagc.org'a"ia 'rcpor t.cilir,c..,-.: out\\ Jrd imc~nncllt more oppmtu·1it;- dd'lgcr, 

lR \\-hitc l lome 'Statement from the I'rc~idcm Rcgrrrdmg :m'c.·;tme'lt :\e~rriction~." prc~srclcasc,Junc 27, 2~11~- hTp~:. "\'\:\\ \\. 

\'v hitehmJ<>e.go,,- ·brieDng:-;~c;t,c: emc'llC':- \ratuncnt -prcsklcnl-ITg,lFdlng-in \est nl\'nl-rcs! rk1 i( 'H\: 

J(). Fore1gn Tt1\<'s\ment ~isl, l\t•\·in\ \lndt•t nJD'tion ,\t': tlt' 201?{, H.l\._.:;R--1-1. 11srh Cong .. 1111ps: 'lo.-;>->Y.hov!n>l-k.us tY)flgt\'s<>'hi1J<> 

11_sibr;)0.p teAt; dll<-~ .lchr, :--. \lcC1in _\;~ttiuna1 Dcr·nbc Authorizahon :\ct f-~1r Fi~ui Yco1r ::0019, S.ll)~<;. 11:)-r:il Cung-.,http:--:' 

conp:re~s.goc h1li 'IISth-cnngrc~>s ~t.'llJtc -bili,':.~;S; 't\.'Xt. 

2l). '-.jmtonal BL11·cau of .'\<.1<11l f?.c-:c,ti'Lh. i ypddlc u; the TP Commi.~.::Jon R(__pon, februar~ .::Oil. hH p: •\\Ww.ipcor:lmi~•;'nn.ilrg 

J.2. -\1 ulon, ''A<olon C lmpktc~ l. '/)10._;0 Billiun _-\l'llui-.it·,on<>fCIT C3n>tlp ).ircr<lft Le1~ing Bu~cn,_·;,~." pn .. ·:;:-, rcka~c·, April j 

contc:lt ltpln,tds.::.u l':' '( 1 1,.?, vnlon J 'inrr·, ( 'ln::inv, .) Aprll .~oJ:·.pdf: .md Bthincss \\'ire, ''L1mce 

Cmynn 'lrid;_.:c CapiLl~ P;1rlncr~. hw. fo1" S1 3 Dillion.'' "\ovcmhcr .~. 2011\ lltips: 

Sec ~tcf,l~1 ~,!. :\ khn<'r and_.;.;;hky !\lc\ bh:m, ":--,uprcmc Court ( :brifk::. Prin~·iplc'> of hrcrn:Jtional ( :on;i~: in \·itmntn (: Rulint~: 

\'arinr1ill L:JH" l?.c\ fc,,._ Tunc JS, ~oJ::<-, http:-,:· 'W\\'\'>.na11:nncl icw.com anidc ;,uprcmt:-Cillln-cianllc;,-princ;plcs-lntcr.ulioml-

''omil y-vit:1.r11; n-c-··uli ng. 

::..-J-. t·.nc >o~g and \ic) U-, ~(_ hm,< Uct,lilb u·xc·~ l:"oundcr \c.il,mming. \\'!plnf.:ULlt LSSJ::;~S'll!lKm i11 \ .tlucoft Steeb."' Sout!i 

'\flwnirw J'(hf, \·I arch 1, ~\ :('{, https:, .,\ \HY.SCPijJ.LOln L~u~ilW'>'-,~"(l!11p::HliC"';Ut1clc'2135·'JN,china-dcrahl-cdc-f(mikkr-yc 

ji<_1'1n;ing-c;tn..:k'i. 

The i\merican Enterprise Institute (AEI) a r:'mpartisan. nonprofit, 501( c) (3) cd1.ccational orga:--..iz;:r~i .. m and doe~ not 

take lnsritution3ltw~itioM. on anytssucs. The \'lC\\·s 2xpres'lec here ore tiwsc of the Juthor(s). 
24

Mr. POE. Thank you, Dr. Scissors. 

Dr. Atkinson, recognized for 5 minutes. 

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

INFORMATION TECHNOLOGY AND INNOVATION FOUNDATION 

Mr. ATKINSON. Thank you, Chairman Poe and Ranking Member 

Keating. I will take Derek’s 15 seconds. I appreciate you inviting 

me here today. 

I think it is important to recognize that the problem with China, 

in our view, is not so much the trade deficit, it is that they have 

a contra-strategy to seek and attain global technology dominance 

in a wide array of technology-advanced industries that the U.S. 

specializes in. And unchallenged this could and potentially is resulting in the loss of U.S. competitive advantage in a wide array 

of industries that we enjoy right now that provide high wages to 

American workers. 

Technology acquisition is at the center of China’s strategy. They 

lag behind us in most industries and absent cheating, as the chairman said, it is going to take them 20, 30 years to come close to 

catching up. They understand that and so their entire strategy, the 

first part of it, is premised on getting technology from foreigners 

by hook or by crook. 

There is a recent study by the National Bureau of Economic Research looking at joint ventures in China. This is one key tactic 

they have. Between ’98 and 2012 there were over 4,000 U.S. joint 

ventures in China. The study found that not only did the Chinese 

JV partner gain substantial technological capabilities, but so did 

other Chinese firms in the same industry which isn’t a surprise because that is exactly what the Chinese want with joint ventures. 

There has been a lot of talk about the fact that we don’t have 

a right to force China to roll back its 2025 ambitions. I disagree 

with that—I agree with that. We don’t have a right to ask them 

to not advance technologically. Every country has that right. What 

we do have a right to insist upon is that they do it through fair 

practices, and right now the bulk of their practices are unfair. 

I would argue though that success is an incredibly daunting task. 

They have several weapons that they are able to use that we don’t 

have. One of them is they can punish and they will punish U.S. 

corporations with impunity. They know how to do that. There is no 

rule of law. They can retaliate against U.S. firms in pretty much 

any way they want to do. And secondly, it has been raised before, 

the WTO provides little redress so much of what China is doing is 

in the gray area of the WTO or even in areas that the WTO protocols don’t cover. 

So what do we do? Number one, I agree with the Trump administration. We have to focus on results-oriented trade. This is not 

about winning a case or not winning a case. This is about insisting 

upon a wholesale set of practices that they change, which to me 

have to be around forced technology transfer and IP theft, and then 

a significant reduction of their industrial subsidy regime. 

So what do we do, how do we do that? I think number one, the 

best way we are going to be able to do that is we need a coalition 

of the willing. We have to have our allies at our side because they 

are hurt by China as well—the Japanese, the South Koreans, the 

25

Europeans in particular, and the Canadians. Not having those allies at our side makes this a much tougher fight. 

Secondly, even if we don’t win, in other words winning meaning 

rolling back their practices, getting the Chinese to admit and roll 

back their practices, even if we can’t do that we need to put roadblocks in their way. One roadblock would be obviously passing 

FIRRMA, having the President sign it, and really taking a hard 

line on restricting Chinese investment in the United States particularly in areas around innovation. Second would be enacting a 

regime where we treat their technology licenses in the U.S. the 

way we treat theirs. 

We should limit science and technology cooperation with China. 

It is not clear to me why we continue to cooperate. Dr. Scissors 

mentioned a few things going after specific Chinese firms that have 

benefited. So, for example, we should prohibit Chinese firms that 

have stolen intellectual property from using our banking and financial system. We should enact an antitrust regime that is much 

tougher on the Chinese. So, for example, U.S. DOJ does not take 

into account the fact that when state-owned enterprises merge that 

is not covered by U.S. antitrust law, whereas private sector mergers in other countries do that. 

Lastly, we need on this, we need to, I would argue, set up a new 

regime in the antitrust bureau to focus on foreign government-led 

enabled antitrust violations. Subsidies, all of these other practices, 

these would be, if the private sector were doing them, antitrust violations. We should treat Chinese firms that benefit from these as 

antitrust violators. 

And lastly, we shouldn’t let China gain the moral high ground. 

That has been one of the most disconcerting things I have seen 

when you have President Xi claim and have the media agree that 

he is the defender of free trade when there is nothing more ludicrous under the sun than that statement. We need to be seen as 

the defenders of global free trade and we can’t let China have the 

high ground. I am sorry I don’t remember which member said this, 

but we didn’t start the war, the Chinese started the war. Mr. Sherman said that. We are just now finally fighting back. So thank you 

and I look forward to your questions. 

[The prepared statement of Mr. Atkinson follows:]

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IT I f : INfORMATION TECHNOLOGY 

I i & INl\l!lVAl!!lN FlliJN!lAT!GN 

Testimony of 

Robert D. Atkinson 

President 

Information Technology and Innovation Foundation 

Before the 

House Committee on Foreign Affairs 

Subcommittee on Terrorism, Nonproliferation and Trade 

Hearing on China's Predatory Trade and Investment Strategy 

July11,2018 

Washington, DC 
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Good afternoon Chairman Poe, Ranking Member Keating, and members of the Committee; th,mk you for 

inviting me to share rhe views of the Information Technology and Innovation Foundation (TTl F) on the issue 

of Chinese pn.:darory trade :md investment policks and what the U.S. government should do in response. 

The InfOrmation Technology and Innovation FouncL1.tion 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 the vital role of technology in ensuring prosperity, IT IF focusc.:s 

on innovation, productivity, and digital economy issues. ffF has long focuscd on the issue of how unfair 

foreign policies and practices, particularly Chinese, negatively impact the U.S. economy. I very much 

appreciate the opportunity to comment on these issues today. 

The Existential Threat of Coerced and Purloined Chinese Technology Acquisition 

Ever since the first industrial revolution advanced countries have worried about technology transfer to foreign 

nations. For example, it \Vas against the law to transfEr technology designs outside of Britain; something that 

Samuel Slater did when be nH.:morizcd the plans for textik mac.:hines before immigrating to the Unitc:d States 

and establishing the first U.S. textile mill in Rhode Island. 

Today rhe United Stares leads in the so-called llfth indtLmial revolulion (informalion technology) and hopes 

to lead in the 6th (artificial intelligence, robotics, etc), but a major threat to our leadership is technology 

transfer to China. China is seeking global technology dominance in an array of advanced technology 

industries through an unprecedented array of predatory economic and trade policies and practices, including 

theft of U.S. technology and coerced transfer thereof 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 c~conomy where 

Arms 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 econon1ic and trade behavior. It is a country where the 

government is concerned with one and only one economic goal: Yvinning 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 \X'TO Commitments and Practices," "Enough is Enough: Confronting Chinese Innovation 

Mercantilism,'' and "Stopping China 1

s 1\1crcantilism: A Doctrine ofConstrucrivc, Allianc<~-Backed 

Confrontation "-China has deployed a vast panoply of innovation rnere<mrilist practices that seek to unfairly 

advantage Chinese advanced-industry producers over fOreign competimrs. 1 These practices have included 

forced technology transfer and fOrced local production as a condition of market access; theft of fOreign 

intdlcctual property (IP); curtailment .:md even outright denial of access to Chinese markets in <:ert~in sectors; 

manipulation of technology standards: special benefits for state-owned enterprises~ capricious cases ro force 

fOreign companies to license technology at a discount; government subsidies of Chinse con1panies, and 

governrnent-subsidized acquisitions of fOreign enterprises. U.S. and foreign enterprises across virtually every 

advanced technology s<·ctor-from aerospace and biotechnolobT to inf(Jrmation and communications 

technology (JCT) products. lnrernet, clean energy, and digital media-have been harmed by China·s 

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. 

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In the last few years, though, the focus of China's efforts has shifted. In 2015, Chinese President XiJinping 

unalx1..;;hcdly trumpeted a goal of making China rhc "master of its own technologies."" China's arrival at that 

point resulted from the evolution of Chinese economic policy over the past nvo decades. Up to the mid2000s, China's economic development straregy sought principally to induce foreign multinationals to shift 

relatively low- and moderate-value production w China.:\ 1t used an array of unfair tactics, including currency 

manipulation, massive suhsidh.::s, ~md limits on imports. That strategy changed in 2006 as China moved to a 

"China Inc." development model of indigenous innovation which focused on helping Chinese firms, 

especially those in advanced, innovation-based industries, often at the expense of fOreign firms. :Marking the 

shift v-.ras a seminal document called the "National Medium- and Long-term Program for Science and 

Technology Do:.:vclopment (2006-2020)," the so-calll:<i "MLP/' which called on China to master 402 con: 

technologies. everything from intelligent automobiles to integrated circuits and high-performance computers. 

The ~1LP announced that modern Chinese economic strategy sought absolute advantage across virtually all 

advant:cd 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 arc the most cfflcicnr and trade for 

the rest. Instead, China now wishes to dominate in the production of a wide array of advanced technology 

products including jet airplanes, semiconductors, compurers, machine tools, robots, electric vehicles, artificial 

intelligence software~ and pharmaceuticals. t:Ssentially~ Chinese policymakers wish to autarkically supply 

Chinese markets for advanced technology producrs with their own production while still bencArting from 

unfettered access to global markets for their technology exports and foreign direct investment (FDI). 

In recent years President Xi 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 l'ive-Year 

Plan tor National Infonnarization," and "The National Cybersecurity 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-Y car Plan for National 

Jnformatization" and "The National Cybersecuriry Strategy" effectively deny access to U.S. enterprises 

seeking to co1npete in emerging ICT industries such as cloud computing in China. The "National 

Cybersecurity Strategy" fUrther oudines a goal for China to become a strong Cjber power by 2020, and d1at 

includes mastering core technologies, many of which the Unitc~d States is currently the international leader in, 

such as operating systems, integrated circuits, big dara. 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 £\.1ercator 

Institute for China Studies in Germany writes, '~Made in China 2025 in its current form [means that] China's 

leadership systematically intervenes in domestic markers so as to beneflr and f..1cilirare the economic 

dominance of Chinese enterprises and to disadvantage foreign competitors. "1 For instance, with regard to 

ICT -enabled manuf~Kturing (i.e., "smart manufacturing") the strategy calls fOr 80 percent Jomestic market 

shan.· of high-end computer numeric controlled machinc·s by 2025; 70 percent for robots and robot core 

components; 60 percent for big data; 60 percent for IT for smart manufacturing; and 50 percent for 

industrial sof~vare. 5 

3 
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China's economic strategy can be summarized as follows: China seeks global competitive advantage in 

virtually all advanced industries. However, attaining that requires -~ignificant "learning" as the production 

"recipes" to make a jet aircraft, a computer chip, a gcnomics sequencer, a robot, or a biotech drug arc 

incredibly complex and can't be- obraincd from scholarly journal articles or other widely available sources of 

scienti!lc knowledge. The United States has gained competencies and leadership in these and a host of other 

industries the hard way: trillions of dollars of investment in R&D, production testing, v . .:orkforce training, 

and other areas in order to master incredibly complex products and production systems. The Chin~.:se 

government knows that if it proceeds the fair and "natural" way that it will take ir many decades for Chinese 

firms to close the gap with global leaders. Most of their firms are too far behind to be able to catch up any 

time soon through organic and fair means. Hence, it has embraced a multifaceted set of policies and programs 

to obtain the knowkdgc and capabilities it needs from foreign producers; including through theft of 

intellectual property, forced joint ventures and technology transfer as a condition of market access; and statesubsidized purchases of or investments in foreign advanced industry firms. And once it obrains that knowhow, it then proceeds to lavish subsidies and other benefits on its Chinese business champion.~ so they can 

advance and scale up, while at the same time limiting foreign company market act:ess in China. Once the 

Chinese champions have the protected "aircraft carrier" of a domcsric market they provide subsidies and other 

incentives to enable their companies to launch atracks ("going out") to take market share trom global leaders 

in non-Chinese markets. 

Foreign Technology Acquisition Underpins "Made in China 2025" 

At the hean of China's strategy is foreign technology acquisition. The Chinese leadership knows that if it just 

relies on market forces few if any foreign technology leaders will provide them with the technology Chinese 

f1rrns need. Pewl't would even establish factories in China, preferring instead to simply '~xport products to 

China. As a result, China has deployed a panoply of tools to obtain needed foreign technology. 

Intellectual property theft is one important tool in the Chinese arsenal. China has deployed industrial spies to 

obtain foreign secrets. As the /Vew York l?mesdocumcnted, a leading Chinese computer chip maker alleg,·dly 

paid employees of a Taiwanese chip company working with the U.S. company Micron to steal valuable chip 

designs.6 Another vector is cyber theft. Seven percent ofU.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 \Vas aware of 

it. The IP Commission RtJ)()ri on the Theft of U.S. hlte!lectual Propert)' found that China accounted for nearly 

80 percent of all [p thefts fi·01n U.S.-headquartered organizations in 2013, amounting 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."'" 

Weak enforcement of IP law is another vector. Chinese -Arms can often copy and reengineer foreign 

technologies with impunity (what they call introducing. digesting, absorbing and re-innovatlng), even those 

technologies protected by patents. ill a .l\11T S!ot1n Manttgement RevieuJ article, "Protecting Intellectual 

Property in China," noted, ''lntclkctual property protection is th,~ No. 1 challenge t()r multinational 

corporations operating in China." 11 According to the U.S. International Trade Commission, in 2009, U.S. 

IP-intensive enterprises conducting business in China reported losses of approximately $48.2 billion in sales, 

royalties, or license fees due to Chinese IPR inffingementY In 2018, according to the American Chamber of 
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Commerce in China, one-quarter of surveyed U.S. companies cited ''Insufficient protection offered by text of 

IP-related laws and regulations," vv·hile 24 percent cited, "Djfficuhy prosecudng IP infringements in coun or 

via administrative measures" as significant challengt: ..... 15 

i\nother vector 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 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 

hean back from the investment company again. 

An increasingly important ''vay 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 investment into the United S[ates was in technology industries. According to Select 

USA, the top four industrial categories in terms of numbers ofChincsl: PDT projects from 2003 to 2015 were 

electronics, industrial machinc1y, software and information technology services, and communications. wrhc 

Rhodium Group reports thar over the last 16 years there has been roughly $18 billion of Chinese FDI into 

ICT ~md electronics indusrries 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. firms15 Of the 

$14.2 billion invested in IC'J', 74 percent was made from 2014 to 2016, with more than 95 percent going to 

acquisitions. 16 These numbers ·would have been considerably larger if the federal government had not 

informally or formally blocked some deals through the Committee on Foreign lnvesnnent in the United 

States (CI'IlJS). 

The main purpose of most Chinese technology companies buying U.S. technology companies is not to make 

a prollt, but to tal<e 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 irs technology and other capabilities."P Like\vise, in the electronics and electrical 

equipment sector, "Chinese investors are dra\vn to the US electronics and electrical equipment sector for 

building their brands, expanding their sales and distribution channels, and upgrading their innovative 

capacity and technology portfolios." 13 1nvcstmcnts in pharmaceuticals and biotechnology arc "often driven by 

upgrading technology (such as Wuxi's acquisition of AppTec, a laboratory services fJrm)." 19 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. 70 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, largdy because it provides rapid 

access to proprietary rechnology."11 

China has also ramped up its eHorts to buy into early-stage U.S. technology start-ups. A recent report from 

DOD's Defense Innovation Unit Experimental (Dll!x) finds that "Chinese participation in venture-backed 

startups is at a record level of 10-16% of all [U.S.] venture deals (2015-20 17) and has grown quite rapidly in 

the past seven years."~~ A ..nd son1e of this investment comes fl·om venture firms that are backed by Chinese 

governments (federal or provincial). For example, the Zhongguancun Development Group, a state-m.vned 
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enterprise headquartered in Beijing has set up ''Danhua capital" to promote the strategy of "Zhongguancun 

capital going global and bringing in overseas advanced technology and talents."~> Likewise .. Shenzen Capital 

Group, a purportedly private venture capital firm that has invested in at least one advanced U.S. technology 

company,!4 has actually received about 80 percent of irs invested capital from the Chinese governmcnr,-'·5 and 

its investments are tOcused, not surprisingly, to march the central governments key targeted industries. The 

firm even boasts a chart the compares the technology allocation of irs investments and how it compares to the 

governments prioritics.26 

Forced Technology Transfer as a Key Weapon in the Chinese Arsenal 

Dwarfing these tools is forced technology transfer. Although China's ~'orld Trade Organization (WTO) 

accession agrt:cmcnt contains rules constraining it from tying foreign dir(.:Ct investment or market access to 

requirements to rransfcr technology to the country,2-' China routinely requires firms to transfer technology in 

exchange for being granted the ability to invest, operate, or sell in China. 28 As Harvard Business School 

professors Thomas Hour and Pankaj Ghemawat document in "China v.~ the World: \Vhose Technology Is 

lt?," Chinese tcchnolot:,ry transfer requirements as a condition of market access have affected st:ores of 

companies in industries as diverse as aviation, automotive, chemicals, renewable energy, and high-speed rail.19 

To be sure, because such conditions usually contravene China's W'TO commitments, officials are careful not 

to put such requirements in writing, usually resorting to oral communicarions to pressure ftlfeign firms to 

transfer technology.:w In 201] j then-U.S. Trea~ury Secretary 'Timothy Geithner laid ~uch t:oncerns about 

China's technology transfer requirements, stating that "we're seeing China continue to be very, very aggressive 

in a strategy they started several decades ago, which goes like this: you want w 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."31 

ln 2012, 23 percent of the value of all foreign direct investment projects \Vctc joint ventures.-12 And the U.S.-

China Business Council's "20 14 China Business F.nvironment Survey" reports that 62 percent of companies 

had concerns about transferring technology to China, while 20 percent reported that they had been requested 

to transfer technology to China within the past three years. :1.' 

Forced technology transfer is not new. A 1987 Congressional Office of' l'echnology 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 d1e China rnarket.":~ But what is new are two things. 

rirst, there arc more foreign companies seeking to get in the Chinese market, such that the scale of forced 

technology transfer is much larger rhan 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. 11 

~econd, 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 ro give their Chinese ''partners" 

older generations of technology, conHdent that the U.S. Hrms could innovate faster. Now fOr n1any foreign 

advanced industry companies, doing business in China requires transferring ever-more valuable technology to 

Chines{~ joint venture partners. ln 2013, 3S percent of U.S. business respondents in China said thar tech 

transfer requirements were a concern, and 42 percent in advanced technology industries voiced this concern. 16 

Fifty-six percent of survey respondents who gave a response thought that tech transfer requirements were 

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increasing.i' And as USTR points out in its 301 report on China, it is likely that these numbers are underreporled.J!i 

For example-, the CEO of a large multinational telecommunications equipment company recently 

shared with ITIF that he opened up a large R&D facility in Beijing that employs over 500 scientists and 

engineers. \Xlhen asked if he did this lO access Chinese engineering lalent, 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 arc de facto 

controlled by the Chinese government). 

The Chim:sc government ha...;; employed the weapon of fi)fced technology transfer to gain technological knowhow in a varieryr 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 equipmem \Va.<; something no foreign rail producer could afford to ignore. As such, lhe 

ChitH.:sc government had enormous leverage to pressure fordgn 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 srrJregy thac shiffed from jusr 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] to build a Chinese brand."'iO After that the srate Minisr'Y of Railways (MOR) 

launched three tenders lor foreign high-speed electric trains and in each one MOR stipulated that foreign 

companies had to collaborate with domestic partners in the co1npelition and had to transfer key technologies 

to achieve localization.t1J 'J'hc tender included two kqr 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 rhe government's "Action Plan for rhe Independent Innovation of Chinese 

High-Speed Trains." As a result, multiple foreign train companies were pressured to transfer valuable 

technology to the Chines(' companies (nmv principally one company due to the central governm,·nt 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 '~xport its new skill in HSR production and its ncv;.' 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 systen1s containing advanced foreign technology to other 

nations, backed \vith generous export subsidies ffon1 the central government. For example, the China ExportImport Bank (a state agency-) announced in 2017 the equivalent of $30 billion in financing assistance for 

CRCC exporrs.41 (Surprisingly, the U.S. Deparrrnc-nt of Commerce International 'T'rade Administration, in irs 

document promoting U.S. rail export opportunities to China, makes no n1ention of the fact that the lion's 

share of these opponunitie~ come with forced technology transfer requirements."?) 

The Chinese have employed different tactb to the same end in the biopharmaceurical 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 with the lack of a formal definition of a "new chemical entity," means 

7 
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the Chinese government can pressure U.S. firms to turn over important d.tta to Chinese generic drug firms. 

Similarly, the Chinese government requires that any drugs sold in China must go through Chh1ese clinical 

trials, even if' they are approved in the United States. This extends the tirnt.:: for sales hcf()re 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 the drug. Moreover, in China, unlike the United States 

and Europe, there is no extension of marketing exclusivity at the back end w take into account long clinical 

trial delays. 1\1orcovL"r, China also issues compulsory licenses for the intellectual property for particular 

drugs. 43 Finally, it presses foreign biopharmaccutical companies to form joint ventures if they want their drugs 

more easily put on the government list of drugs to qualifj.r for reimbursemenr. 4

·' 

Wt: also S\;;C this in cloud computing. China requires companks running cloud-computing operations to he 

locally controlled. This means that if a company like Amazon Web Services or Microsoft wants to serve the 

rapidly growing Chinese market it must partner with a Chinese company and sell their services under the 

Chinese company brand. And as pan of this partnership the expectation is that the fOreign cloud provider will 

provide the Chinese firm \Vith tcdutology and knmv-how."'j Chinese douJ providers, lik~.: Aliyun, the doud 

services unit of Alibaba, is able to establish irs own data centers in the United States without any similar 

requirements. 

The Chinese have long had policie& in place reqniring joint ventures with local :Arms in order for foreign 

companies ro produce automobiles in China:1r' 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.q~ Indeed, the New Energy Vehicles program undc.~r Made in China 2025 strategy 

requires foreign companies wishing to sell in China to disclose and share valuable technology witb their local 

joint venture partner.'18 We see this pattern in many other advanced technology industries, including wind 

turbines.~ 9 

Tools to Force Technology Transfer 

The Chinese have a host of cactics with which they use to pressure foreign companies to transf-er technology. 

All involve "making rhein an offer they can't refuse." The f-irst and most important is to set up industries that 

are off-limits to fltlly-owncd foreign direct invejtment. China's ''Catalogtl(~ of lndustdcs for Foreign Direct 

Investment" classifies industries based on categories: "encouraged," "restricted/' "prohibited.'' Other 

industries are considered to be "permitted." his in the restricted category, (vvhich includes 35 sectors, such as 

automobiles, cmnmercial aircraft, cmd high-value added telecommunications services) that fOreign f-Irms are 

le-gally required to p<~rtner \Vith a domestic firm in a joint venture. 

China wields a host of other vveapons 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 transfCr technology ro local Chines(~ partners. ;o 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 
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for less and/ or transfer even more IP and technology to Chinese-owned companies, often after paying 

substantial fines to the government. 1 

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. S[i\1 another is to lie 

regulatory and licensing approvals needed for operation in China to technology transfer. Still another is to til: 

purchases by the state, including state-owned enterprises, to technology transfer. I<' or example, the 

Commercial Aircraft Corporation of China (COMA C) requires foreign suppliers to enter into ]Vs with 

Chinese suppliers if they want to sell to COiv1AC. 51 

Forced Technology Transfer is Effective 

Some apologists for Chinese coercion argue thar China is shooting itself in the foot \vith these practices and 

that if \Ve are just patient the Chinese government \Vill see the error of its ways. Their argument is that by 

making it so painful for foreign firms to Jo business in China, the foreign firms will tkddc to participate less 

in China and nor transfer any technology. Clearly rhis is naive ar best. The Chinese government is masterful 

at understanding the maximum amount of pain they can impose without the foreign firm balking. 

;\1oreoverl forced technology transfer has been an extremely successful strategy for helping China catch liP 

technologically. One recent study published by the National Bureau of Economic Research examined all 

international joint ventures 0V) in China from 1998 to 2007. lletween 1998 and 2012, they counted 4,057 

U.S. JV's in China. First, they found that the Chinese Hrms the government chose to be panners offoreign 

investors were on average the best Chines<.~ firms in the particular industry; they were larger, more productive, 

and more subsidized than other Chinese firms. Second, the Chinese JV partner firm gained substantial 

technological capabilities from its participation in the JV, even though foreign partners usually rook steps to 

liinit the transfer of technology to the partner. Third, it was not just the joint venture firm that benefited; so 

did many other Chinese firms in the same industry. As the authors write, there is a high lcvd of "technology 

leakage'' to orher Chinese firms. This should not be a surprise because the Chinese government sees JVs a tool 

to upgrade entire Chinese industries, not just rhe designated champions. Fourth, the tech transfer effect is 

larger if the foreign finn is a U.S. firm compared to a Japanese or Taiwanese firm. This should not be 

surprising as in general U.S. firms <~rc more focused on short-term returns (something they can g'~t if th'T arc 

more accommodating ro the Chinese government and Chinese industrial partners) and also because there is 

n1ore domestic government pressure of firms in Japan and Taiwan to not transfer valuable technology to 

China.'' Finally, in contrast to what promoters of China's accession to the WTO might have hoped lor, the 

amount of technology spillovers to othn Chinese firms was actually higher after the Chinese joined the WTO 

than before.'A 

Other Steps to Gain Dominance 

Once Chinese firms gain <~cccss to needed fOreign technology, rh,· n<.~xr step of the Chinc_se stratCbJr is to 

ensure that they have the capital needed to scale up. This involves direct and indirect subsidies and also 

designing markets protected fron1 foreign competition, so the Chinese firms can accumulate capital. Once 

flrms have the technology, competencies and scale to go global, the government often subsidizes global 

9 
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market expansion, such as through tile China Export-Import Bank (an entity the World Bank has funded) 

and China's Export and Credit Insurance Corporation (Sinosure).Y' Moreover, by leading to global 

overcapacity and selling bdovv cost, China use.s that overcapacity as a cudgel to disrupt the t:conomics of 

innovation-based industries (i.e., subsidized competition prevents foreign competitors from earning 

reasonable profits from one generation of innovation ro reinvest in future generations of innovation) and thus 

weaken foreign competitors, enabling Chinese f1rms to g~lin even more global market share. 

The Chinese government also "\IVorks to limit foreign competition for its budding national champions. Por 

example, in rhe high-end equipment manufacturing sector, China maintains a program that conditions the 

receipt of a subsidy on an enterprise's use of ar least 60 percent Chinese-made componems \vhen producing 

intelligent manufacturing cquipmcnr.~ ' And dc~pitc the fact that China "clarified and underscorc.:J __ that it 

agreed that enterprises arc free to base rechnology transfer decisions on business and market considerations" at 

a December 2014 meeting of the United States-China Joint Commission on Commerce and Trade (JCCT), 

USTR notes that China has "announced two measures relating to [local procurement of] inK)rmation 

technology cquipml:nt used in the banking services sector and in providing fnternct- or tdccommunicationsbascd services more gencrally."')7 

China also lavishes Chinese firms that have obtained ~Oreign technology wirh massive subsidies. As George 

and Usha Haley document in their book, Subsidies to Chine.1·e Industry: State Cdpitalisrn, 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 tor auto parts, and $27 billion for steel.'' 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 20 I 0 to 2012 alone." China now 

v:ants to replicate this strategy in other advanced-technology industries, such as semiconductors and electric 

batteries."" For instance, China's National Integrated Circuit (!C) Strategy calls tor at least $160 billion in 

subsidies to create a completely closc~d-loop semiconductor industry in China, including explicit plans to 

halve Chinese imports of U.S.-manufacrured semiconductors by 2025 and eliminate them entirely by 2035. 

The "Made in China 2025 SErategy" is supported by some 800 state-guided funds to the tune of more than 

$350 billion, including advanced-battery manufacturing, wide-body aircraft, and robotics. 

China is Unique in Global Economic History 

It is important understand hmv China differs from past Asian mercantilist nations. Japan and the four "Asian 

Tigers" (Hong Kong, Singapore, South Korea and Taiwan) all implemented mercantilist practices to leapfrog 

their industrialization process, including state subsidies, protected home markets, and other policies. But 

China is diffe-rent in three fundamental \vays. 

First, these nations, especially Korea, Japan and Taiwan, largely dosed their markets to U.S. flnns, preferring 

to develop their ovvn domestic champions. This reduced the leverage they had over U.S. firms to transfCr thdr 

technology as a condition of market access. i\1oreover, it led U.S. companies to protest much more against 

these unfJ.ir practices since the competition was benveen "our companies" and "their companies." This 

explains why there was strong bipartisan support in Congress and the executive branch in the 1980s and early 

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1990s for tough action against these practices and for robust domestic competitiveness policies. U.S. 

businesses strongly pushed for rhes.e policies. 

In contrast, China took a different tact, welcoming in (some might say seducing) U.S. companies, but 

holding out access to the largest market in the world in exchange !Or "\vhat China wanted: advanced 

technology. Moreover, because so many U.S. flrms are nov,: ensconced in China and would be significanLly 

hurt if they "val ked away, or if the Chim:sc government retaliated against them for C.S. government 

enforcement action, most have been less than full-throated supporters of tougher enforcement action against 

China. 

Second, Japan and the tigers were largely "rule of law" nations. 'X'hilc the Japanese government, for example, 

could exercise considerable discretion through so-called "administrative guidance," it did have a Constitution, 

a legislature (the Diet), and laws that courts would enforce. This meant that not only were more of their 

mercantilist ~tctions \X!TO-actionable, but there was a limit on how capricious and unflir rhe government 

could be. China know& no such bounds. for example) the Chinest: government is too savvy and 

understanding of WI '0 legal arcana to ever put its rules on forced technology transfer in wridng. lr knows 

that if it did, this would be actionable under WTO rules. Rather, its rules are informal-known to all, but 

''hidden" behind f~ICe-w-tace meetings and v~1gue bur ultimately clear informal messages. 7Vloreover, when the 

Chinese government vvants to send a message to a U.S. firm doing business in China-either to retalime for 

some legitimate action the U.S. government has taken vis-3-vis China or simply to require a U.S. firm to toe 

the party line--it can pretty much do whatever it wants, including generating a trumped up anti-trust charge, 

denying pennits and approvals, or otherwise making life difficult for a U.S. company. 

Finally, Japan and the Tigers were not only allies of the United States, they henefited fi·om and required the 

U.S. security umbrella. Without U.S. protection, these nations would have to cope wirh military and other 

security challenges !rom China, North Korea, and Russia on their own. As such, that gave the U.S. 

government some leverage to challenge their mon~ egregious policies and practices. rvforeover, the 

technological rise of these nations never posed a military and national security threat to the United States. Jn 

fact, an increase in their economic and technological strength benefited U.S. national security. The exact 

opposite is the case with China, \'1-'hich is working vigorously to upgrade its military capabilities to be on par, 

if not ahead, of the United States. 

What is at Stake? 

Given China's h-1ade in China 2025 plan, it is no exaggeration to suggest that, without aggressive action, the 

Unitt~d States may face a world within two decades where U.S. jobs in industries as diverse as semiconductors, 

computers, biopharrnaceuricals, 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 oflosing more commodity-based, low-skilled industries to China in the 

2000s. II~ lor example, the value of the dollar was to fall signil!candy related ro the yuan (and other 

currencies), it is possible that America could regain at least some of the production lost to China in industries 

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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 \vcrc severely wcah.::ncd 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 jus[ machines but 

deep and complex tacit knowledge embedded in the firm in workers (from the shop floor to scicntistB to 

managers) coupled with an innovation ('Cosystcm (universities training the right talent, a network of suppliers, 

etc.). Once those capabilities are lost, they are essentially gone, and are very diftlcult to resurrect absent 

massive government intervention. 

There is 3n additional rca..;;;on Vifhy losing advanced technology indu;;;trics is problematic. Most rcchnologybased industries have high barriers to enny. In contrast to the t-shirt indusn;r \vhere enrry largely requires just 

capital co buy sevv·ing machines, entry into innovation-based industries requires borh physical and intellectual 

capital. [nan industry like semiconductor&, 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 marerial and labor costs are involved. Tn rhis sense, fixed costs are extremely 

high, but marginal costs are low. ln these innovation-based industries losing market &hare to unfairly 

competing firms supported by their innovation mercantilist governments means two things. l'irst, 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 dedim· more than sales, it is nmv 

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 ro a death spiral whereby the market-based leader can lose complete market share. 

A loss of advanced technology industries has t\Yo major negative in1pacts on the U.S. economy. The first is on 

prosperity, as the average wage in these industries is approximately 75 percent hlgher than average U.S. 

wages.6 ; The second is on national security and the ddense industrial base. U.S. defense superiority is based is 

in large part on technological superiority. Our snvicc men and women go into any conflict \'Vith theadvantage of fielding technologically superior weapons systems. But maintaining that ad van rage 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 "~..vill diminish, if not cv<Jporarc, as 

U.S. capabilities whirher and Chinese ones strengthen. It is certainly a highly risky proposition ro assume that 

the United States can continue its \veapons 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 lmes a 

moderate to significant shan.· of its <Jdvanccd technology innovation and production cap<~bilitics. As ITIP 

wrote in 2014, "The United States defense system is still the most innovative in the world, bur that leadership 

is not assured and is in danger of fJ.iling. This decline is not only impacting defense innovation and 

capabilities, but also overall commercial innovation and U.S. competitiveness."(,~ 

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Why Action is Needed 

Some have invoked the "willing-buyer, willing-seller" defense to describe the relationship between U,S, 

companies and their Chinese company partners, especially with regard to joint ventures and technolob'Y 

transfer. For example, in interview in China's People~· Daily, Liu Chunrian, Professor of Law School of 

Renmin University of China, argues, "the transfer of technology from American companies to China is a 

normal business practice. It is the result of t\vo-way choice and independent decision-making by enterprises. 

It cannot be regarded as a mand:Itory beh~l\'ior of government prm:urernenr." r,.J 

There are indeed some ca..,es where the U.S. company is willing and engages in pmtnerships under no duress. 

But in most cases, foreign companies have little real choice between doing at least some of what the Chinese 

government wants and leaving the market. A survey of companies conducred by the EU found that only I 2 

percent of respondents would have chosen their current JV structure in the absence ofJV requirements. As 

Prud'homrne writes, "Foreign firms are allowed some flexibility to decide "vhether or not they want to comply 

with China's FIT [forced technology transfer] policies. Yet all are acwmpanied by consequem•es for noncompliance.''6'i And as Hour and Ghemawat note, "Executives working for multinational companies in China 

privately acknowledge that making oftlcial complaints or Hling lawsuits usually does little good."'"' 

There is another challenge that relates to market f.,ifurcs. One challenges is that for many U.S. Hrms the 

negative consequences from sharing technology won't accrue to the firm for five or ten years, while the 

negative consequences of not sharing technology are immediate. Given that the median tenure fOr a CEO at a 

U.S. large cap company is just five years, the rational decision f(x a typical CEO is to avoid the short-term 

pain, even if it means longer-term damage to the company.''' The CEO will likely be gone by the time the 

damage is done. ln the short run they get to continue to participate in the Chinese market with minimal 

hassle from the government. They effectively get co-opted. 

A second market failure relates to spillovers. Sometimes U.S. firms share technology with Chinese firms that is 

not very important to them but is important to its other U.S. competitors. lf a U.S. company has only a small 

share of the U.S. market in a particular technology, it is often willing to share that technology with its 

Chinese partner, knowing that this will do little to hurt it.'l core business, but might hurt its other U.S. 

competitors, all the while buying goodwill \Vith the Chinese government. Often China is able to succeed at 

this by focusing on second-tier players in any particular industry segment \vhlch, as McKlnsey notes, "h ... 1.ve less 

to lose than global glJJJts-and everything to gain. "63 The problem, of course, is that the U.S. company's actions 

harm other U.S. companies that arc still competitive in that particular technology. 

Why the U.S. Government Is Justified in Pushing Back Against Chinese Innovation Mercantilism 

Broadly, and Forced Technology Transfer Specifically 

The Chinese government dcfCnds these predatory practices on the grounds that as a sovereign nation it has 

the right to build its own advanced industries. The state-run Global Times newspaper ''-'TOte rhat it's "our 

sovereign right to develop high-tech industl}' and it is connected to the quality of rejuvenation of the Chinese 

nation. It will not be abandoned due to external pressure."''9 

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It is China's sovereign right to do so the way they are doing it: as long as they are not members of the World 

Trade Organization. Bur when China joined the WTO it made a binding set of commitments lo live by that 

at least in the spirit, if not the letter) of the law made these practices a violation of that cornmitmcnt. 70 So if 

China insists on its right to practice predatory practices with impunity, it should withdraw from the \Xi'TO. 

Others argue that China is justified in its practices because h f~1ces pressures to modernize. As an article from 

Australia's Lowy Institute writes, "what is not negotiable for China is relinquishing the ambition of becoming 

a global leader in advanced technology industries. 'fhat is central to its economic progress as Chinese wages 

rise, the workforce begins to contract, and its labour-intensive manufacturing moves to other countries. "71 

Likewise, a Council on Foreign Relations blog states that China's "ambition makes sense within the context 

of China's development trajectory: countries typically aim ro transition away from labor-intensive industries 

and climb rhe value-added chain as wages rise, lest they full into the so-called 'middle-income trap. 

But these views are wrong on t\vo grounds. First, a_<; the McKinsey Global Institute report How to Compete 

and Grow: A Sector Guide to Poliq ~how:;, per-capita im:omc growth is ovcr'vvhelrningly related to the ability to 

raise productivity in all industries, and not from changing an economy's industrial mix toward higher valueadded industries."' Moreover, the so-called middle income trap is largely a myth. 74 Developing nations are not 

consigned to rhis trap; ~:hey can get out of it by raising produclivity across the board in <1ll industries. 

Second, even if China wants to grow its technology economy, the key problem is the way in which they arc 

going about it. The major problem with Made in China 2025 is the vast panoply of illegal, unethical, and 

unfair means China employs to reach its goals, which damage not only U.S. firms and workers, but the global 

innovation economy. 

Limits of the WTO 

One major barrier to getting China to roll back its predatory practices is that the World Trade Organization 

is not designed ro deal with nations like China. The c~ntirc WI'O framework, including its dispute settlement 

process, is premised on governments abiding by tbe rule oflav.r and there being a fundamental separation 

bet\veen the state and the private sector. Neither is true in China. If something is in a law that is problematic, 

the \X!TO can rule against it. But that is not hovv' China works and the Chinese are extren1dy canny on 

(k~signing measures that can avoid triggering successful WI'O challcngt~s. As Harvard Law Professor t\.1ark \X1u 

notes, the lines between what is public and private in China blur, at least from a WI'O perspective. He goes 

on to ask, "These scenarios remain complicated. Would SASAC's ability to remove the firm's top 

Inanageinent or the NDRC\ coordination on sector-spedflc polky sufhce to render the flrm a "public body?" 

]:or example, in China private banks often provide subsidies to an exporter because of informal demands from 

the government. As \X/u writes, ''At the heart of this challenge is the fact that China's economic structure is 

sui generis, having evolved in a manner largely unfOreseen by those negotiating \VfO treaty law.-;"~ 

Second, also another problem is that givC"n the \XrTO's limited capacity, it can realistically handle only about 

two-dozen major trade dispute cases annually, meaning China can flood the zone with a gauntlet of unhir 

practices that could simply never get adequately adjudicated under \lVTO auspices. 

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Finally, the U.S. government relies on firms to provide specific evidence of the unfair policies and harms. But 

U.S. nrms know that if they cooperate with the USTR in a case against China they \vill face reraliadon. As 

one corporate counsel related to me, representatives from their company met v.drh the minister of a Chinese 

agency to complain abour an egregious and predatory acrion from the Chinese governmcnr and warned that if 

this did not stop that the firm would go to USTR to imitate a WTO case. The minister told the company 

representatives that they certainly had every right to do that, bm that if they did that they would never sell 

another product in China abrain. Needless to say, the U.S. company "turned the other check" and did not 

initiate the case. 

This is not to say that more cases could not be effectively brought before the WTO, but there should be no 

illusion that a.s an institution that \Xfl'O can do more than pu('ih hack at the margin. As such US'J'R should 

develop \X1

TO "non-violation nullification and impairment'' claims that would assert rhc United States is 

being denied the benefits of reasonably expected market access. The claims can contend that China's manifold 

mercantilist policies undercut and undermine the beneflts and rights the United States thought it was getting 

·when it assented to China joining the 'X'TO. If that fails to produce satisfactory results, ultimately, the 

United States with irs allies should consider establishing an alternative organization that can and will do the 

job. Nations that are governed by the rule oflaw and which do not pur predatmy practices at the center of 

their economic strategies \vould be welcomed to join. Orhers \vould be excluded, at least until they reformed 

enough to comply. 

What the U.S. Federal Government Should Do 

The main approach now being tried is tariffs under Section 30 I authority. The Trump administration has 

announced placed tariffs on Chinese exports (including products ranging from aircraft to chicken incubators) 

and has announced his intention to add ro thar, But iris not clear \vhat the administration's strategic goal is. 

Is it to reduce the trade deficit with China? Is it to restore production in traditional sectors, such as steel and 

autos? Or is it to pressure China to roll back egregious "2025" practices that threaten America's advanced 

industries? Jn our view, the goal should be the latter. 

Regardless, any efiective campaign co roll back Chinese innovation mercantilism vvill require a concerted joint 

campaign with our allies. The United States should be doing much more to develop such a coordinated 

agenda with like-minded allies. 

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 fir~t relates to boosting the 

institutional capacity of the federal government to understand and address these issues. The House should 

introduce and pass a companion ro the National F.conomic Securiry Srraregy Acr of2018 (S 2757). By 

requiring the administration to develop a national economic strategy to support the national security strategy, 

the legislation will not only help d1e administration make 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 weaknesses within American industry related to national security broadly defined, but also on 

the threats from other nations, policymakers will be better prepared to ra.ke rhe decisive steps that are 

required. ITIF has also published a list of proposals for legislative and administrative actions that would help 

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with trade enf0rcement. 7r' Congress should also pass (he Foreign Investment Risk Reviev;,r Modernization Act 

(FlRRMA), to modernize CFlUS. It should instruct USTR to bring a WTO case against China over its 

ongoing failure to publish thousands of trade-related final measure~, including subsidies, in a single official 

journal as it's required to do under \X.r fO 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 WTO to enforce China's 

publication requiremenls would make it possible to bring additional W'TO cases for subsidy or other 

violations, suc.:h as forced TP or tcdmolob'Y 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 

of1er an indemnity against third-party infringement to the Chinese licensee. 77 In other \vords, a f{)reign 

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 ro offer something thar the Chinese licensee is nor, making ir difficulr for small companies, 

companies ''vhich 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) ro arrive at murually beneficial licensing agreements. TIER makes ir almosr impossible 

for small companies, such as start-ups, to license their breakthrough technologies in China, because no startups (due ro their limired resources) would be able to conduct the complex analysis required by China's highlitigation environmem and industrial policies that limit the value of foreign IP in order to ofler 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 typically do not have subsidiaries jn China. Consequendy, 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 party 

making the improvements, which typically is the Chinese licensee. Thus, foreign licensors, including U.S. 

firms, cannot negotiate to m•vn any improvements or to share the improvements \Vith Chinese licensees, even 

ifhoth licensing pJ.rtie.s desire for the improvements to be slwred or ov.:ned by the foreign lkensor.s. 

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 markets 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. 

To address this discrimination, Congress should enact a regime whereby if Chinese entities seek licenses in the 

United States, dten the Chinese enterprise must license on the same terms by which fOreigners are required to 

license· into China. Such legislation would spe~ciflcally require the Chinese~ licensor to offer an indemnity 

against infringement by the U.S. licensee and to stipubte that the U.S.licensees are entitled to o\vn the 

improvements they make and receive a reasonable market allocation under rhe licenses. Another possible 

approach would be lor Congress to pass legislation requiring that the U.S. company whose original 

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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 hy improvements owned by the Chinese entity. Although technology-licensing 

law is usually a matter of state contract law, the legislation would be enacted pursuanr to CongrC'ss's povorcr to 

legislate international commerce. 

T'hcrc arc other idea.'\ that arc at least worth considering and developing further. The United States could limit 

Chinese student visas to the United States. it could limit ongoing science and technology cooperation with 

China. The administration could take a hard line on limiting most Chinese investment in the United States, 

including in Chinese-backed tech accelerators.~8 It could prohibit Chinese firms that are stealing IP from 

accessing the U.S. han king and financial system. ft could deny Chincsc-hcadquartcrcJ enterprise.-. access to 

listing on U.S. stock exchanges if they fail to provide fin;mcial statements in line with generally accepted 

accounting principles, It could build an "inspection wall" against counterfeit and pirated Chinese goods, with 

the goal of stopping them alL China accounts f(x 87 percent of counterfeit goods seized each year, with costs 

estimated to be between $30 and $40 billion."" These kinds of steps could be employed to gain more leverage 

in negotiations to roll back some of China's most egregious innovation mercantilist actions, including forced 

technology transfer and massive subsidies. 

The federal government should also work to establish a deeper North American supply chain, as at least 

somewhat of an alternative to the Chinese supply chain. This would entail c maintaining (if nor improving) 

NAFTA and expanding it to other L~tin American nations, 

It should also consider ramping up the use of anti-trust policies to discipline Chinese actions. Unfortunately, 

our antitrust regime is like the \X/TO: it is premised on the view that it is private companies that are in the 

driver's seat and call the shots, not sovereign nations. For example, China has abused the doctrine of"foreign 

sovereign compulsion'' to justif}r anticompetitive behavior that has harmed U.S. interests, even though it 

initially passed muster in U.S. courts. In 2016 the U.S. Second Court of Federal AppeaJs threw out a case 

against Chinese vitamin C makers alleged to have conspired ro fix prices and limit supplies in international 

n1arkets, including in the United States, on grounds that rhe behavior "'i-vas 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., th<~ foreign sovereign compulsion defense). \X!hilc this verdict was 

recently reversed by the U.S. Supreme Court, Congress should curb foreign governments' ability to abuse the 

foreign sovereign con1pulsion defense for these kinds of mercantilist ends. 80 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 dcfense.::: 1 Congress should also call on the adminh.tration to 

eliminate a regulation that exempts mergers involving Chinese state-owned enterprises from having to be 

announced in accordance with U.S. antitrust lawY 

Congress should also p3ss legislation that would allow :Arms to ask the Dcp~rtment of justice for an 

exemption to coordinate actions regarding technology transfer and investment to other nations. One of rhe 

key levers China has is that it's a n1onopsonist: its n1arker is so large it can pressure foreign companies to hand 

over technology in order to sell their products in China. But if companies in similar industries can jointly 

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agree that none of them will transfer technology to China to gain market access, then the Chinese 

government will have less leverage over them. The same would be true if companies agreed that they \'\'(mld 

not invest in China until China improved irs IP protections. Such an amendment to antitrust lavv would be.: 

similar to the 1984 Cooperative R&D Act, which allowed firms to apply to form pre-competitive R&D 

consortia. 

Congress should consider going even further to stand up a new arm ofDOJ's antitrust divbion 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. DOT needs to not only be able to but be 

willing to bring actions against foreign flrms if their actions are helped by their state in a \vay that leads to 

antkompctitivc results. ln the case of China, its subsidies, forced technology transfer, lP theft, and other 

unfair actions give Chinese firms unf.1.ir advantJges thar distort markets in an ;mticompetitive manner. DOJ 

should be able to investigate cases and if they found a violation, bring those to an administrative law judge 

who \vould adjudicate the case and the damages the U.S. government coLLld impose on the Chinese 

companies that benefited from the anti-competitive Chinese government policies or practices. The challenge 

will be that not all Chinese mmpanics likely to have cases brought against them are involved in the US 

market, But some are, and lor the ones that aren't such a ruling would effectively preclude them from 

entering the U.S. marker. 

In summary, taking firm and strategic action against Chinese predatory, mercantilist practices is long overdue. 

\Vhether such action can be successful is an open question, given the limits of the WTO, tbe unwillingness of 

the administration to engage our allies in the fight (and often their reluctance to be in the fight), and the fact 

th.Jt our leverage over China is much less than it \Vas a dcc:~dc ago. But one thing is ckctr: not raking action 

will make it much easier for the Chinese government to achieve their goal of dominating globally advanced 

technology industries. 

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References: 

1. St~plu:n J. ED::ll, and Roben D. Atkinson, "fal.sc Promise:.: Tht: Yawning Cap Between China's \X!TO 

Commitment<; and Practice.;;" (Information Technology and Innovation Foundation, Septemhcr 2()15). 

https:/ /iLif.org/ publications/20 15/09 I 171 !:Use-promises-yaw ning-gap-between-chinao/oE2°AJ80q,099'i-wtocommitmcnts-and-practic(;,',; Robert D. Atkinson, Enough is Enough: Confronting Chinese Innovation 

Mercamilism (Information Technology and Innovation Foundation, February 2012), http://vV'.vw2.itif.org/2012-

enough-enough-chinese-mercamilism.pdf: Roben D. Atkinson, :...!igel Cory, aucl StepheH J. Ezell, "Stoppiug 

China's Mercantilism: A Doctrine of Consrructivc, Alliance-Backed Confrontation" (Information Technology and 

Jnnovation ~oundation, March 20 17), hnps://itif.org/publications/20! 7/03/16/stopping-chinas-mercantilismdoctrinc-constructivc-alliancc-backcd. 

2. Rohcrr D. Atkinson, ·'China's Strat%T f<or Glohal T cchnology Dominance By Any ..\.{cans "0Jcccssary," Forbes, 

November ! 2, 2015, http://wv,rw.forbes.com/sires/realspin/20 15/ t 1 /12/china'Htrategy-for-global-technologydominancc-by-any-mcans-necessary/#J 1 b91 b207242. 

3. Atkinson, "Enough is Enough." 

4. Jost \\1iihhckc et al., ''Made in China 2025: The lvfaking of a I -Tigh-Tcch Superpmvcr and Consequences for 

lndusLrial CounLrks'' (Mtrcator Institute for China Studie~, Dtcember 2016), 

https:/ /www. mcric<;.org/Alcadmi n /user _upload/ dmvn!oads/MPOC/:'\1POC_M ade_i n_ China_202 5 ll'vfPOC_N o.2 

_MadeinChina_2025.pd[ 

5. Joseph !\ahm, "China's Specialization in Innovative Manufacturing" (power point, National Academies of Sciences 

Innovation Policy Forum. \Xlashington, DC, ;vtay 2.3, 2017). 

6. Pau!J\-iozur, "Inside a 1-lcist of American Chip Designs, as China Bids for Tech Power," The iVew York Times, June 

22, 20 I 8, https://-.-,-..,'\Y\v.nytimes.com/20 1 8/0G/22/techno\ogy/china-miCI'on-chip~-theft.htmL 

7. The lutelle<.·Lual Property Cormnbsion, The I<Pport of The Cornmi.uion on the ·n,e_ft of American lntelle{tUttl Prope11)1, 

(United Stares: The National Bureau of /\'\ian Rc.<;earch, 2017), 11, 

http://www.ipcommission.org/report/ip_commis~ion_report_052213.pdf. 

8. Ibid. 

9. The Intellectual Property Commission. Cpdate to the l P Commissiun Report, '!7Je Theft of American lmel!ectual 

Property, (United States: The National Bure:m of Asian Research, May 2013), 1], 

hrrp:/ /ipcommission.org/report/IP _ Commi~sion_Report_ Gpdate_20 17.pdf 

10. Keith B. Alexander. "Cyhcr~ecuriry and Americm Power'' (conrerence presentation hosted by the American 

Enterprise In::.titute, \\1ashington, D.C., July lJ, 2012). 

11. Andro::as Schotto::r and Mary Teagarden, ''Prott:cting Intellectual Propt:rty in China'' 1rv!IT Sloan ldanagement 

Review, June 17, 2014, hilp://sloanreview.mit.cdu/arricle/prolecting-inte!lecrual-prnpeny-in-chin<~l. 

12. Katherine linton. Alexander Hammer, and Jere.my Wise, China: lntdleCLual ProperLy Infringement, Indigenous 

Innovation Policies, and frameworb fOr l'vlcasuring the EftCcts on the U.S. Economy (U.S. International Trade 

Commission, :'\lovemher 201 0), hltp://www.usirc.gov/publicadons/332/pub4199.pdf. 

13. Ibid, 30. 

19 
45


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14. Select USA. "Foreign Direcr J nvestmetH (FDJ) C.hina," accessed July 3. 201 R. 

http:/ I selectusa.comrnerce. gov/ country-fact -.'lhel'ts/China_F act_Sheet. pdf. 

15. Rhodium Group, ''Chinese Investment .Monitor,'' acces.'led July <1, 2018. http:/ lrhg.com/interactivd chinai nvestment-moniior. 

16. Ibid. 

17. Thilo Hancmann, Daniel H. Rosen, and Cassie Gao, "Tvvo-\)\lay Street: 25 Years ofVS-China Directlnvcstmcm'' 

(report. CS-China FDI Project- Rhodium Group and the National Committee on U.S.-China Relations, in 

partnership \Yith rhe American Chamber of Commerce in Shanghai ,Hld rhe China General Chamber of 

Commerce, 20 16), http:/ /rhg.com/v,:p-content/uploads/2016/11/T woWayStreet_FullReport_En.pdf. 

IH. Bijiun \Vang and I-luiyao \\'ang, "Chine~e Ma11ufacturing Finns' Overseas Direct InveMrncm (ODI): Patterns, 

,\1o!iva!ions and Challenge"'' Rising Chitut: Globrtl Chrtllmgi's and Opportunities, (Augusr 2011), 99, 

http:/ /s~rn.com/ab~tract=1907170. 

1Y. Ibid, 103. 

20. Ibid, 110. 

21, !hid, 111, 

22. Michael Brown and Pavncct Singh, "C.hin:1's Tcchnolob'Y Transfer Str:1tq,,ry: How Chinese Investments in 

Emerging T~.:chnology Enable a Strategic Competiwr to Acctss tht Crcnvn Jewds of U.S. Innovation, 

(Washingron, DC: Defense Tnnovarion Unit Expcrimcnr<J! DIUx, January 2018), 

https:/ /admin.govexec.com/media/ diux_ chinatechnologytransfersrudy _jan_20 18 _( 1). pdf. 

23. "ZhongguaiH.·un Development Group," accessed July 3, 2018, 

http://w\vw.zgcgroup.eom.cn/busincss/overscas_funds.html. 

24. "Shenzhcn Capit:1l Group Made G ~cw Ttwcstmcnts in M<Jrch 2018," Shem:hcn Capital Group Co, accessed ]tdy 7 

2018, http;/ /·wv,J-..v.szvc.com.cn/t.~nglish/a/ 20 180409/2388.shunl. 

2'5. "Cov~·rnmL·nt Backt.:d Funds," Shcnzhtn Capital Group Co, accessed July 2018. 

http: I ;.,vv.w.szvc.com.cn/ cngl ish/Ou rBu '\in es.'I/F u nd?vfanagcmcn t/l ;overn mcnt IhckcdF un d"/i n dex. '\htm 1. 

26. "Invc<>tmcm Port+C)lio," Shenzhen Capital Group Co, accessed July?, 201H, 

http://www .5'/.VC.COm.cn/ ett glish/Ou rBu sin e~s/ r nvestmen t/1 nvestrnent Portfo!io/i ndex .sh l ml. 

27. These ~tep.s were dearly laid out in the protocol on the acce~sion ol tlw Pt'ople\ Republic of China.: China shalL 

upon accession. comply with the TRI!vfs.Agrecmcnr, vvithout recourse ro the provisions of Article 5 ofthc TRI!vfs 

Agreement. China shall eliminate and cease to enforce trade and foreign exchange balancing requirements, local 

content and export or performanc<.' requirements made effective through la\VS, regularions or other measures. 

N1oreover, China will not enforce provisions of contracts imposing such requirements. \XTithout prejudice to rhe 

rdevam provisions of this Protocol, China shall ensure tbat the distribmiou or import licenses, quotas, tarifT--rate 

qnotas, or any other meam. of approval for importation, the right of importation or inve~tment hy national and 

sub-national autl10rities, b not conditioned on: whether competing dome~tic suppliers of such prodttt:ts exist; or 

perf{mnance requirements of any kind, such as local content. off~ets, the transfer of technology. export 

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29. Thomas M. Hom and Pankaj Ghemawat. ''China vs the World: \\7hose Technology Js It?," Hmwmi BwineJ-> 

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ht tps:/ /f;ls.org/sgp/crs/row/RL3353<l.pdf. 

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:)2. Kun Jiang. Wolfgang Keller, Larry D. Qiu, \~'illiam Ridley, "International Joint Vcmures and Internal vs. External 

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40. Ibid, R. 

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!J9. Keith Bradsher, "To Conquer Wind Power, China \X! rites the Rules,'' The tVew York Tirn('S, Decem her 14, 2010, 

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2017, htrps:/ /v.'W\V. nyti mes.com/20 1 7/08/01 I rechnol Of:,'YiquCJ !com m -chi na-n·u mp-tech-trade. htm I. 

51. Hearing on Foreign Investment Climate, Bef(He rhe 1;.S.-China Economic and Secmiry Review Commission 

(2015), 8, (staLemeill of Robert D. Alkinson, Information Technology awl Innovation Foundation). 

52. Lnited States Trad<.: Rcpresentativ<.:, 2017 Report to Congress On China~- W'TO Compliance ~'a,~hington DC: 

Execu! ive Oflkc of the P1'esidcnr of the 1;nited Stares, January 201 R), 34, 

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53. Kun Jiang, Wolfgang Keller, Larry D. Qiu, \X'illiam Ridley, "'International Joint Vem:ureil and Internal vs. External 

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Cambridge, Massachusetts, 2018), http://wv..'\v.nber.org/paper~/vv24455. 

54. Ibid. p. 39. 

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Plan for Sub-project Consultation Service," November 27, 2007, 52-58, lmp://wwwwds.worldhank.orglexternalldefaulr/WDSContentServer/WDSPI!B/20071111271000020953_2007112714 5624/R 

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(New York: Ox lord University Press, 20 13). 

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and fnnovatiotl Foundation, hbruary 201 R), https://ilil.org/publications/201 R/02/06/huild-bal tery-industry-newyork-nced~-help-washin~:,rton. 

Gl. Luke A. Stc>van and Robert D. Atkinson. ''Just the Facts: The Bendlts ofinfOrrnation aud Communications 

Technolog:_).'" (Information Technology and lnformation Foundation, May 2013). 

https:/ /irif.org/publications/20 13/05/ 1 3/j ust -facts-benefits-information -and-communications-technology. 

62. Information Technology and Innovation FoundaLion, "Ddcm;..: Innovation and the Future of American 

com peri tivene.ss" http,<,;/ /itiforg/publ ications/20 1.1\ I 1 1/25/ defen.se-i n novation ~and- fum re-america ncompetitiveness. 

63. \Xlang Ke. "People's Daily: The L·nited State.<; Has No Right to Nickname China's Compulsory High-Technology." 

People's Daily, June 22, 201 H) http://we,'ltdollar.comhhdm/finance/news/13!J4,201 H0()22H92991369.hrml. 

<l!l. European Commis-,ion, Tmpact Jhsesmu:nt Report on the EU-C:hina Ttwestment Relations, (Bru.t:;d;, hfay 23, 2073, 

SU?D Final) 185, http://ec.europa.eu/smanrcgulation/impacr/ia_carricci_our/docs/ia_2013/swd_20 13_01 RS_cn .pdf. 

65. Ibid, 8. 

66. Thomas !vi. Hout and Pankaj Ghemawat, "China vs the \XIorld \XIhose Technology Is lt?" l'lx Hamr1rd Business 

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67. Dan l\.1arcc, ·'CEO Tenure Rates,'' Jlarvard Lat!) School Forum on Corporate Governance and Financial Regulation, 

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68. Gordon Orr and Christopher Thomas, "Semiconductors in China: Brave ne-w world or same old story?," (article, 

McKinsey & Company, High Tecb, August 2014), http://.,v>vvv.nKkiuscy.com/industric.s/high-tcdt!ourinsigbts/'temiconducrors-in-china-hrave-new-world-or-same-old-story. 

G9. Ne\vmyer, '"T11e Finance 202: Trump Team Faces Long Odds for Trade Breakthrough in Beijing,·' The 

Post, May 3, 2018, llttps://w\vw.wa.shiugtonpost.com/ncws/powcrpost/paloma/tbc-financc2()2/20 1 R/ 05/03/the-fl nance-2()2-trump-rea m-faces-long-odds-for-trade-breakthrough-inbeij ing/5aea3963 301b042db5 797 2b21. 

70. Stephen J. Ezell, and Robert D. Atkimou, "False Promises; The Yav,:niog Gap Between China'~ \\'l'TO 

Commitments and Practice,.,'' (Information T ecbno!ogy and Innovation Foundation, Septemher 201 5), 

https:/ /it if.org/publications/20 1 5/09/17/G.!lse-promises-yawning-gap-between-china~~b E2?:b80o/o99~-wtocommitmcnts-and-practiccs. 

71. John Edwards. "US-China Trade: Joke's Over,'' The Interpreter, July 10, 201H, https://v ... ,.vw.lowyinstitutc.org/du:-

i n !erprerer/ us-cl1 i na-1 rade-joke-over. 

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72. Ad:.Hn Segal. ''\X'11y Does FNeryone Hare lv1ade in China 202'5?" Council on Foreign Rebttioru, March 2R, 20 I R, 

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73. ;vfcKinsey Global Institute, "Hov,r to compete and grow: A senor guide to policy," (!v1cKin~ey & Company, March 

2010), 26, 

http://ww"v .mckinsey .corn/ mgi/ reports/frccpa ~s_pdfs/ compctitivcncs:,/F ull_Report_ Compt·titiwnes~. pdf. 

71. Gregory lvL Larson, Norman V. L)ayLa, l\1ichad \Xi"oolcock, ''The 1.1issile-lncorne Trap: Myth or Rcaliry?'' The 

WorlO Bank, (March 2016), h11p://dncumenrs.v-.'orldhank.nrg/curated/en/9()551146R 194956R37t!'he-rniddlcincomt·-trap-myth-or-reality. 

75. ).tfark \Vu, "The "China, Inc.'' Challenge to Global Trade Governance,'' Harvard International Law journal vol. 57 

no. 2 (20 1 ()), htrp;/(w\\".v.harvardilj.org/wp-contenr/nplnads/f I Ll21 O_crop.pdf. 

76. lnforma!ion T'echnology and Innovation Foundation, ''Tech Policy To-Do List" (lnlormation Technology and 

Innovation foundation, July 2018), https://itif.org/tech-policy-to-do-list#tradc. 

77. Article 40 of the TRIPS Agrccmclll (as an dfurt to control abusive liccusing practicc·s) holds that Members agree 

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may have adverse effects on trade and may impede the tramfer aud dissemination of tedmology. 

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news release, June 14, 2018, https:/ /iti[org/publications/20 18/06/11/itif-wdcomes-suprernc-coun-ruling-amitnL'.;tcasc. 

81. Robert Atkinson. Nigel Cory, and Stephen Ezell, "Stopping China's ~~1ercantilism: A Doctrine of Constructive . 

. Alliance-Backed Conffontation '' (Information Technolob'Y and Innovation Foundation, March 2017). 

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82. FrankL. Fine, "China Antitrust Law Journal,'' Itxirf\lexis, voL 1, issue l, 2017, 

htLps:/ /\V\V\V .cooley .com/~ I media/ cooley I pdf/ reprinu:,/20 1 7/20 1 7-07 -05-nwrse-regulatory-hmdles-facing-c:ltinese-

.soes.ashx?la=en. 

24 
50

Mr. POE. Thank you, Dr. Atkinson. 

Mr. Reinsch? 

STATEMENT OF MR. WILLIAM ALAN REINSCH, SCHOLL CHAIR 

IN INTERNATIONAL BUSINESS, CENTER FOR STRATEGIC 

AND INTERNATIONAL STUDIES 

Mr. REINSCH. Thank you very much. It is a pleasure to be here. 

China’s economic strategy is well known. It has been discussed 

here at length. Rather than repeat that I want to spend my time 

discussing what the United States might do about it. 

Mr. POE. Could you pull the mike a little closer there? 

Mr. REINSCH. Sure. How is that? Better? 

And I begin with a fundamental principle. If a country has an 

adversary and wants to stay ahead of them there are only two 

ways—hold him back or run faster. Both strategies have their limitations which is why the best approach is to pursue both. Let me 

take them one at a time. 

Holding the adversary back means denying him the means of 

gaining advantage, if possible, while trying to leverage better behavior. This has been the focus of the administration’s efforts thus 

far. We are attempting to deny China advantage through investment controls and export controls, both designed to impede the flow 

of critical technology beyond our borders. Congress has recognized 

that the current CFIUS process does not subject enough transactions to review and has moved to expand its reach. Both versions 

now in conference are thoughtful and carefully drafted. The administration has expressed its support and I think its enactment would 

be a positive step. 

Similarly, your committee has reported and the House has 

passed legislation to reauthorize the Export Administration Act. 

This is long overdue as you know and its enactment would also be 

useful step. I caution the committee, however, against a too broad 

expansion of controls. Maintaining control over the crown jewels of 

our economy is important. Attempting to re-control technologies 

that have already been released are not critical and are available 

from multiple sources would accomplish nothing and would do serious harm to our exporters. 

In addition to investment review and export licensing, devoting 

more resources to compliance and enforcement is critical. The problem is not with large established companies which know the rules. 

I am worried about the small start-up, the proverbial two guys in 

the garage with a brilliant idea. When a savvy Chinese investor offers them $100 million for their company they may not know or 

care that such a transaction would require CFIUS review or that 

any technology transfer pursuant to it could require an export license. The government does not currently do an adequate job of 

finding and monitoring those situations and making sure 

innovators know what their responsibilities are and that is something I think the committee could constructively work on. 

Leveraging better behavior is more complicated. As the President 

has said, the Chinese are doing what is good for them. Persuading 

them to do what is not good for them is a heavy lift. I think there 

are some areas where agreement ought to be possible and my 

statement cites a couple of them as an example. 

51

The most difficult problem to address is Made In China 2025. 

Here, we are asking China to restructure its economy into a market-based system and effectively abandon its technology competitiveness goals. Doing that would reduce the Party’s control of the 

economy and the society, which is the last thing they will be willing to do. Many of the technologies at issue involve aspects of the 

digital economy. For China these are not trade issues. They are national security and public control issues and they are not susceptible to resolution in a trade negotiation. 

The President is attempting to force changes through tariffs. 

That is not likely to succeed for the reason I have indicated. We 

are demanding that the Chinese do something that will imperil the 

Party’s control and it will certainly produce a great deal of collateral damage in its wake. The better approach is through building 

coalitions and I endorse what Rob said, I won’t repeat that ground. 

I would also suggest that a more productive course would also be 

to recognize the long-term battleground with China is not in China 

but is in the United States and in third countries where the playing field is level. We can deny them advantages here and in the 

process give a boost to our own manufacturers and innovators. 

In third countries we cannot only compete with the Chinese on 

more equal terms, we can also develop networks of rules and standards that work to the advantage of Western economies. That is 

what TPP was about. That is what TTIP is about, building trading 

structures based on Western rule of law principles and standards 

to which the Chinese will ultimately have to conform if they want 

to access the very large market structures and global supply chains 

that we are creating through those agreements. 

Beyond trade agreements there are some time-tested things the 

United States can do: Let the Export-Import Bank function as it 

was intended; use trade missions to promote American products; 

aggressively defend American commercial interests in third countries. If there is one data point I hope you remember it is that 95 

percent of the world’s consumers are outside the United States. 

Maintaining a competitive advantage over China inevitably means 

beating them in third countries. If we cannot do that we 

marginalize ourselves and yield leadership to China. 

Finally, a few words about running faster. It is not my primary 

topic but it is more important. The reality is that holding the other 

guy back doesn’t work all that well and I speak from somebody who 

spent the Clinton administration trying to do that. There are simply too many ways to get around the steps we take. There are inevitable limitations also on what we can do to control somebody else’s 

economic policy. 

What we can control is our own economic policy and if we do it 

well we can surmount the Chinese challenge. In today’s totally 

globally-integrated economy that means more than pro-growth 

macro policies and more than job creation. I have suggested three 

things in the past which I will just list: Training our workforce to 

meet the demands of the 21st century economy; giving our companies incentives to stay here; and promoting innovation. We are very 

good at promoting innovation. We have a demonstrated record 

since the Lincoln administration of targeting government resources 

in sectors that will define global leadership in the future. That is 

52

what the Chinese intend to do. We should remember that we 

thought of it first, we can do it better, and we can do it without 

the massive subsidies, the WTO-illegal subsidies that they plan to 

do, but with expanded support for basic research, encouragement 

for our private innovators, and immigration policies that encourage 

smart people to study and stay here. Those are debatable. 

Rob has made some other suggestions which I endorse also. But 

the principle of running faster remains fundamental. Thank you. 

[The prepared statement of Mr. Reinsch follows:]

53


30708c-1.eps

& 

INTFRNATIONAL STU!liES 

Statement Before the 

House Committee on Foreign Affairs 

Subcommittees on Asia and the Pacific 

and Terrorism, and Trade 

Testimony: 

Alan Reinsch 

Senior Adviser and Scholl Chair in International Business, Center 

for Strategic and International Studies 

11,2018 

2172 Rayburn House Office Building 
54


30708c-2.eps

Reinsch Written Testimony, HFAC A&P, TNT Subcommittees 07111/2018 

Thank you for the opportunity to appear before you today. T want to begin by making clear the 

views I am presenting are my own and not those of either CSIS or Kelley, Drye & Warren. 

China's economic strategy is well-known. The Foreign Affairs Committee has discussed it in 

previous hearings, and the administration has documented it in its Section 301 report Rather 

than repeat that material, I will spend my time discussing what the United States might do about 

it I begin with a fundamental principle: if a country has an adversary and wants to stay ahead 

of him, there are only two ways: hold him back or run faster. Both strategies have their 

limitations, which is why the best approach is to pursue both. Let me take them one at a time. 

2 

Holding him back means denying him the means of gaining advantage, if possible, while trying 

to leverage better behavior. This has been the focus of the administration's efforts thus far, and it 

remains to be seen how successful it will be. We are attempting to deny China advantage 

through investment controls and export controls, both designed to impede the ±1ow of critical 

technology beyond our borders. Congress has recognized that the current CFIUS process does 

not subject enough transactions to review and has moved to expand its reach. Both versions now 

in conference are thoughtful and carefully drafted. The administration has expressed its support 

for the legislation, and I agree that its enactment would be a positive step. 

Similarly, your committee has reported and the House has passed legislation to reauthorize the 

Export Administration Act That is long overdue, as you know, and its enactment would also be 

a useful step. I would, however, caution the committee against a too-broad expansion of 

controls. Maintaining control over the crown jewels of our economy is important Attempting to 

re-control technologies that have already been released, are not critical, and are available from 

multiple sources would accomplish nothing and would do serious harm to our exporters. 

In addition to investment review and export licensing, devoting more resources to compliance 

and enforcement is critical. The problem is not with large, established companies which know 

the rules and devote considerable resources to comply with them. Rather I worry about the small 

start up --the proverbial two guys in a garage with a brilliant idea. When a savvy Chinese 

investor offers them $100 million for their company, they may not know-- or care-- that such a 

transaction would require CFTUS review or that any technology transfer pursuant to it could 

require an export license. The government does not currently do an adequate job of finding and 

monitoring those situations and making sure innovators know what their responsibilities are. 

Leveraging better behavior is more complicated. As the president has said, the Chinese are 

doing what is good for them. Persuading them to do what is not good for them is a heavy lift 

Nevertheless, there are some areas where agreement ought to be possible. The Chinese have in 

the past promised to end commercial IP theft, and there is no reason they couldn't do that again --

and actually mean it It is a serious domestic problem in China-- most of the current lP litigation 

is between Chinese companies-- and very much in the government's interest to crack down on it 

if it wants to keep its own innovators from leaving. Similarly, discrimination against foreign 

companies in China based on corruption -- for example, the Chinese competing company gets 

favorable treatment because it is owned by the provincial Party secretary's nephew-- is 

something the government is already trying to stop. 

The most difficult problem to address is Made in China 2025. Here we are asking China to 

restructure its economy into a market-based system and effectively abandon its technology 
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Reinsch Written Testimony, HFAC A&P, TNT Subcommittees 07111/2018 3 

competitiveness goals. Doing that would reduce the Party's control of the economy and the 

society, which is the last thing they will be willing to do. Many of the technologies at issue 

involve aspects of the digital economy. For China these are not trade issues; they are national 

security and public control issues, and they are not susceptible to resolution in a trade 

negotiation. The president is attempting to force changes through tariffs That is not likely to 

succeed for the reason I have indicated-- we are demanding that the Chinese do something that 

will imperil the Party's control- and it will certainly produce a great deal of collateral damage in 

its wake. 

A better approach is through building coalitions. We have learned over the years that the 

Chinese do not like to be outliers. They do not like to be singled out as rules violators. When 

we have been able to get other major nations-- the Europeans, Japanese, Koreans, Indians, 

Australians and so on all conveying the same message at the same time at a high level we have 

had some success. So far, the administration has not shown much interest in this approach. 

I would also suggest that a more productive course would be to recognize that the long-term 

battleground is not in China but in the United States and in third countries where the playing 

field is level. We can deny them advantages here and in the process give a boost to our own 

manufacturers and innovators. In third countries we can not only compete with the Chinese on 

more equal terms, we can also develop networks of rules and standards that work to the 

advantage of Western economies. That is what TPP was really about, and it is what TTIP is 

about-- building trading structures based on Western rule of law principles and standards to 

which the Chinese will ultimately have to conform if they want to access the very large market 

structures and global supply chains we have created. 

Beyond trade negotiations our government can also help Americans compete more effectively 

through more aggressive use oftime-tested tactics: letting the Export-Import Bank function as 

intended, using trade missions to promote American products, and aggressively defending 

American commercial interests in third countries. The single data point I hope you will 

remember is that 95% of the world's consumers are outside the United States. Maintaining a 

competitive advantage over China inevitably means beating them in third countries. If we 

cannot do that, we ultimately marginalize ourselves and yield leadership to China. 

Finally, let me say a few words about running faster Although it is not my primary topic today, 

it is more important. The reality is that holding the other guy back doesn't work all that well. 

There are simply too many ways to get around the steps we take. Plus, there are inevitable 

limitations on what we can do to control someone else's economic policy. The one thing we can 

control is our own economic policy, and if we do it well, we can surmount the Chinese 

challenge. In today's globally integrated economy, that means more than pro-growth 

macroeconomic policies and more than job creation. In the past I have suggested a 

competitiveness tripod 

I) Train our workforce for the demands of the 21st century economy through more effective 

adjustment assistance programs and education policies that help future workers be more agile 

and acquire the skills necessary in a digital economy. 
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Reinsch Written Testimony, HFAC A&P, TNT Subcommittees 07111/2018 4 

2) Give our companies incentives to stay here. In my fifteen years representing large companies 

at the National Foreign Trade Council I learned you can't bludgeon them into submission but you 

can incentivize them into better behavior 

3) Promote innovation. This is something we have always been good at. Beginning in the 

Lincoln Administration, the United States has a long history of successfully mobilizing public 

support and resources to meet national priorities. World-class agriculture, wireless 

communications, aerospace and the Internet are good examples. Over the years we have shown 

ourselves to be very good at targeting government resources on innovation in the sectors that will 

define global leadership in the future. This is what the Chinese intend to do, and we should 

remember that we thought of it first and can do it better-- not with the massive WTO-illegal 

subsidies they plan to use, but with expanded support for basic research, encouragement for our 

private innovators, and immigration policies that encourage smart people to study -- and stay --

here. 

These can be debated, and I know my colleague Rob Atkinson has a more detailed plan, but the 

principle of running faster remains fundamental. A strategy based solely on trying to hold China 

back will not succeed. 
57

Mr. POE. I thank the gentleman. The Chair will recognize the 

gentleman from Florida, Mr. Yoho, for his opening statements in 

the—started to say court. But the Chair will reserve its 5 minutes. 

Mr. YOHO. I don’t want to see you in court. 

Mr. POE. Nobody did. 

Mr. Yoho. 

Mr. YOHO. Thank you, sir. China prefers to play a one-sided 

trade agreement and the U.S. has been tolerant or worse, negligent, as the trade inequity has built up to $350 billion to $400 

billion, somewhere in there. But China wants a zero sum game in 

their favor and it is time for that adjustment. And this is not a 

trade war recently started by President Trump. This has been 

going on. President Trump has been bold enough to say enough is 

enough. 

The past seven Presidents have ignored the situation of trade 

with China and that is how you accumulate a trade deficit that 

large, and that is not talking about the intellectual property theft. 

China cries foul when we go to intervene, well too bad. That is welcome to capitalism. They want to maintain their Communist form 

of government with its historically terrible outcome, but realize, 

they realize they could not compete in the world economy. 

So they coyishly disguise a market economy, capitalism tied with 

socialism with Chinese characteristics that still is nothing more 

than a Communist pig painted with lipstick. They want the benefits of capitalism, which incidentally is the antithesis of Communism, because they like the money, but they want to hide behind it—and I think this is just mind-boggling. 

They want to hide behind a developing country status. They 

want developing market status yet have a space program; nuclear 

weapons; invested between $4 billion to $10 billion in their One 

Belt One Road Initiative around the globe yet they claim they are 

just getting by and need to maintain developing country status. 

Sorry, President or Emperor Xi, you can’t have it both ways. 

President Trump is the first American President to call the trade 

deficit out not with rhetoric but with action and it is time we adjust the trade imbalance and it is high time China acts like a responsible trading partner. Stop cheating-stealing-lying and start 

honoring the contract, the rule of law, and how about acting honorably? 

So with that rant I want to ask and I read all of your testimonies 

ahead, how should we consider restricting access to sensitive U.S. 

technology in these different scenarios? Dr. Atkinson, you were 

talking about this. And I want to talk, Mr. Reinsch, talk to you 

about the garage, you know, because what do you do to prevent 

people from letting that go through if we can’t go through CFIUS, 

if it gets bypassed? So how do we prevent the technological transfers? 

Mr. ATKINSON. Number one, there is a wide variety of actors that 

use that. One of them is cybersecurity. So, you know, doing a better 

job of making sure that American companies have better 

cybersecurity is one way to do that. We testified in the Senate recently on how, frankly, poorly we do with small business 

cybersecurity. You look at what the SBA is doing in that space, it 

is not very good, frankly. 

58

Secondly, with the passage of FIRRMA we would hope that there 

would be a big ramp-up on enforcement. One of the ways, for example, right now the Chinese have set up a system of technology accelerators so they have what is called an accelerator or incubator 

high tech little platform in Silicon Valley and it is funded essentially by the Beijing provincial government. They have located it in 

Silicon Valley and my belief is it is a vector of which they can take 

knowledge, particularly these young entrepreneurs who need a little bit of capital. We should just not allow that. There is a whole 

set of things we could do around venture capital, around smallscale investments, and I think FIRRMA is the vehicle by which we 

could do that. 

Mr. YOHO. So you think the CFIUS review is strong enough for 

that? 

Mr. ATKINSON. I do think it is strong enough for that. 

Mr. YOHO. All right. What about when we get into biomedical research and the ag products? I have seen university professors from 

the university I graduated from talking about doing a sabbatical in 

China and they are going to pay them four to five times what they 

are making here. And I asked them what they are working on, and 

they said we are going to take our research and go over there, and 

I said I don’t think that is a good idea. 

And so how do we block that? Because I brought that up in an 

export control hearing that we had and they said, you know, 

CFIUS doesn’t really address that. Do any of you want to comment 

how we can protect that intellectual property? 

Mr. REINSCH. I can talk about that, Mr. Yoho. CFIUS does not, 

the export control system does at least in theory. If they want to 

do that they need an export license for the technology they are 

going to transfer if that technology is controlled. 

Mr. YOHO. Does that apply to our universities? 

Mr. REINSCH. Yes. Yes. Although I will tell you and I don’t know 

if it is in my bio, I was the undersecretary that ran this particular 

function in the ’90s. Universities are the worst, frankly. First of all, 

every professor is his own empire and trying to create a central administration—we impose some discipline it is like herding cats. It 

is very difficult. And second, there is an attitudinal issue, frankly. 

For them this is not technology transfer, this is research. 

Mr. YOHO. Research. 

Mr. REINSCH. And you need to get them to think about it differently. They are getting better. I visited with some universities. 

I will tell you, nothing——

Mr. YOHO. I am going to have to cut you off because I am out 

of time. 

Mr. REINSCH. Well, I will just say nothing gets them more focused on this faster than the Commerce Department paying them 

a visit. 

Mr. YOHO. Thank you. 

Mr. POE. The Chair recognizes the gentleman from Massachusetts, Mr. Keating. 

Mr. KEATING. Thank you, Mr. Chairman. Today’s actions by the 

President at NATO certainly don’t make the prospects of this look 

great, but our job here in Congress and this committee is to look 

at directions that we should take on our own. That being said, I 

59

am a believer that one of the greatest things we can do, and I think 

it falls into the testimony we heard from our witnesses, is to really 

keep moving ahead, albeit against some tough odds now, on a TTIP 

type of agreement. 

I think an alliance and a free trade agreement with the European Union would be our strongest move. It would help us here at 

home. It would help our hand globally and it would particularly 

help our hand with China. I can’t think of many other things that 

could have a greater effect. 

So could any of our witnesses comment on that? Mr. Reinsch? 

Mr. REINSCH. I would like to. I couldn’t agree with you more. I 

mentioned this. The point of doing that is to create basically the 

largest middle class consumer market in the world that would set 

up a system of health, safety, environmental inspections and rules. 

If you want to access that market you have to adhere to those. 

That will force the outliers which begins with China, although 

India would be probably another one to conform to those rules, procedures, and practices. 

And that was the point of doing it in the first place. If we can 

get all of us working together we achieve exactly the result you are 

talking about, I think. 

Mr. SCISSORS. We are not going to get a TTIP in this. 

Mr. KEATING. That is not what I asked you. 

Mr. SCISSORS. I know. But I have a way to get closer, which is 

feasible, which is a U.S.-U.K. FTA. That is something that the administration does want to do. It is not difficult to write. 

Mr. KEATING. If I could, because my time is precious. 

Mr. SCISSORS. Sure. 

Mr. KEATING. But 80 percent of our trade partners is the rest of 

the EU. 

Mr. SCISSORS. No, I understand, but. 

Mr. KEATING. We can’t ignore that. And the damage we would 

do with what you are proposing to the rest of our allies would 

make things worse, I think, frankly. 

Mr. SCISSORS. Well, a U.S.-U.K. FTA allows us to put down text 

which can serve as the basis for an agreement. 

Mr. KEATING. We have to wait—again I am going to interrupt. 

Mr. SCISSORS. Sure. 

Mr. KEATING. Because it is not the question I asked. But thank 

you for your response. 

Dr. Atkinson, did you go on this? 

Mr. ATKINSON. I fully agree with that. I think we should have 

had a TTIP. I think we should do a TTIP. I think we should have 

had a TTP, although I would have made it, frankly, stronger. I 

would have maybe kept out a couple of countries and made it 

stronger. But I fully agree that we need those sorts of trade agreements if we are going to move forward. 

And the broader point is we have to get our allies engaged here. 

I have spoken with officials from Europe, the European Commission, from METI in Japan, and Korea. They are as concerned as 

we are about what is going on in China. 

Mr. KEATING. Yes. And I must say this for what it is worth, 

things might have changed in the last few months but I was quite 

60

optimistic about the prospects of support in Congress for TTIP at 

that particular time moving forward much more than TTP. 

Here is a question I just have pondered. The effect of artificial 

intelligence moving forward is going to be quite dramatic on all our 

lives. It is going to result in increasing dependence on that and the 

increasing technological advancements. It is going to result in great 

job displacement. It is going to change the nature of competition in 

the workforce. 

Can you speculate on how China and the U.S. might react given 

the fact that this is just going to be, I think, exponentially advancing? 

Mr. ATKINSON. This is an area we have studied quite extensively. 

I think I would be a little more skeptical, I think, of the big job 

displacements. We have done a lot of work on that. I did a report 

for the G7 Ministerial recently. I agree it will have job displacement, but I think overall it is going to be a very positive thing for 

the U.S. economy particularly as we need productivity going forward. 

At least when you look at the studies right now it appears that 

China is behind the U.S. in terms of AI. They invest less in R&D 

and their science and coding ability, if you will, computer science, 

is not as advanced as ours. But their rate of catch-up is faster than 

ours and they are putting an enormous amount of money in there 

from government. And so it is conceivable that the Chinese could 

match us in AI in 5 to 10 years, I would argue. 

Mr. KEATING. And you think that might level the playing field 

more? 

Mr. ATKINSON. I do. Well, one other advantage the Chinese have 

by the way is AI, it helps if you have bigger data sets. A lot of machine learning is around data pools. They have unlimited data as 

a number of people mentioned. So they are able to use all that data 

and mine it very well so it is an advantage that they have. 

Mr. KEATING. Quickly, I have little time. One other avenue the 

Chinese are moving into to capture our intellectual property is 

their joint activities with our academic institutions here too. I have 

a few seconds, but do you see that as a concern? 

Mr. ATKINSON. I do. And I would add to what Bill said, I think 

we could, for example, have requirements within our science funding agencies like NSF and NIH and DOE that number one you 

have to report any joint projects with a country like China, and 

number two, put some limits on that. 

Mr. KEATING. Thank you. I yield back. 

Mr. POE. I thank the gentleman. The Chair recognizes itself for 

5 minutes. 

The issue regarding China is a national security issue and it is 

also an economic issue, economic security, in my opinion. And I 

would like to focus on China as opposed to other countries in the 

world for trade because China cheats. They cheat a lot and it 

works. They steal everything they can from us. 

I would like to ask all three of you this question. So right now 

what should the United States do regarding holding back as the 

phrase was used, and what should we do—one thing to run faster, 

right now? 

61

And thank you, Dr. Scissors, because I remember that 6 years 

ago that you were before us. I will start with you, Dr. Scissors, and 

go right down the row. 

Mr. SCISSORS. It was a great hearing. I almost wish I could just 

take what I said back then and repeat it. In terms of holding them 

back I am going to stick with what I said earlier. We have seen 

in the example of ZTE, which of course was done for security reasons, that we can hurt the Communist Party by targeting large 

state-owned enterprises. And I am not saying that IP is as important as North Korea or Iran sanctions. I am saying that we have 

a method now that works which is there are large Chinese stateowned enterprises, which matter to the Party, which have benefited from stolen IP and we know how to hurt them. We know how 

to hurt the Party and that is where I would go first. Obviously we 

want them to be guilty of something. We don’t want to target companies that haven’t done anything because that doesn’t change 

their incentives. 

I would not—actually I disagree with pretty much everyone in 

the room on ally coordination. It is definitely a global problem but 

I want us to get our policy first. We need to lead on this. We could 

spend a lot of time talking with the Europeans and never get anywhere because that is pretty much usually what happens when you 

talk to the Europeans. I absolutely agree that it is a global problem, but first we have to decide what we are going to do. 

With regard to running faster, you know that I am not a U.S. 

economic expert. I would say that in the longer term and now too 

because our economy is doing very well, we can’t keep borrowing 

money. That is not going to help U.S. economic security. I know it 

is the easy thing to do in the short term, but I brought up Chinese 

debt. Chinese debt is going to kill China. It is going to kill China’s 

rise. We can stand it for longer because we are richer and because 

the dollar is the global reserve currency, but eventually it is going 

to get us too. 

Mr. POE. Dr. Atkinson? 

Mr. ATKINSON. ITIF issued a report recently, something in the 

title of an agenda for alliance-based confrontation. And in that report we listed 25 things, though I can only give you one of them 

and that would be an earlier comment about really using the Justice Department around tying what the Chinese are doing as antitrust violations and going after specific companies for doing that. 

Domestically, I would argue that—take this the right way. I 

would argue we need our own invented and made in America 2028 

and certainly not using heavy-handed things, but we need our own 

strategy and one of those would be a better research and development tax credit. We are now 27th least generous R&D tax credits 

in the world. We could beef that up and get more innovation in the 

U.S. 

Mr. POE. Mr. Reinsch? 

Mr. REINSCH. On holding back, two things. I think you have an 

acceptable framework now via CFIUS/FIRRMA and the export control structure. If you enact bills that the House has passed, if you 

enact the FIRMMA bill I think you have done an important step 

forward that will address—I mean a lot of these horses are out of 

62

the barn. That will prevent more horses from getting out of the 

barn and I think it is an effective step forward. 

The other thing in that in the holding them back field is don’t 

forget what I said about third markets. Our ZTE competitors, our 

companies that make the same stuff that is critical to our leadership in the telecommunications sector, they are going to live and 

die by what they do in third countries. They are not going to live 

or die by what they do in China or what they do in the United 

States. They are going to live and die by what they do in India, 

what they do in Europe, what they do in Brazil, what they do in 

the rest of the world. Helping them, listening to them and figuring 

out what they need and helping them, I think, in other situations 

is extraordinarily important. 

Running faster, I agree with Rob, it is a question of how do we 

help our people innovate. And as I, I didn’t read this part of the 

statement but, you know, we have done this before. When I refer 

to the Lincoln administration, land grant colleges, the Homestead 

Act, we created the most effective, efficient world-class agriculture 

industry in the world and that was government devotion of resources and focusing of attention on it. 

We did the same thing with wireless communication. We did the 

same thing with aerospace. We did the same thing with the internet. There is no reason why we can’t do that going forward with 

the next generation of technologies and stay ahead of the Chinese 

that way. 

Mr. POE. And I thank all three of you. My time has expired. I 

recognize the gentleman from California, Mr. Sherman. 

Mr. SHERMAN. A few comments as to an R&D tax credit, that increases our deficit. I don’t know any economists that are in favor 

of that. It will lead to innovation which then will be transferred to 

China if it is profitable for the company to do so. And we live in 

a world where we are so weak that we allow China to say you don’t 

get access to our market unless you transfer the technology to us. 

So we are in a trade war with China. For 18 years we have ignored it. I give the President credit for not ignoring it. We are 

probably going to lose because all of China is on China’s side and 

Wall Street is mostly on China’s side as well. Because you can 

make profits by manufacturing something for 50 cents or even $1 

an hour in China and sell it in the United States. That is a proven 

profit method. 

Paying American wages to create a product that you are going 

to sell in China is economically difficult. It is not a get-rich-quick 

scheme. And that assumes China would let you sell it in China, 

which they won’t until you have a coproduction agreement which 

means you are not making it the United States anymore. Hence, 

even the innovation of Tesla, paid for in part by the U.S. R&D tax 

credit, will lead to a factory in China—because the weak United 

States bullied by a powerful Wall Street continues to this day to 

have a 2.5 percent tax on Chinese cars coming here while they 

have a 25 percent tax on our cars going there. 

So the one thing I disagree with in the President’s policy is simultaneously trying to deal with the trade deficits we have with 

our allies. We should pick one at a time and China is the worst 

and most egregious. But aside from that one element, it is time for 

63

us to be bipartisan. Sixty-five percent of Democrats voted against 

MFN for China and now we have a Republican President with substantial support in the Republican Party saying that it was a mistake and also saying that when the United States makes a mistake 

and enters into a bad deal we should tear up the deal. 

So we should be, I think, revoking MFN for China, 6-month lead 

time, and have a chance for them to come to the table. But before 

we do that, we have to specify that if they retaliate against us for 

this bill we have to double tariffs on them. And if they seize American assets we have to seize Chinese assets here in the United 

States—including and especially their ownership of our intangible 

assets and bonds. So we could get tough. Wall Street won’t let us 

and so we won’t. And the balance of trade is worse today than it 

was even when Trump took office. 

But I want to talk about this social score. What is the appropriate American action for Chinese consumers and businesses 

being told that if they don’t buy Chinese goods they could lose their 

passports and their credit? Should we impose an additional, in addition to everything else, 25 percent tariff on everything made in 

China, should we ignore it, or should we issue a press release and 

then ignore it? 

Dr. Atkinson? 

Mr. ATKINSON. Well, first, a couple of things. The R&D credit actually does pay for itself after 15 years if CBO had a 15-year budget window. And secondly, I was asked for one thing so I completely 

agree with you. 

Mr. SHERMAN. Well, you didn’t disagree the technology’s going to 

get transferred to China, but go ahead. 

Mr. ATKINSON. Since I was only able to list one of those as opposed to the 40 that we have in our reports on what we——

Mr. SHERMAN. I do have limited time. I asked you a question 

about the social score in China. Do you choose to answer that question or should I move on to another witness? 

Mr. ATKINSON. I don’t think the point, frankly, is the social score. 

I think the point is there is a set of Chinese behavior. 

Mr. SHERMAN. Okay, you don’t want to answer the question. 

Does anyone else want to answer the question? 

Dr. Scissors? 

Mr. SCISSORS. The social score is another way of China subsidizing production at home, right, that is what it is. There are a 

lot of them. 

Mr. SHERMAN. And is it a violation of the WTO? 

Mr. SCISSORS. This is—I don’t know——

Mr. SHERMAN. Is it a violation of any provision that is proposed 

for TPP or TTIP, or is it a perfect way for China to claim that they 

are not cheating at all, because we don’t bother to write rules that 

they even need to cheat? 

Mr. SCISSORS. I do not believe—I am not a lawyer. I do not believe it is a violation of the WTO or any plank of the TTP. So yes, 

it is a way for the Chinese to encourage domestic consumption that 

doesn’t break existing rules. 

Mr. SHERMAN. And other than imposing a 25 percent additional 

tariff on everything made in China, can you think of another way 

for the United States to respond? 

64

Mr. SCISSORS. I think we should put it in our—it should be 

counted as a subsidy as part of our current subsidies approach 

which should be broader than it is and applied to China. I don’t 

know about a 25 percent tariff but we should be responding to Chinese subsidies including that. 

Mr. SHERMAN. And this—I yield back. 

Mr. POE. The Chair recognizes the other gentleman from California, Mr. Rohrabacher. 

Mr. ROHRABACHER. Thank you, Mr. Chairman. And let me just 

note that our friend from, Mr. Garrett from Virginia was correct in 

that the two Californians here today agree on most things and 

most of what Brad was suggesting and is suggesting is something 

I agree with. I don’t agree with his political attributes on those 

things and, however, the specific points, policy points, he is right 

on target. 

The bottom line is we don’t have all the Americans fighting for 

when they go overseas, our elites go overseas and are not looking 

out for the United States of America. The Chinese elites are looking out for what is good for China. Our elites are what is going to 

make a good deal for them. 

And I remember the good deals. I remember under Bill Clinton 

when we transferred our utmost, our most important rocket technology to the Chinese. The Chinese now have a very competitive 

space system because they got all their R&D from us. They don’t 

look at us as being benevolent. They look at us as suckers and that 

is what we are when we permit our R&D to go and serve as the 

basis for producing wealth and competition on their side. 

Now the WTO—well, I voted against WTO. I didn’t think it 

would work. Can any of you tell me if WTO has the answer to the 

challenge that we are talking about today and that is making sure 

that China is not able to amass wealth in an unfair way which it 

then uses to dominate not only their own people, the oligarchs in 

China dominating China, but also now the Third World through 

bribery, can the WTO handle it and, if so, what is that solution? 

Mr. REINSCH. Well, it is my turn to walk the plank so I will attempt an answer. I think it has some of the answers, not all of 

them. I am more positive about it, I think, than Rob is. I think in 

particular an area that is relevant to Made In China 2025, which 

is one of the subjects of this hearing, is their rules about subsidies. 

And we have, you know, most countries have a domestic law that 

is designed to implement WTO rules against subsidies. 

We have one, actually the Chinese have one, the Europeans have 

one. Those rules I would argue have been fairly effective as far as 

they go. We use them very effectively on steel. We have essentially 

knocked Chinese steel out of our market directly through the use 

of subsidies complaints and——

Mr. ROHRABACHER. Okay. But we have seen some—you have 

seen some successes. 

Mr. REINSCH. It works. And when we litigate in the WTO 85 percent of the cases we have brought we have won which is the best 

record in the world on that so yes. Does it solve all problems, no, 

because it doesn’t have rules that cover all things. 

Mr. ROHRABACHER. Okay. Do our other witnesses have something to say on that? Yes, sir? 

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Mr. ATKINSON. I think the biggest—there are a number of challenges with the WTO. Bill is right, it will solve some problems. I 

particularly agree on subsidies. We should do more there. There is 

a subsidy regime we should take a lot more action under. The biggest problem we have with the WTO though is it is very difficult 

to win a case unless you have U.S. companies being willing to come 

forward with evidence and stand up. American companies know 

that if they do that they will be punished in China quite severely. 

And that is not going away and you cannot blame American companies for that position, in my view. They are acting on the behalf 

of their companies and their workers. 

I think ultimately what we need to be thinking about is some 

longer term alternative to the WTO that is really designed around 

liberal market democracies that are committed to free trade and 

have a club there. And that is why I thought TPP and TTIP would 

be at the beginnings of beginning to assemble that. 

Mr. ROHRABACHER. Well, our President today seems to think that 

unilaterally we can have something accomplished. I agree with him 

there. We should be courageous and that is what he is. Would you 

have an answer to that question? 

Mr. SCISSORS. Yes, I agree. I think I more agree with starting 

with the unilateral action. I would say that there is nothing about 

the WTO that should prevent us from taking the actions we need 

to take. We don’t need to withdraw from the WTO because China 

is a bad WTO actor. I would say that is a mistake. I think Rob’s 

suggestion on changing our antitrust laws to recognize the way 

China handles its state sector is long overdue. That would give us 

another set of tools that are WTO-compatible. 

I think a smaller thing is properly resourcing CFIUS. I agree 

with my colleagues we have good revisions to CFIUS pending in 

both Houses, but if they don’t have the resources they can’t do 

what is necessary. WTO doesn’t stop us from doing that obviously. 

Mr. ROHRABACHER. One last thought, and that is when we were 

sold the bill of goods and I voted against it, but when those people 

in Congress voted for WTO and voted for most favored nation status for China we were told that more trade and more economic activity going back and forth and building them into a modern society 

would create a more peaceful world and democratize China. It has 

been just the opposite. China has no more democracy than they 

had and now they are a greater threat to everyone. We have created a Frankenstein monster trying to look at that WTO as the 

possible solution to all these challenges. 

Mr. POE. The gentleman’s time has expired. The Chair recognizes 

another member from California, Mr. Issa, for 5 minutes. 

Mr. ISSA. Thank you, Mr. Chairman. As I have been going in and 

out and watching a lot of this, I wonder if there aren’t two Chinas. 

And I would like to ask my questions about the two Chinas for a 

moment. 

For two decades I was an electronics manufacturer, operated in 

South Korea, Hong Kong, Taiwan, and then the company over the 

years has moved, after I left has moved into mainland China. 

Would one of you like to take on the question of is there a free enterprise China starving, dying to actually compete against their 

own state-owned enterprises? 

66

And if we, in fact, using WTO and any other resources, begin to 

target the state-controlled, those entities which have the capital behind them to fund losses in order to gain market share, aren’t we 

also enabling, if you will, if you believe there is the free enterprise 

portion or semi-free enterprise portion that does exist in China and 

certainly existed in Hong Kong for decades. Anyone want to take 

that? 

Mr. SCISSORS. I will give a short, a partial agreement. I certainly 

agree there is a free enterprise China. Chinese private entrepreneurs complain bitterly about state repression. They take 

money out of the country legally and illegally because they don’t 

feel like it is safe in China for them to be operating there. 

Mr. ISSA. Fortunately it is safe in Vancouver. 

Mr. SCISSORS. Yes, right, because there are a lot of cities where 

you see free China, they are just not in China. So I agree with that 

completely and I agree that the U.S. should try to encourage it. 

I do think, Bill said this earlier and I am with him 100 percent. 

Unfortunately he is right, the Party is just not going to tolerate 

that up to a point. We don’t have that much ability to change the 

state-private balance in China because the Party under Xi Jinping 

thinks state control of the economy is absolutely vital. We should 

do it but it is not going to work that well unfortunately. 

Mr. ISSA. Well, let’s follow up though. They think it is absolutely 

vital because it works. What if we make a decision as a country—

and by the way Mr. Rohrabacher and I, when I came into Congress 

he was already a pro-free China, a Taiwan advocate, if you will. 

Free trade for free people. 

One of the questions I have is, isn’t that one of the fundamental 

decisions that we have the power to make to treat state monopolies 

and state-backed entities, entities that are able to compete because 

in fact the government has made decisions and is funding them, 

isn’t that a strategy that at least we should explore? Because here 

is my question: We can’t not trade with those 1 billion-plus people. 

We cannot ignore the market. But what we do seem to be able to 

do is to make a decision about do we allow ZTE back to buying our 

goods and, if so, under what conditions? Do we, in fact, have the 

ability to insist that there be a price to pay for stealing our intellectual property? You know, those are questions I think that this side 

of the dais certainly can begin looking at and that is why I asked 

it. 

Would anyone else like to comment on techniques that might 

allow us to change the government’s behavior in a way in which, 

if you will, the real Chinese people could benefit? Because you 

know, this is certainly an area in which the President is trying to 

look at being pro billion-plus Chinese and anti bad behavior of the 

Chinese Government and its state-owned enterprises. 

Mr. ATKINSON. I was in China several years ago meeting with a 

fairly large, but privately owned, company and I was sitting down 

with the CEO and one of his biggest complaints was about an unfair competitor from a Chinese SOE. He felt it was completely unfair. Now he can’t say that outside the room when he was meeting 

with me, but he feels it. 

So I 100 percent agree with you that that is something we should 

be focusing on which is partly why I brought up the point about 

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anti-trust, going after firms whether they are SOEs or firms that 

are just so tied-in with the government that we target them for unfair anti-competitive behavior. Also to Dr. Scissors’ point about denying them access to our financial system, companies that have 

stolen IP or the like, so I agree that that is an important step. 

Mr. ISSA. Well, let me ask one closing question in my few minutes and then you can take whatever time the chairman will give 

you on all the subjects. 

Should we—on the Judiciary Committee just on the other side, 

which I also serve on, should we, in fact, begin to look at the question posed this way: Inherently, isn’t a government-owned, -run, or, 

in fact, -subsidized enterprise automatically, essentially, a monopoly in the sense that it has powers that an ordinary company no 

matter what their market share would not have and wouldn’t that 

be the first step to look at state-owned enterprises domestically, to 

be fair, and internationally, as in fact by definition, failing the first 

checkmark of an antitrust question about a monopoly? 

Mr. SCISSORS. I would just say, I have said for years that if you 

can’t go out of business for commercial reasons that is the biggest 

subsidy of all. Loans are secondary to that even as big as they are 

and there are a whole set of Chinese state-owned enterprises we 

can identify as they will never go out of business for commercial 

reasons. 

And to get to Congressman Sherman’s point of view, that should 

also be part of our subsidies regime. If they cannot fail they are—

they may not be monopolized but they are very heavily subsidized 

and we should treat them accordingly. 

Mr. ISSA. Yes, Bill. 

Mr. REINSCH. I don’t want to intrude on the chairman’s rules. 

Can I respond to the question or do you want to go on? 

Mr. POE. Okay. 

Mr. REINSCH. Thank you, Mr. Chairman. I appreciate it. I served 

on the U.S.-China Economic and Security Review Commission for 

15 years and I had a colleague there who told me seriously that 

there are only two kinds of Chinese companies, those that are 

owned by the government and those that shut up and do what the 

government tells them. And I think there is a lot of truth to that 

and the problem with what you are suggesting is telling the difference. 

In some cases it is obvious because there is a very clear line of 

control that comes down from the government. In some cases it is 

not so clear. And it is an intriguing idea to, you know, adjust our 

economic policy based on, you know, their lines of control and lines 

of authority. It raises a host of sort of definitional and complicated 

questions that it would take awhile to sort out. 

Mr. ISSA. Thank you. 

Thank you for your indulgence, Mr. Chairman. 

Mr. POE. The Chair recognizes the gentlelady, patient gentlelady 

from Missouri. 

Mrs. WAGNER. Oh, she is not so patient. Thank you, Mr. Chairman. 

Earlier this year I joined a pretty large number of my colleagues 

in urging the President to rethink the imposition of tariffs on steel, 

aluminum, and other goods. We, as I said, commend the President 

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for standing up to China’s bullying trade practices, but urge him 

to remember that our constituents depend upon free, fair, and 

healthy trade relations. And we must address China’s predatory 

practices but prevent the axe from falling on American families. 

Dr. Scissors, how will China’s retaliatory tariffs on soybeans affect Midwest economies? 

Mr. SCISSORS. I can’t speak to how they will affect the whole 

economy, but I will say soybeans are probably the toughest case because there is no substitute for the Chinese market. For most 

American goods that might face Chinese retaliation there is some 

substitute. We are not a huge beef exporter or corn exporter, you 

know, go down the range of products. Soybeans we simply are, and 

of course the Chinese are going to go after where we are most vulnerable. 

So if we get into a tariff fight we either have to, we simply have 

to accept that soybean farmers are going to get hurt and we cannot 

provide them with another market. And I know you know very well 

they don’t want government subsidies, they want to be able to compete and sell their product. 

Mrs. WAGNER. That is correct. How can state governments reduce the effect of constricted access to Chinese markets? 

Mr. SCISSORS. I think the best thing, I am in favor of confronting 

the Chinese and it is easy for me to say because I am not a soybean farmer and I don’t represent soybeans farmers and others 

who would be hurt by that. I think the best way to help Americans 

who are harmed by a trade interruption with China is to make 

sure that we have a stable policy. In other words, we are not saying tariffs are on, tariffs are off, tariffs are on, tariffs are off, you 

don’t know how to run your business, you don’t know how to run 

your farm. 

If we could get some consensus, which has been referred to in 

this room, among parties and between Congress and the administration and tell people this is going to be the trade situation with 

China for 7 or 8 years, they have a chance to make better decisions. If we yank them around, you know, not only do they lose 

their market, they have no ability to plan for an alternative. 

Mrs. WAGNER. Mr. Reinsch, in the interest of running faster, if 

trade relations with China remain strained, commodity producers 

in Missouri will need to find new markets for their goods. ASEAN 

countries seem to be a natural trade partner. Over half of the 

United States’ congressional districts export more than $100 million in goods to ASEAN every year. ASEAN countries themselves 

wish to see stronger trade relations with the United States. Can we 

pressure China to institute fairer trade practices through improving U.S.-ASEAN trade relations? 

Mr. REINSCH. Well, we could try. It is a noble effort. I can’t resist 

saying that the best way to have done that was through TPP. 

Mrs. WAGNER. I concur. 

Mr. REINSCH. Because that would have set up a framework in 

which they would, China would have to basically conform to the 

rules in order to expand. Instead what we have done is created a 

vacuum in that region that has allowed them to step in and we are 

playing defense. How we recapture it—and the administration has 

proposed bilaterals. I think that has potential but they have yet to 

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propose any. If they were to pursue that line, and I was talking the 

other day to representatives of one of the governments, ASEAN 

governments, and they are actually, they are interested in it. 

Mrs. WAGNER. I know they are. 

Mr. REINSCH. But it has been slow moving and our administration seems so far to have taken the attitude that they don’t want 

to begin having a discussion unless the other government makes 

some concessions up front. And I think the other government’s view 

is usually you make concessions as part of the negotiation, you 

don’t make them in advance. So I am not sure that these things 

are going to move very fast, but that is the alternative the administration has put forward. 

Mrs. WAGNER. Anyone else? China’s ascension to the World 

Trade Organization has done little to change its predatory trade 

policies as we have discussed. Dr. Atkinson, how can the World 

Trade Organization be restructured to better restrain China’s behavior? 

Mr. ATKINSON. Well, there are several ways, one is just pressure. 

There is a Professor Mark Wu from Harvard, used to be at USTR 

as a lawyer. He has talked about how the practices of the WTO 

have frankly been biased sometimes. So I think just having pressure. I think Dennis Shea, now who is our Ambassador to the 

WTO, is trying to do that. Telling WTO in very clear and on certain 

terms that they have to be thinking much more about not sort of 

letting China win one and us win another. That is number one. 

Number two, we can bring more cases. There are some cases we 

can bring where the USTR decides to bring them on their own unilateral basis. We could do that. I think ultimately though having 

the WTO fix this problem is going to be hard unless we can have 

a more important restructuring of the WTO that doesn’t require 

things being on paper to prosecute them. That is the big advantage 

the Chinese have. They can do things that—they come to the—

show us the law. Well, we can’t show them the law because there 

is no law. It is up here in their brain and they——

Mr. POE. The gentlelady’s time has expired. 

Mr. ATKINSON. Sorry. 

Mr. POE. Thank you, Dr. Atkinson. 

Mrs. WAGNER. Yes. 

Mr. POE. The Chair recognizes the gentleman from Florida, Mr. 

Garrett—or Virginia. 

Mr. GARRETT. I haven’t moved to Florida yet. Thank you, Mr. 

Chairman. Thank you, gentlemen, for being here today. 

It is interesting that we should have started with some tangential discussion of CFIUS. And I think, I hope, and I have a finite 

amount of time, that we made some progress in the arena of protecting American intellectual property and technology, but there is 

an 800-pound proverbial gorilla in the room that I have discussed 

that I have never heard anyone else discuss. And I say this as 

much for the benefit of the other members of the subcommittee as 

for you gentlemen. 

I would ask you, is it possible and indeed probable that we bleed 

technology and innovation, that we bleed intellectual property by 

virtue of exploitation of the U.S. EB-5 visa program, Dr. Atkinson? 

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Mr. ATKINSON. I am just afraid I can’t answer that. I don’t know 

enough to answer that. 

Mr. GARRETT. Dr. Scissors, are you familiar with EB-5 visas? 

Mr. SCISSORS. I am. I am familiar with them as a conduit for 

Chinese investment in the U.S. I don’t think—I think there are 

problems with the EB-5 program. I don’t think that that is—I 

would say as we have discussed that the academic visits to China 

are a bigger source of technology loss than EB-5. 

Mr. GARRETT. Well, let me—I am going to split hairs for a second. Bigger implies that both of them might be sources. One might 

be more prevalent than the other. I would point out the data as it 

relates to EB-5 visas, which are essentially visas purchased by ‘‘foreign investors’’—air quotes intended—in order to come to the 

United States to start business and create jobs ostensibly. 

However, comma, in one particular prominent example: 

GreenTech Automotive, partly found by former Virginia governor 

Terry McAuliffe, built a facility in Mississippi which is now defunct 

owing tens of thousands of back taxes, wherein they brought in 

‘‘Chinese investors.’’ Now the Chinese have monopolized rare earth 

minerals like cobalt as it relates to battery technology, et cetera, 

these were used in these GreenTech Automotive cars. 

And once these investors bought EB-5 visas they had unfettered 

access to U.S. cutting-edge technology by virtue of their legal residency here—does that not sound about right?—or they wouldn’t 

have the same hoops to jump through to garner U.S. technology as 

visa residents of the United States ‘‘job creators’’ once they were 

here as they would if they were trying to export it through something like CFIUS, correct? 

Mr. SCISSORS. I am not saying there isn’t a problem. As I understand the export control law it doesn’t matter if you are Chinese 

or a resident or a citizen, if you are transferring controlled technology you are breaking the law. So export control should be able 

to handle that regardless of EB-5. 

Mr. GARRETT. Having spent 10 years as a prosecutor wherein I 

would have been unemployed if people didn’t break the law, I 

would posit that perhaps people break the law. So what I am driving at is that if you have access to the technology in a world where 

a thumb drive can contain any innumerable amount of technological secrets whether they are allowed to do it and whether they 

are doing it might be two entirely different things. 

So I would hope that we would take a long hard look at EB-5 

visas when quite literally if you combined every nation in the 

world’s EB-5 visa recipients over a period of 5 years you would 

equal the number of Chinese EB-5 visa recipients in the United 

States in one. That is real and it is true. And so whether or not—

and I have the utmost respect for the members of this panel. I 

mean you guys are awesome, but this might be one where I am a 

little bit more well studied perhaps, for a remarkable change, than 

some of the fine individuals before us today. And it is something 

we haven’t looked at that we ought to be looking at because once 

you get the technology whether you are allowed to steal it or not 

doesn’t mean you won’t. 

The next thing is technological proliferation by virtue of the fact 

that the Chinese are smart enough to go where the technology and 

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innovation is, which is in many cases our university and college 

campuses and the Confucius Institute, et cetera. What, if anything, 

should we be doing as it relates to reciprocity with these breeding 

grounds for ‘‘Chinese values,’’ cultures, and ideas at 524, I believe, 

locations in the United States when there is nothing similar advancing U.S. culture and ideas in China? 

Anybody? Yes, sir, Mr. Reinsch. 

Mr. REINSCH. Just on the Confucius Institute I would just comment when I served on the China Commission we did a study and 

report on exactly that subject and analyzed them and I would commend that to you. It basically——

Mr. GARRETT. I think I have looked at it. I think it says no smoking gun but cause for concern; is that right? 

Mr. REINSCH. Yes. That is exactly right. 

Mr. GARRETT. See, I am all read, imagine that. 

Mr. REINSCH. You have a good memory, better than mine. I think 

that is probably still true, although that was a few years ago worth 

a second look——

Mr. GARRETT. Yes, sir. 

Mr. REINSCH [continuing]. Because it needs to be monitored. 

Mr. GARRETT. Thank you, anything else? 

Mr. ATKINSON. If I could just quickly comment on EB-5. One of 

the problems with EB-5 is most of those EB-5 applicants don’t really create any jobs that wouldn’t have been created anywhere, somebody else would have created them. So we have argued and we 

filed on—narrow it down significantly and if you do that you might 

address that and then perhaps more limitations on the Chinese 

EB-5. 

Mr. GARRETT. Thank you so much. And I want to say this. I am 

about to mutter a word I don’t often mutter, but quotas, for example. If we want to encourage development in the United States and 

other regions of the world, why are 80 percent of EB-5 visas yearin and year-out going to China when they could go to places like 

Nigeria or Brazil or Italy, et cetera? 

I don’t normally champion such a thing but this EB-5 thing has 

manifested itself almost solely to the benefit of our chief rival economically and perhaps strategically. And so again I just wanted to 

shine some light on that. 

Thank you, gentlemen. I yield back my negative 19 seconds. 

Mr. POE. I thank the gentleman from Virginia. The Chair recognizes the gentleman from Utah, Mr. Curtis. 

Mr. CURTIS. Thank you, Mr. Chairman. And to our guests here, 

thank you for being here today and enduring these many questions. 

We are reading in the press today that the U.S. is readying another $200 billion of sanctions. It is seeming very predictable, right, 

they are calling this a trade war. And I guess my question for you 

today, I am going to leave this hearing and the press in Utah is 

going to ask me a very predictable question which is, where does 

this end? And if you could please tell me that I would be happy 

to report that to the press. 

Mr. SCISSORS. Well, I can tell you where it is going to have to 

end one way or another, how long it takes us to get there is a different story. The President is committed to reducing the trade defVerDate 0ct 09 2002 10:57 Aug 21, 2018 Jkt 000000 PO 00000 Frm 00077 Fmt 6633 Sfmt 6633 F:\WORK\_TNT\071118\30708 SHIRL
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icit with China. We had a quote from Congressman Sherman saying it rose last year which it did. 

Now I am not going to defend the President’s view of the trade 

deficit. I am simply saying he has had this position for a long time. 

He has been very clear about it. He has not been inconsistent. So 

we have a situation right now where our trade deficit with China 

is rising. You can make an argument our economy is growing faster 

than theirs even though they don’t report that. We are richer than 

them. It is going to take some work to get the trade deficit under 

control which means we may get a series of 10 percent tariffs applied to all Chinese goods for awhile. 

But that is where it is going to end. It is going to end because 

that is the President’s goal with the U.S. bilateral trade deficit 

with China at least stabilizing. 

Mr. REINSCH. You want to know where it is going to end. I have 

to say this reminds me of, you know, two 8-year-olds having a staring contest waiting to see who is going to blink first. And the President has only one tactic which is to escalate, up the ante. He has 

allowed time with the 200. He has allowed time for more negotiations. There may be some, there may not be. 

If you go back to my statement, I am skeptical for reasons I indicated that that will accomplish much but there is a possibility 

there. I think if they don’t accomplish anything he will move to 

round 2 and impose those tariffs. The Chinese have been very clear 

that they will respond in like amount in kind. It is already more 

trade than we have with them but they will do other things. 

Read today’s clips, you will see a lot of speculation about what 

those other things might be. And then he will probably respond 

with a third tranche and I am very gloomy where this goes because 

in the end all trade is subject to punishing tariffs and there is 

going to be a lot of collateral damage on both sides. 

Mr. CURTIS. So I feel that that is true and the worry in Utah is 

the path is littered with dead companies. And right along the way 

that, Dr. Scissors, you referred to the unpredictability and that has 

hit Utah in a really hard way is assuming that these tariffs are 

coming in already, how you place orders, how do you plan for the 

future and all of those things. 

I am curious to know if any of you are aware of a different ending that still gets us the same results using different tools. So is 

the only tool available to us to fix this imbalance a tariff or are 

there other tools that we could be using? 

Mr. ATKINSON. So we had an op-ed, I believe, in The Hill or Politico recently, 10 non-tariff alternatives the Trump administration 

could use as weapons or tools or tactics. There are a number of 

them we could use. And I have talked about some them, others 

have talked here. What I find striking with what the Trump administration is doing is they are pretty much using only one tool. 

They have a WTO case but they are pretty much only using one 

tool. 

I would disagree a little bit with maybe Bill in saying that I don’t 

think the Chinese are as fundamentally committed to this as—I 

don’t think forcing them to stop intellectual property theft or forced 

tech transfer or massive subsidies are a threat to the Party. I think 

there is more leeway that the Chinese could give without giving up 

73

Party control of China or even giving up the goal of growing their 

tech economy. 

So I could see one outcome of this is the Chinese essentially decide they don’t want to have that much pain and make some modest concessions. I don’t think we can rule that out. I don’t know 

what the odds of it are. I don’t know that anybody knows that but 

that is one outcome. 

Mr. CURTIS. Do modest concessions get us to where we need to 

go or do we look at it more dramatically? 

Mr. SCISSORS. I think Rob is being realistic, but I don’t think 

modest concessions get us where we need to go and this is one of 

the reasons why I think there is going to be pain. And when I was 

in the White House meeting that kicked off the 301 tariffs that led 

to this point I said, if you are not willing to stick to this for 3 years 

and suffer some pain don’t bother, because that is what it is going 

to take to get the Chinese to change. I don’t think tariffs are the 

best weapon. I don’t think they are the only weapon. But I do think 

that if you don’t have tariffs in your pocket and you aren’t willing 

to use them you get less attention from China and it takes longer. 

So, you know, do I think we should only be using tariffs, no. Do 

I wish we were using something else first, yes. But I don’t think 

we are going to be able to get to where we want to go without tariffs and without pain. 

Mr. CURTIS. Unfortunately I am out of time. Mr. Chairman, I 

yield. 

Mr. POE. I thank the gentleman. It seems to me that maybe all 

is not gloom, doom, and despair. That the information you have 

given us of holding China back and running faster is something 

that Congress, specifically these two committees, need to move forward on right now. That is our responsibility. 

We are not going to be here in 6 years debating this, Dr. Scissors. There are several of us who won’t be here next year. But it 

is absolutely necessary that Congress assumes its role and to lead 

on this issue of dealing with the cheaters in China. But more than 

just bemoan the fact, we need to be proactive on doing what is best 

for the United States. Your information has been of great resource 

and we probably will have you back again at a later time to see 

if some of the changes that we are going to make hopefully through 

legislation are effective or not. I do not want to be a victim of what 

my grandfather always would say: When all is said and done, more 

is said than done. And so it is time to get something done. 

Thank you very much for your participation and thank all the 

people that are in the audience as well for being here, and the 

members. These two subcommittees are adjourned. 

[Whereupon, at 4:20 p.m., the subcommittees were adjourned.] 

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JOINT SUBCOMMITTEE HEARING NOTICE 

COMMITTEE ON FOREIGN AFFAIRS 

U.S. HOUSE OF REPRESENTATIVES 

WASHINGTON, DC 20515-6128 

Subcommittee on Terrorism, Nonproliferation, and Trade 

Ted Poe (R-TX), Chairman 

Subcommittee on Asia and the Pacific 

Ted Yoho (R-FL), Chairman 

TO: MEMBERS OF THE COMMITTEE ON FOREIGN AFFAIRS 

You are respectfully requested to attend an OPEN hearing of the Committee on Foreign Atlairs. to be held 

jointly by the Subcommittee on Terrorism. Nonproliferation, and Trade and the Subcommittee on Asia and the 

Pacific in Room 2172 of the Raybum House Otllce Building (aud available live on the Committee website at 

lill!ll6lli ,., .Foreio!ld.fl.l-1it?_,_house .gO\·): 

DATE: 

TIME: 

SUBJECT: 

WITNESSES: 

Wednesday. July 11,2018 

2:00p.m. 

China· s Predatory Trade and Imestment Strategy 

Derek Scissors. Ph.D. 

Resident Scholar 

American Enterprise h1stitute 

Robert D. Atkinson, Ph.D. 

President 

Information Technology and Innovation Foundation 

Mr. William Alan Reinsch 

Scholl Chair in lntcmational Business 

Center for Strategic and Intemational Studies 

By Direction of the Chairman 
77

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COMMITTEE ON Ji'OREIGN AFFAffiS 

MINUTES OF SUBCOl\1JYllTTBE ON T~1·rori:im, Nollpl'ollfemthm, tmfl1'nnlc & A sin .fill(/ the Pacljlc HEARING 

Dny Werllle.<tfay Dntc ___ 0711111_8 ___ Hoom 1172 

Starting Time 2:45pm Ending Time 4:20pm 

Recesses ~-~-~ ! L__to __ ) 'L__to __j L__to __ ) L__to 

Po-c,,iding Mcmber(s) 

Represeuiutli•e Poe 

CfJecfr all oft!Jefo!lowill!llitnl apply: 

) (__to __ ) L__to __ ) 

Open Session 0 

Executiye ~sed) Session D Televised U 

Electronically Hccordw_(tapc<l) [2] 

Stenogo·a(>hic Record W 

TITLE OF HEARING: 

"CIIiua•,, Prerlafm:l' Tnrde mtrl lrtl'e;·tmeu/ Sft•ategy" 

SUBCOMMITTEE MEMBERS PRESENT: 

Reps. Poe, /(eating, Yoflo, Sltermtm, Rollmbrtc/tei; Sclmeitfe1; Chabot, l<.<a, Bmoks, Zeldin, IVttgnet; Garrett 

NON-SUJJCOMMl'lTllE MEMBERS PRICSF.NT: (Mark with an • ![they are no/members of/it! I comll/iltee) 

Rep. Curtis 

REARING WITNESSES: Same as meeting notice nttached? Yes m NoD 

(If "no", please list he!ow m1d include JitJeJ agency, departmenf1 or organization.) 

STATEMENTS FOR THE RECORD: (List any statements st~bmitfedfor lite record.) 

IFR suhmilferl l1y Rep. Silermrm 

QFR Jubmilted by llep. Yo/to 

TIM~i: SCHICTHJLED TO RECONVENE ___ _ 

or 

TIME ADJOURNED 4:20pm 
78

MATERIAL SUBMITTED FOR THE RECORD BY THE HONORABLE BRAD SHERMAN, A

REPRESENTATIVE IN CONGRESS FROM THE STATE OF CALIFORNIA


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single step." But at a time when the Chinese Communist Party is aggressively 

advancing its presence across town hall offices and company boardrooms, 

this move has sparked that it is another step in the tightening of China's 

already scant freedoms. 

But it has been hard to distinguish future promises - or threats - from the 

realities of how social credit is being implemented. Rongcheng is one place 

where that future is visible. Three dozen pilot systems have been rolled out in 

cities across the country, and Rongcheng is one ofthem. According to Chinese 

officials and researchers, it's the best example of the system working as 

intended. But it also illustrates those intentions may not be as straightforward 

as they like to claim. 

The system is the brainchild of city hall staff, says He Junning, the deputy 

director of the Rongcheng Social Credit Management Office. 

The bureaucrat, wearing square glasses and a black checkered sweater, shares 

the social credit department with seven other employees on the second floor 

of the city hall. The system they have devised assigns 1,000 points at the 

beginning to each of Rongcheng's 740,000 adult residents. From there, the 

math begins. 

Get a traffic ticket; you lose five points. Earn a city-level award, such as for 

committing a heroic act, doing exemplary business, or helping your family in 

unusual tough circumstances, and your score gets boosted by 30 points. For a 

department-level award, you earn five points. You can also earn credit by 

donating to charity or volunteering in the city's program. 

He stresses that "anything that influences your points needs to be backed by 

official facts with official documents." That reduces subjectivity and limits 

penalties to mainly breaking laws and regulations. 

Depending on their score bracket, residents hold a grade ranging from A+++ 

to D. Some offenses can hurt the score pretty badly. For drunk driving, for 

example, one's score plummets straight to a C. On the other hand, triple As 

are rewarded with perks such as being able to rent public bikes without 

paying a deposit (and riding them for free for an hour and a halD, receiving a 

$50 heating discount every winter, and obtaining more advantageous terms 

on bank loans. 

Companies are also included in the gauntlet of social credit. They can remain 

in good standing if they pay taxes on time and avoid fines for things such as 

substandard or unsanitary products - a sore point for Chinese people, who 
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tend to firms and service providers due to frequent scams and food 

safety scandals. High-scoring businesses pass through fewer hoops in public 

tenders and get better loan conditions. 

But even though the system, established in late 2013, theoretically extends to 

every part of people's lives, many of the city's residents don't even know it 

exists yet. Sometimes people only realize it when their big life plans - buying 

a home, applying for a government position or an academic title - take them 

to the bright hallways of the city hall. 

Yu Guanqing sports black Nike sneakers as he rushes from one counter to 

another, his wife by his side. The 30-year-old company employee needs his 

social credit score among other documents to apply for a house loan. 

"This is making me do extra work! It's too troublesome," Yu says while 

walking, his documents in hand. He hasn't given the social credit too much 

thought but says it might help improve people's behavior. When asked, he 

checks his score. "''man A," he says -just like 90 percent of Rongcheng's 

population. 

Oversized pictures depicting the heroes of this brave new world are displayed 

outside the city hall. They include Bi Haoran, a 24 -year-old policeman, who 

saved some students one evening by pushing them out of the way of a car that 

crashed into the crowd. Yuan Suoping, a 55-year-old villager, is also there. 

After her husband's death, she took care of her bedbound mother-in-law, and 

when she remarried years later, her only condition for her new husband was 

that the old woman come live with them. 

High-scoring residents are shown outside the public library and in residential 

communities and villages, which are already operating their own trial social 

credit systems. Boards explaining how you can win or lose points and 

showing pictures of the best scorers are a common sight in Rongcheng; 

passersby talk about them with pride. 

But the most startling thing is that cars yield to pedestrians at the crosswalk 

- a sight I've never seen in another Chinese city. 

"I feel like in the past six months, people's behavior has gotten better and 

better," says Chen, a 32-year-old entrepreneur who only wanted to give his 

last name. "For example, when we drive, now we always stop in front of 

crosswalks. If you don't stop, you will lose your points. At first, we just 

worried about losing points, but now we got used to it." 
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Rongcheng is a microcosm of what is to come. The national credit system 

planned for 2020 will be an "ecosystem" made up of schemes of various sizes 

and reaches, run by cities, government ministries, online payment providers, 

down to neighborhoods, libraries, and businesses, say Chinese researchers 

who are designing the national scheme. It will all be interconnected by an 

invisible web of information. 

But contrary to some Western press accounts, which often confuse existing 

private credit systems with the future schemes, it will not be a unified 

platform where one can type in his or her ID and get a single three-digit score 

that will decide their lives. This caricature of a system that doles out unique 

scores to 1.4 billion people could not work technically nor politically, says 

Rogier Creemers, a scholar of Chinese law at the Leiden University Institute 

for Area Studies in the Netherlands. The system would instead expand and 

automatize existing forms of bureaucratic control, formalizing the existing 

controls and monitoring of Chinese citizens. 

"The social credit system is just really adding technology and adding a 

formality to the way the party already operates," says Samantha Hoffman, a 

consultant at the International Institute for Strategic Studies (IISS) who 

researches Chinese social management. 

The Communist Party has experimented with forms of social control ever 

since it came to power in 1949, though China's self-policing tradition 

stretches back to the ~~!:l.l_U?,.d:u:Htfu. An nth-century emperor instituted a grid 

system where groups of five to 25 households kept tabs on each other and 

were empowered to arrest delinquents. 

But previous efforts largely focused on groups, not individuals. As early as the 

1950s, during Mao Zedong's rule, rural Chinese were forced into communes 

that farmed collectively - to disastrous effect - and had their status 

measured as a group. Similarly, danwei were work units whose members 

were apportioned public goods and were ranked based on their "good" or 

"bad" political standing. Such groups were supposed to police their own 

members - efforts inevitably tied to the violent political struggles of the 

Maoist era. 

Post-1980s, the state relied on hukou, or housing registration, to keep tabs on 

where people lived, worked, and sent their children to school. But the hukou 

system often broke down when confronted with China's mass urbanization in 

recent decades, which saw hundreds of millions of migrant workers move into 

metropolises despite poor access to housing and social services. 
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Along with society at large, the Communist Party has always monitored its 

own members for both ideological and personal loyalties. E-government 

projects that started in the 1990s, such as the Golden Shield, which connected 

public security bureaus across the country through an online have 

been aimed at both efficiency and control. 

Former President Jiang Zemin in 1995 called for "the informatization, 

automation, and intelligentization of economic and social management." In 

the early 2000s, his successor, Hu Jintao, attempted to automate social 

surveillance through ll!Qi;krn ~<;.LJ2Qlicin~ projects in cities such as Shanghai. 

Hu, with his minister of public security, Zhou Yongkang, dreamed up a 

monitoring system capable of functioning automatically, with the end goal 

being to keep the Communist Party in power. 

The result of decades of control, however, is that Chinese society suffers from 

a lack of trust, says veteran sociologist Zhang Lifan. People often expect to be 

cheated or to get in trouble without having done anything. This anxiety, 

Zhang says, stems from the Cultural Revolution (1966-1976), when friends 

and family members were pitted against one another and millions of Chinese 

were killed in political struggles. 

"It's a problem the ruling party itself has created," Zhang says, "and now it 

wants to solve it." 

But around Rongcheng, nobody wants to talk to foreign journalists about the 

difficult times. "Life in our village has always been good," says Mu Linming, a 

62-year-old resident of Daxunjiangjia Village. "After introducing the system, 

it's gotten even better." 

The retiree and his wife treat visitors the way people used to in the old days: 

They invite us into their home, insist that we have some noodles, and 

practically force bags of apples and nuts into our hands before we depart. The 

orderly village, where some rooftops are covered with seaweed, has its own 

social credit system that's separate from Rongcheng's. Here, the criteria boil 

down to whether you take care of your parents and treat your neighbors 

nicely. 

Most people's scores are middle ofthe road, Mu says, though the top rankers 

are displayed on a board near the village center. 

"We are all good, and we can all encourage bad people to be good," he says. 
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In Beijing, Zhang Lili is one of the researchers designing the national social 

credit system. She works at Peking University's China Credit Research Center, 

which was established more than 15 years ago for this purpose. 

Zhang, wearing her hair in a ponytail, talks about how the idea for the system 

originated in China's rapid economic expansion. It's a narrative commonly 

put forward in China: Because the Chinese market economy didn't take 

centuries to expand like in the West, people need the government to keep 

companies and businesspeople in check, as well as to ensure a smooth 

urbanization. 

The Peking University credit center started in the early 2000s with social 

credit projects for tourism agencies, the Ministry of Commerce, and academic 

researchers. The rankings were based on criteria such as permits and 

professional qualifications. 

"But now with the inclusion of personal information, because there's more 

debate about it, [the government] is more cautious," Zhang says. 

The experience of an early citywide experiment might explain why. In 2010, 

authorities in Suining, a county in Jiangsu province near Shanghai, launched 

a pilot project that included criteria such as residents' education level, online 

behavior, and compliance with traffic laws. Locals would earn points for 

looking after elderly family members or helping the poor and lose them for 

minor traffic offenses or if they illegally petitioned higher authorities for help. 

High scorers were fast -tracked for job promotions and gained access to top 

schools, while those at the bottom were restricted from some permits and 

social services. 

The scheme was a disaster. Both residents and state media it for its 

seemingly unfair and arbitrary criteria, with one state-run newspaper 

comparing the system to the "good citizen" certificates issued by Japan during 

its wartime occupation of China. The Suining pilot was canceled but not 

before teaching the government some lessons about what is palatable to the 

public. 

The reason why Rongcheng has the most successful social credit system so far 

is that the community has embraced it, Zhang says. And that has happened 

because the scheme basically only deducts points for breaking the law. It is 

precise in its punishment and generous in its rewards. 
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As a result, schools, hospitals, and neighborhoods are independently running 

versions of it. "It's not because the government has asked them to do it," 

Zhang says. "It's because they feel it's better for their own administration." 

One such microsystem has been built by residents of First Morning Light, a 

neighborhood of 5,100 families a stone's throw from Rongcheng city hall. The 

spacious, modern-looking community has been divided into grids of 300 

families, each grid overseen by a management team. Residents have even 

taken the official Rongcheng credit system a few steps further by adding 

penalties for illegally spreading religion - echoing recent countrywide 

crackdowns on religious practice - abusing or abandoning family members, 

and defaming others online. 

The effects have been positive, says Yang Lihong, a resident in her 30s who 

uses a pseudonym. Quality oflife in First Morning Light has shot up - along 

with property prices. Yang, who asked that her real name not be used, says 

she sees no downsides to the social credit system and has no privacy-related 

concerns. 

"I trust the government," she says. "Who else can you trust if not them?" 

China needs a "very delicate" type of administration, Zhang adds. 

As Rongcheng shows, enforcing the law is a priority of the social credit 

system. Chinese courts struggle to enforce their judgments, especially civil 

ones. They're hampered by their relatively low status in the political system, 

the country's sheer size and scale, and the varied and often contentious levels 

of law enforcement. 

On the one hand, the scheme wants to address real problems that Chinese 

society is confronting, such as financial scams, counterfeit products, and 

unsanitary restaurants, which amount to a "lack of trust in the market," says 

Creemers of the Lei den Institute. 

"Yes, the social credit system is connected with maintaining the integrity and 

stability of the political regime," he says. "It is also the case that it tries to do 

so by addressing legitimate concerns. And that complicates the criticism." 

Perhaps the most controversial initiative so far is a supreme court of 

170,000 defaulters who are barred from buying high-speed train or airplane 

tickets or staying at luxury hotels as a means to pressure them to repay their 

debt. 
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NOTE: The preceding document has not been printed here in full but may be found 

at https://docs.house.gov/Committee/Calendar/ByEvent.aspx?EventID=108531

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Page 1 of3 

QUESTIONS FOR THE RECORD OF THE HONORABLE TED VOHO 

COMMITTEE ON FOREIGN AFFAIRS, lJ.S. HOUSE OF REPRESENTATIVES 

"CHINA'S PREDATORY TRADE AND INVESTMENT STRATEGY" 

July 11, 2018 

These questions are directed to all witnesses. 

Intel is reportedly planning to partner with and provide memory chips to Tsinghua Unigroup, a 

subsidiary ofTsinghua Holdings, which itself is a wholly owned subsidiary ofTsinghua 

University, a public university in China with direct ties to the state. Another subsidiary of 

Tsinghua Holdings, Unigroup's parent company, is Tsinghua Tongfang, which supplies military 

equipment to the People's Liberation Army (PLA). 

In short, Intel, dominant in processor chips, is partnering with a Chinese domestic champion to 

boost its memory chip business. The deal could help the Chinese partner to destroy American 

memory chip companies. 

1. Should the U.S government be concerned about Intel's deal with Tsinghua Unigroup to 

provide NAND memory chips? 

Dr. Atkinson: My understanding is that Intel completed a supply agreement with Tsinghua 

Unigroup in 2017, which is an advance payment for "locking in" future shipments on memory 

chips. This gives Intel an advance payment they can use, in part for R&D and capital 

investment. Again, to my understanding this is not a transaction that is governed by U.S. export 

control policy in part because it involves a "commodity" technology that the Chinese can 

purchase from a wide variety of sources (such as Samsung and SK-Hynix), if not make 

themselves. If Intel is simply supplying memory product to Tsinghua, even in high volumes, 

there would be no national security issue as there is no transfer of design or manufacturing 

know-how and large memory facilities in China already are supplying that market. 

Mr. Reinsch: I am not familiar with either Tsinghua Unigroup or its various parents and other 

relatives, and in cases like this 1 generally trust Commerce's Bureau of Industry and Security to 

investigate and come to the correct conclusion about whether the entity poses a security 

risk. They are in a much better position than a private party to examine the company's history 

and practices and decide whether the proposed transaction poses a risk to our security. 

2. Since this would be the first time Intel is providing flash memory chips to a foreign 

partner, does the deal raise tech transfer concerns? 

Dr. Scissors: I am far from a computer engineer and the first question is about how advanced 

such chips are. China can get less advanced chips from many sources but Intel (and others) 
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Page 2 of3 

should not be upgrading Chinese dual-use technological capabilities. Further, the US should 

block other countries from providing China with the most advanced technology available. This 

means constant diplomatic activity and lost business for American ±inns, but all parties must 

accept this. 

Dr. Atkinson: l do not believe that this is the first time Intel is selling flash memory to a foreign 

company. Intel was once in memory chips but stopped producing them. They reentered the 

market in 2010 and as part of that seek to sell memory chips around the world. Also my 

understanding is this is not a tech-transfer agreement and instead is a sales of off-the-shelf 

memory chips to the Chinese company that Intel sells to companies around the world. To the 

extent that is the case, there should not be any concerns with it as it involves U.S. sales which are 

good for the U.S. economy. My understanding is that the chips are designed in the United States 

and produced in China. 

Mr. Reinsch: I have not studied the capabilities of this particular chip, but, in general, the US 

government has always controlled semiconductor design and manufacturing equipment more 

tightly than the end products- the chips themselves. Semiconductors are somewhere between 

difficult and impossible to reverse engineer, so the more important question is keeping the ability 

to design and make them out of the hands of our adversaries. An obvious exception would be a 

case where the semiconductor itself provides a capability with military applications that we wish 

to deny. As with question #1, l don't want to second-guess BIS' judgment on that. 

3. What other options should Congress and the U.S. government consider in cases like this 

one? What is the appropriate role of government, when one US. company willingly aids 

a predatory Chinese entity that threatens overall U.S. competitiveness? 

Dr. Scissors: One temptation for the Congress and the rest of the USG is take a strong public 

stand on one case while not pursuing a broad, steady policy. Regardless of the preferred 

approach, it would do no good at all just to loudly block one high-profile transaction and then 

stop paying attention. In my view, it isn't the government's job to decide which American ±inns 

should be saved from competition. It is the government's job to protect national security. The US 

should assume that any technology transferred to a Chinese ±inn is immediate! y available to the 

Chinese military, and American ±irrns should not be permitted to improve the Chinese military. 

This is the proper role of export controls. If necessary, a multilateral system similar to COCOM 

should be created. 

Dr. Atkinson: As l wrote in my testimony, pressured tech transfer by the Chinese government is 

a serious problem. But it is important to differentiate between legal sales to Chinese companies 

and pressured tech transfer. The former is clearly in the US. national interest because it allows 

U.S. ±irrns to gain greater global market share, expand their U.S. workforces and become more 

competitive, including against Chinese ±irrns. The US. government should not be setting up 

roadblocks to such sales. And some of these sales will be intermediary goods to Chinese 

companies (e.g., flash memory, software systems, etc.); while some will be final goods (e.g., a 

smart phone). Treating the forrner as somehow problematic because Chinese companies can 

uses thee inputs input to compete with US. companies in final goods products would be "cutting 

2 
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oti our nose to spite our face." We see this, for example, in the calls to cut off ZTE from US. 

exports of technology inputs (software, chips, etc.). Bans on intermediate technology product 

sales are usually not effective not only because the Chinese company can obtain the products 

from companies headquartered in other nations, but also because it provides an incentive for the 

Chinese company and the Chinese government to develop their own domestic capabilities to 

produce the product. In short, limiting sales ofintennediate technology products would do little 

to keep Chinese firms from accessing technology like flash memory, but would hurt U.S. firms 

selling them. 

In contrast, when it comes to forced technology transfer where companies are willing to share 

technology with the Chinese in exchange for market access, the best path to take is to work with 

our allies to put sustained pressure on the Chinese government to roll back such practices. 

Mr. Reinsch: I believe the US government's existing export licensing system is adequate to the 

task. Critical dual-use products or technology cannot be transferred without a license, either as a 

straightforward export or as part of a joint venture or other financial arrangement, and I am 

confident in BIS' ability, along with the other agencies with which it coordinates, to detennine in 

this case the sensitivity of the technology and the legitimacy of the end user and decide whether 

or not to issue a license. In addition, my experience with Intel, both in the government and 

subsequently, leaves me confident that it is both committed to compliance with US law and 

providing sufficient resources to ensure compliance.