    [House Hearing, 112 Congress]
    [From the U.S. Government Publishing Office]

    CHINA'S INDIGENOUS INNOVATION TRADE AND INVESTMENT POLICIES: HOW GREAT
                                   A THREAT?

    =======================================================================

             Minus 20 pts for each extra line of title deg.HEARING

                                   BEFORE THE

             SUBCOMMITTEE ON TERRORISM, NONPROLIFERATION, AND TRADE

                                     OF THE

                          COMMITTEE ON FOREIGN AFFAIRS
                            HOUSE OF REPRESENTATIVES

                          ONE HUNDRED TWELFTH CONGRESS

                                 FIRST SESSION

                                   __________

                                 MARCH 9, 2011

                                   __________

                                Serial No. 112-5

                                   __________

            Printed for the use of the Committee on Foreign Affairs

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

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                          COMMITTEE ON FOREIGN AFFAIRS

                     ILEANA ROS-LEHTINEN, Florida, Chairman
    CHRISTOPHER H. SMITH, New Jersey     HOWARD L. BERMAN, California
    DAN BURTON, Indiana                  GARY L. ACKERMAN, New York
    ELTON GALLEGLY, California           ENI F.H. FALEOMAVAEGA, American
    DANA ROHRABACHER, California             Samoa
    DONALD A. MANZULLO, Illinois         DONALD M. PAYNE, New Jersey
    EDWARD R. ROYCE, California          BRAD SHERMAN, California
    STEVE CHABOT, Ohio                   ELIOT L. ENGEL, New York
    RON PAUL, Texas                      GREGORY W. MEEKS, New York
    MIKE PENCE, Indiana                  RUSS CARNAHAN, Missouri
    JOE WILSON, South Carolina           ALBIO SIRES, New Jersey
    CONNIE MACK, Florida                 GERALD E. CONNOLLY, Virginia
    JEFF FORTENBERRY, Nebraska           THEODORE E. DEUTCH, Florida
    MICHAEL T. McCAUL, Texas             DENNIS CARDOZA, California
    TED POE, Texas                       BEN CHANDLER, Kentucky
    GUS M. BILIRAKIS, Florida            BRIAN HIGGINS, New York
    JEAN SCHMIDT, Ohio                   ALLYSON SCHWARTZ, Pennsylvania
    BILL JOHNSON, Ohio                   CHRISTOPHER S. MURPHY, Connecticut
    DAVID RIVERA, Florida                FREDERICA WILSON, Florida
    MIKE KELLY, Pennsylvania             KAREN BASS, California
    TIM GRIFFIN, Arkansas                WILLIAM KEATING, Massachusetts
    TOM MARINO, Pennsylvania             DAVID CICILLINE, Rhode Island
    JEFF DUNCAN, South Carolina
    ANN MARIE BUERKLE, New York
    RENEE ELLMERS, North Carolina
    VACANT
                       Yleem D.S. Poblete, Staff Director
                 Richard J. Kessler, Democratic Staff Director
                                     ------

             Subcommittee on Terrorism, Nonproliferation, and Trade

                     EDWARD R. ROYCE, California, Chairman
    TED POE, Texas                       BRAD SHERMAN, California
    JEFF DUNCAN, South Carolina          DAVID CICILLINE, Rhode Island
    BILL JOHNSON, Ohio                   GERALD E. CONNOLLY, Virginia
    TIM GRIFFIN, Arkansas                BRIAN HIGGINS, New York
    ANN MARIE BUERKLE, New York          ALLYSON SCHWARTZ, Pennsylvania
    RENEE ELLMERS, North Carolina

                                C O N T E N T S

                                  ----------
                                                                       Page

                                   WITNESSES

    Ms. Karen Laney, acting director of operations, U.S.
      International Trade Commission.................................     7
    Mr. Peter Brookes, senior fellow, national security affairs and
      Chung Ju-Yung fellow for policy studies, The Heritage
      Foundation.....................................................    45
    Mr. Philip I. Levy, resident scholar, The American Enterprise
      Institute for Public Policy Research...........................    52
    Ms. Thea M. Lee, chief of staff, AFL-CIO.........................    64

              LETTERS, STATEMENTS, ETC., SUBMITTED FOR THE HEARING

    Ms. Karen Laney: Prepared statement..............................    10
    Mr. Peter Brookes: Prepared statement............................    47
    Mr. Philip I. Levy: Prepared statement...........................    54
    Ms. Thea M. Lee: Prepared statement..............................    66

                                    APPENDIX

    Hearing notice...................................................    84
    Hearing minutes..................................................    85
    The Honorable Gerald E. Connolly, a Representative in Congress
      from the Commonwealth of Virginia: Prepared statement..........    87

    CHINA'S INDIGENOUS INNOVATION TRADE AND INVESTMENT POLICIES: HOW GREAT
                                   A THREAT?

                                  ----------

                            WEDNESDAY, MARCH 9, 2011

                  House of Representatives,
                         Subcommittee on Terrorism,
                               Nonproliferation, and Trade,
                                  Committee on Foreign Affairs,
                                                        Washington, DC.
        The committee met, pursuant to notice, at 2 o'clock p.m.,
    in room 2172 Rayburn House Office Building, Hon. Edward R.
    Royce (chairman of the subcommittee) presiding.
        Mr. Royce. This hearing of the Terrorism, Nonproliferation,
    and Trade Subcommittee will come to order.
        Today's hearing is going to focus on China's indigenous
    innovation trade and investment policies, an issue that Brad
    Sherman and I have worked on in the past. China's economy has
    been rapidly growing and this has meant opportunities for
    American businesses, but it's also meant perils. Mr. Sherman
    and I have worked to bring attention to the fact that many U.S.
    business people are getting fleeced in China, their property
    stolen, and much worse.
        We heard from Nancy Weinsten of Long Beach, California,
    previously in a hearing who went through a nightmare in
    Shanghai. And we've heard from many other business people about
    their similar experiences. The State Department even reports
    that Americans may be held hostage.
        Today we consider China's ``indigenous innovation''
    policies.
        The Chinese Government has been turning up the pressure on
    U.S. and other foreign businesses to share sensitive technology
    with Chinese state-owned enterprises as the cost of selling in
    the Chinese market. This is done through an ever-changing web
    of government policies, official policies as it pertains to
    procurement, regulation policies, tax policies, and
    governmental policies that encourage U.S. companies to move
    research dollars and jobs to China.
        China is looking to move its economy from ``Made in China''
    to ``Designed in China.'' And they're playing hardball to do
    it. A top administration official has described the threat:

            ``China's indigenous innovation policies threaten
            global intellectual property protections, fair
            government procurement policies, market competition,
            and innovators' freedom to decide how and when they
            transfer technology.''

        This presents some U.S. companies with the dilemma of
    agreeing to these terms and making sales, though at the risk of
    their long-term competitiveness, because Chinese companies
    potentially will then take their technology and become their
    competitors. These commercial concerns are intensified by
    rampant Chinese Government industrial spying in the U.S. There
    are obvious national security concerns, too. This issue goes to
    the heart of a company's competitiveness, and our country's
    economic well-being. I'm not convinced that these policies are
    an economic winner for China in the long term either, but I
    know they'll hurt U.S. businesses.
        While traditionally preferring ``quiet diplomacy,'' U.S.
    businesses are increasingly vocal. The U.S. Chamber of Commerce
    recently released a report, ``China's Drive for Indigenous
    Innovation,'' sounding the alarm. We'll hear from the U.S.
    International Trade Commission today, which has produced a
    detailed report on this problem.
        This comes against a backdrop of broader concerns over
    China's trade and investment policies, including very poor
    intellectual property protection, which harms U.S. firms. In
    January, Chinese President Hu Jintao and President Obama signed
    a joint statement pledging to ``delink'' indigenous innovation
    from China's very large government procurement market. On
    paper, this was a win for the United States. China also
    committed to join the WTO's Government Procurement Agreement
    this year, which would help curb its indigenous innovation
    policies. But China has a history of promises made, promises
    broken.
        We should aggressively challenge these policies. They
    worsen our trade deficit with China. What we don't want to do
    is blow up the system in a way that sets back U.S. exports,
    which are critical to economic recovery. Currently, U.S.
    exports to China are rapidly growing.
        China is emerging as a serious economic challenger. It's
    building ``national champion'' companies, as they call them in
    China, to compete globally. The Commercial Aircraft
    Corporation, for example, has Boeing in its sights. This
    challenge is coming, ``indigenous innovation'' or not. This
    means two things. One, pressing China, and two, better
    competitiveness. Our country needs to approach economic
    competitiveness with urgency. This means tax and regulatory and
    budget reform and a slew of other issues beyond this hearing's
    scope.
        I will now turn to the ranking member, the gentleman from
    California, Mr. Brad Sherman for his statement.
        Mr. Sherman. Mr. Chairman, I thank you for your statement
    and those who think that this city is divided by partisanship
    will find that that's not true when it comes to you and me and
    the issues that we face in this hearing today.
        Mr. Royce. We flipped gavels again, but continue these
    hearings. Thank you.
        Mr. Sherman. In the Year 2000, the United States made an
    enormous blunder in granting Permanent Most Favored Nation
    status to China in a bill that was H.R. 4444. Ironically, that
    number denotes extreme bad luck in the Chinese tradition. Of
    course, the bad luck has all been ours.
        The United States-China trade deficit swelled from $83
    billion, already outrageous in the Year 2000, to a record high
    of $273 billion in 2010. It grew every year except the
    recession year of 2009.
        The Economic Policy Institute estimates that roughly 2.4
    million American jobs were lost as a result of our intentional
    blindness to this trade deficit.
        We hear from supporters of the current trade policies that
    the volume of exports to China has never been higher. This is
    true. We hear that the rate of growth in exports to China is
    not greater than the growth of imports from China. True, but
    misleading; misleading in part because what we're exporting to
    China is scrap iron and scrap paper so that they can ship us
    more exports. But what's more telling is that the trade deficit
    with China continues to grow as increases in imports from China
    outpace increases in exports year in, year out in absolute
    terms.
        The industrial base and quality of U.S. employment continue
    to erode.
        China conducts a number of unfair trade practices that keep
    American exports out and more importantly aims to set up export
    promotion policies that the American public should not
    tolerate. And American firms have been all too happy to oblige
    in order to take advantage of cheap labor, various incentives
    and whatever they can do to up their particular corporation's
    quarterly report.
        As the chairman noted, if you do business in China, good
    luck. You'll have to enter into a joint venture, transfer your
    technology, and if you're lucky, you may be allowed to flee
    China rather than being held as hostage. At the urging of our
    current chairman, back when our roles were reversed, we held a
    hearing in July 2008 on the topic of U.S. business operating
    abroad. That hearing detailed the horrible experiences of
    Americans, especially American small businesses doing business
    in China.
        I want to commend the chairman for today's focus on an
    aspect of the China trade policy that has shaken even the most
    slavishly pro-China corporate interests. And those interests
    are so outraged that they have demanded that we take what they
    count as tough action, namely a strongly-worded letter.
        In 2006, the Chinese Government announced a strategy for
    promoting what it reportedly translates as indigenous
    innovation. China no longer wants to make iPads. They want to
    develop the next iPad. They no longer want to license
    technology from the West. They want to develop it there or at
    least steal it and claim ownership of it. Among the policies
    that have imploded since that time to implement this dream is a
    restrictive government procurement policy. Overall, China's
    effort is to increase its trade deficit with the United States,
    not to decrease it.
        Promulgated in November 2009, this draft policy provided
    for the creation of a product catalog that would list goods in
    several categories approved for purchase by Chinese Government
    agencies. Such goods would have to be developed in China and
    the intellectual property held by Chinese firms. These draft
    regulations were softened somewhat in April 2010, but are still
    considered to be objectionable by the U.S. business community.
        During his recent visit to Washington, President Hu
    committed to de-link procurement from indigenous innovation.
    Whatever that means, and it probably means almost nothing, what
    is important in the Chinese system is that the central
    government has, through its actions to date, already informed
    bureaucrats, provincial officials and managers of state-owned
    enterprises that they need to buy Chinese products and Chinese
    intellectual property whenever possible.
        You can't unring the bell. The word has already gone out.
    And whatever the final regulations provided, if you are a
    bureaucrat or provincial official in China, and you buy
    products containing American intellectual property instead of
    Chinese intellectual property, you are subject to re-education,
    regardless of what the official regulations finally state.
        Nominally, the policy is not already on the books, but the
    word is already out. We can't complain about anything because
    there's nothing official in their publishing final regulations.
    This is how China beats us at the so-called free trade process.
    We operate only by written standards. They get the message out
    orally or through unofficial documents. And then we
    deliberately ignore the fact that that gives them a way to
    restrict American exports that we do not have.
        The procurement policies were complemented by anti-monopoly
    patent technical standards and other policies that discriminate
    against foreign products and/or forced technology transfers as
    a condition of doing business in China. If anything gets the
    attention of the business community it should be this: Another
    aspect of China's innovation policies is to develop 16 so-
    called megaprojects. Chinese managers seek to co-innovate
    technologies borrowed from the West to develop passenger
    aircraft and chip and circuit manufacturing equipment,
    etcetera. I think the chairman outlined this well.
        What happens to American firms that are helping China
    develop these industries after China can make the products on
    their own? It was Lenin who said, ``The capitalists will be
    happy to sell the rope.''
        I think my time has more than expired. I thank the chairman
    for his indulgence and I'll use some of my question time to go
    over some of these points. Thank you.
        Mr. Royce. Thank you, Mr. Sherman. We're joined today by
    Jeff Duncan of South Carolina. We have with us Bill Johnson of
    Ohio who has an opening statement. Go ahead, please. We'll try
    to keep these opening statements to 1 minute each, if you can.
        Mr. Johnson. Thank you, Mr. Chairman. I want to thank our
    panel for being here today to discuss an issue that has
    attracted growing concern in recent years, particularly for
    American businesses that have worked hard to become innovators
    in high-tech industries, whether it's through currency
    manipulation, massive government subsidies to Chinese industry
    or newer concerns surrounding indigenous innovation efforts,
    the threat China poses to American exports is of growing
    concern.
        U.S. businesses have taken great risk to develop new
    technologies, innovate like never before. Because of American
    leadership and technology, protecting U.S. intellectual
    property is more important than ever, especially when it comes
    to our biggest trade rivals. We must have safeguards in place
    to ensure our continued position as a global leader in the
    high-tech sectors of the world economy. American businesses are
    faced with tough decisions these days. Our economy is showing
    some positive signs of recovery, but many business owners are
    still struggling to discern what is best for their development.
        China's aggressive indigenous innovation policies are the
    cause of one more tough decision; abide by China's terms and
    risk long-term competitiveness, as Chinese companies steal
    American technology, or lose access to the enormous fast-
    growing Chinese market and put American exports and jobs on the
    line.
        The American people have always expressed a strong desire
    to achieve and move our nation forward, sometimes taking risks
    in order to do so. We must protect the investments that
    American businesses have made in innovation, as other nations
    attempt to imitate our ingenuity and surpass us and we can't
    allow our willingness to be open go the benefits of trade to
    defeat the gains that we have made.
        As we move forward and evaluate China's trade policies, we
    must keep this cautious optimism at the forefront of our global
    trade strategy.
        Thank you, Mr. Chairman. I yield back.
        Mr. Royce. Thank you very much, Mr. Johnson. Ms. Schwartz,
    I think yours is the last opening statement.
        Mr. Connolly. Actually, Mr. Chairman----
        Mr. Royce. Mr. Connolly, go ahead, please.
        Mr. Connolly. I thank the chairman.
        Mr. Royce. Gerry Connolly of Virginia.
        Mr. Connolly. And just very briefly, Mr. Chairman, I have a
    full statement I would ask be entered into the record without
    objection.
        Mr. Royce. Without objection.
        Mr. Connolly. Obviously, I represent a very high-tech
    district, but I think the whole battle of Chinese policy with
    respect to innovation, Chinese requirements with respect to the
    transfer of technology and knowledge, the lack of protection of
    intellectual property, are real issues for businesses--to say
    nothing of repatriation of profits and capital or even making a
    profit as Mr. Sherman indicated.
        So I'm very interested in Ms. Laney's point of view about
    this and her insights into it. But I think that moving forward,
    part of the problem with doing business in China is it cannot
    be just one way. And the United States Government has an
    obligation at some point to protect the interests of U.S.
    companies doing business in such a broad and large market.
        I thank the chair.
        Mr. Royce. Thank you. Mr. Rohrabacher, I think you had a
    statement. Before I mentioned that Ann Marie Buerkle serves as
    vice chairman of this committee. We're delighted to be working
    with her and to welcome Renee Ellmers, as well, as a member of
    the committee.
        Mr. Rohrabacher, go ahead with your opening statement.
        Mr. Rohrabacher. Mr. Chairman, thank you very much for
    holding this hearing and I appreciate Mr. Royce and Mr. Sherman
    and the great work that they've been doing on this for a number
    of years.
        Let's just note that there's been a massive transfer of
    wealth from the American people to China. This has happened as
    a result of policy decisions made not by the Chinese, but by
    the people who run the United States Government. This is
    working against the interests of the people of the United
    States. At first, it was thought to build up their economy
    would create a more democratic society.
        Mr. Chairman, instead of a democratic society in China, we
    now see emerging a threat to the peace of the world, a
    dictatorship, the world's worst human rights abuser. It's time
    to take a look at those policies that have permitted this
    transfer of wealth and the transfer of technology and
    investment from the United States into China at the expense of
    the people of this country. Our people have been betrayed by a
    lack of action on the part of our own Government to watch out
    for them, rather than some globalist perspective. So I'm very
    pleased to be here today and I'm going to be listening to the
    witnesses and hopefully, we can alert the American people to
    the changes that need to be made to protect our country.
        Mr. Royce. Thank you, Mr. Rohrabacher. Before I go to
    Allyson Schwartz, another new member from Pennsylvania of this
    committee for her statement, let me just take a moment and we
    have a distinguished visitor with us, Ben Gilman, who served as
    chairman of the International Relations Committee.
        Ben, if you would just stand for a minute here and be
    recognized. Thank you for all of your service. Ben, it's good
    to see you.
        Ms. Schwartz.
        Ms. Schwartz. Thank you, Mr. Chairman. I just wanted to say
    this is my first meeting in the subcommittee. I'm pleased to
    serve on the committee on this subcommittee and as we begin
    this hearing I just want to say I've heard from some of the
    large companies that do work, facilities here, of course, and
    some even have headquarters here, have been seeking to do
    business in China. They have often, to this point said, we're
    fine. It's a huge market. But are now calling us to do even
    more to make sure that their intellectual property is
    protected, that some of the not well articulated, but well
    understood requirements the Chinese put on them to put plants,
    to share their intellectual property which is then shared, is a
    nice word, I think. Really is doing us great harm for the
    future. So we've got to figure this out.
        I look forward to the testimony and to this hearing to
    figure out how we can both have our companies take advantage of
    the huge marketplace that China is, but to do it in a way that
    protects their ability to grow not just there, but here and
    grow internationally and also to have some discussion about
    what effect it is having on employment and job growth here in
    the United States. Obviously, we've seen some progress. We do
    want to, I believe, operate in a global marketplace, but we
    need to do so in a way that is fair to our businesses and fair
    to our workers.
        So I look forward to the comments and understanding that
    you'll share with us, our witnesses will share with us today so
    that we can take the kind of action again that will grow our
    economy, understanding what a huge market China is and how
    unfair some of their policies both to our businesses and to our
    own growth here. I yield back.
        Mr. Royce. Thank you, Ms. Schwartz. We'll now go to Ms.
    Karen Laney who is the acting director of operations for the
    United States International Trade Commission. She previously
    served as the director of the Office of Technology Policy at
    the Commerce Department. She's also served as deputy director
    of U.S. steel trade policy at the U.S. Trade Representative's
    Office during WTO negotiations. And she holds an M.S. degree in
    resource economics from the Colorado School of Mines.
        Now I should note that the ITC is an independent, U.S.
    Government agency that supports policy makers through fact-
    finding investigations and research. It does not make policy
    recommendations. The Senate Finance Committee directed the
    Commission to prepare two reports on intellectual property
    infringement and indigenous innovation policies in China.
    Director Laney will present information from the first
    completed report. She cannot address the second on-going
    report.
        So Ms. Laney, thank you for presenting your reports' key
    findings to this subcommittee, and afterwards, if you'll keep
    this brief to within 5 minutes, maybe summarize it, we'll go
    right to questions.

     STATEMENT OF MS. KAREN LANEY, ACTING DIRECTOR OF OPERATIONS,
                  U.S. INTERNATIONAL TRADE COMMISSION

        Ms. Laney. Thank you, Chairman Royce and members of the
    subcommittee, for this opportunity to testify before you today.
    As the chairman noted, my remarks will be summarizing the more
    extensive written submission from the Commission's first
    report. Those written remarks are entered into the record.
        The first report was delivered in November of last year,
    and our second report will be given to the Senate Committee on
    Finance May 2nd.
        Today, I'll be describing what indigenous innovation
    policies are, how they are being employed in China, and why
    they are of concern to U.S. firms. First, let me say there is a
    wide understanding about what indigenous innovation policies
    actually are. In the Commission's first report, we broadly
    considered these policies as the collection of Chinese policies
    that are aimed at increasing domestic innovation and, where
    possible, replacing foreign intellectual property with domestic
    intellectual property in goods that are produced in China.
        The policies are intended to advance China's innovation
    goals that were articulated in the 2006 National Plan called
    the Medium to Long Term Plan for the Development of Science and
    Technology. I'll be referring to that as the MLP.
        The broad goals in the MLP are for China to become an
    innovation-oriented society, a global leader in science and
    technology. The policies that are reflected in the MLP are
    broadly focused on high-tech industries of national interest in
    which innovation plays a key competitive role. These sectors
    include agriculture, energy, environment, manufacturing,
    national defense, some frontier technologies such as
    biotechnology, advanced materials, lasers, ocean technology,
    and as Mr. Sherman indicated, certain large-scale megaprojects,
    such as core electronic components, large aircraft, water
    pollution control and treatment technologies.
        In our report, the Commission identified several areas in
    which indigenous innovation policies are being drafted or
    applied, but today, I'm just going to touch briefly on two of
    those. The first is technical standards. China's technical
    standards strategy recognizes the importance of technical
    standards as drivers of technology innovation and trade. The
    MLP has highlighted the importance of incorporating Chinese
    intellectual property into technical standards. And in China,
    there is a top-down approach to standards.
        The central government ministries decide what standards
    will be developed and lead the process. This is in contrast to
    the United States, which has a much more decentralized process
    led by the private sector. Reportedly, the Chinese system for
    development of standards tends to be nontransparent and to
    exclude meaningful opportunities for foreign companies to
    provide input and comment.
        According to U.S. firms, Chinese standard-setting bodies
    frequently take an existing standard and change the technology
    requirements slightly--just enough to add significant costs and
    make it much more difficult for foreign manufacturers to sell
    their products in China. This restriction of market access is
    one way that Chinese-developed technical standards reportedly
    affect U.S. companies. A second is that they reduce royalty
    payments to U.S. firms. More examples and more explanation of
    this are in my written comments today, so I will move on to
    talk just briefly about government procurement policies.
        During the Commission's research, government procurement
    policies promoting indigenous innovation were one of the areas
    of greatest concern for U.S. firms. The annual market for
    Chinese Government procurement is estimated to be between $88
    billion and $200 billion annually. I want to note, as the
    members here have already said, that the government procurement
    policies were a focus of discussion during the December meeting
    of the U.S.-China Joint Commission on Commerce and Trade
    (JCCT), which occurred after the release of the Commission's
    first report.
        Our second report does include information and analysis
    about subsequent events since November 2010.
        Of particular industry concern during our first
    investigation were the draft national government procurement
    policies that were issued in April 2010. These applied to six
    high-tech sectors and as indicated, they contain certain
    provisions that must be met in order for any product to be
    included in a national procurement catalog.
        Another requirement was that approved products must be free
    from any type of intellectual property dispute which was not
    defined in the draft regulation. U.S. firms expressed concern
    that an unsubstantiated allegation raised by a third party,
    perhaps a competitor, could be used as a reason to exclude a
    foreign-made product from the government procurement catalog.
        One important point which has been made, but let me stress
    this: Although no national procurement catalog has been
    released, there are a number of provincial procurement catalogs
    which are actively in use for government procurement decisions
    at the local level. Most of these catalogs include very few
    products that are made by foreign companies or by joint
    ventures. This situation underscores the fact that the Chinese
    Government ministries and agencies at all levels are working to
    implement the central ideas of the MLP for a wide variety of
    policies under separate jurisdictions. This variation makes it
    extremely difficult to track the development and implementation
    of such policies.
        Although relatively new and still evolving, indigenous
    innovation policies have the potential to pose significant
    problems for U.S. companies trading with or operating in China.
    It is clear from the MLP that China is intent on raising the
    level of scientific and technological innovation that
    originates within the country. Policies appear to be promoting
    indigenous innovation in sales of domestically made high-tech
    products at the expense of foreign firms. U.S. firms note that
    China's approach to innovation policy seems to vary
    significantly from global business practices. For example,
    requirements that R&D take place exclusively in China are
    broadly incompatible with the global innovation policies of
    many multinational companies.
        In sum, some U.S. industry representatives believe that
    indigenous innovation policies pose a greater potential threat
    to their business in China than do either intellectual property
    infringement or currency-related issues. They described, as Mr.
    Sherman indicated, a web of interrelated policies that work
    together to help build ``national champions,'' which are
    Chinese industries capable of competing with foreign companies,
    both inside China and in third-country markets.
        This concludes my testimony this afternoon, summarizing
    some of the findings from the Commission's first report. I
    would say that the Commission's second report will provide more
    specific analysis of the scope and impact of China's indigenous
    innovation policies. It updates information about U.S. firms'
    concerns, provides several case studies, and presents the
    results that were obtained through mailing out 5,000
    questionnaires to U.S. companies asking for their experiences
    and insights regarding indigenous innovation in China. After
    the public release of the report in May, we would be pleased to
    come back and brief the committee on those findings as well.
    Thank you.
        [The prepared statement of Ms. Laney follows:]

        Mr. Royce. Ms. Laney, let me ask you a couple of quick
    questions. First of all, China has not signed the WTO's
    government procurement agreement, right? So that means that
    U.S. and other foreign firms that try to do business there can
    be discriminated against by China in government contracting.
        What I'm wondering is if you have a sense of the scope of
    that? If you could give us some examples? And I think it's
    important because we have a number of us here that have called
    for Congress to act to preclude Chinese companies from bidding
    on U.S. Government contracts until China makes this decision to
    join and sign this agreement and keep to the agreement so that
    we've got a two-way street.
        Ms. Laney. During the JCCT in December, the Chinese did
    make a commitment to apply for admittance to the WTO government
    procurement agreement, of course, by the end of this year,
    2011. I'd be happy to provide--get back to you with some
    examples.
        Mr. Royce. I'll get the examples from you later.
        Ms. Laney. Yes.
        Mr. Royce. But in the meantime, do you know the extent of
    current Chinese contracting at the state, local, and Federal
    level here in the United States with our U.S. Government?
        Ms. Laney. No. And I will look into that and get back to
    you on that.
        Mr. Royce. I think that would be very important for us to
    know and for us to know as soon as possible.
        Ms. Laney. Okay.
        Mr. Royce. Let me ask you another question. You testified
    that foreign businesses have reportedly been pressured to
    transfer know-how and technology to Chinese firms in order to
    gain access to the Chinese market, something that we hear about
    from businesses out in California all the time. But maybe you
    could give us some examples of specific U.S. businesses and how
    this plays out so that we can understand precisely, and so that
    the other members and the audience can understand precisely how
    this is done.
        Ms. Laney. Most of the information that we have had
    concerning specific impacts of tech transfer policies are going
    to be reported in our second report.
        Mr. Royce. Do you have any examples right now that you'd
    like to share with us? Because I would imagine that someone in
    your position--I'm familiar with a half dozen, so I imagine you
    have access to some of this data.
        Ms. Laney. Certainly we have heard about situations and
    have heard from industry, such as the semiconductor industry
    which has talked often and publicly about their concerns with
    different technical standards, for example, the WAPI standard
    that the Chinese employ rather than the WiFi standard that we
    use here in the unescorted access, and pressure to adopt those
    technical standards in order to be able to do business or sell
    products in China. Of course, semiconductors are in many
    different types of products, so that has a ripple effect.
        Also, the same industry has talked a lot about tax
    preferences, which are given to high-tech Chinese industries
    rather than foreign industries. So there are examples like
    this. In addition, the wind energy industry has talked to us
    about some of the discriminatory regulations that are in place
    requiring experience, requiring proof of certain business
    practices in order to be able to access the Chinese market. So
    we do have some specific examples in various high-tech
    industries about these concerns.
        Mr. Royce. And in fact, these violate current treaties with
    China, do they not?
        Ms. Laney. I don't know.
        Mr. Royce. Well, I'm going to allow Mr. Sherman here to ask
    his questions. I thank you again for appearing as a witness.
        Mr. Sherman. Thank you. Just to take a minute before I
    begin asking questions, I for one have lost patience with China
    and our trade policies toward China. We need balanced trade
    with China. The only way to achieve this is for Congress to
    revoke most favored nation status for China and to direct the
    administration to enter into emergency negotiations knowing
    that MFN will end by the end of the year to arrange a new
    system, one that results in balanced trade and one that perhaps
    follows Warren Buffet's approach which is a voucher system
    where you in order to import anything from China, need a
    voucher from someone who has exported to China.
        I know all my colleagues are a bit frustrated with China.
    The question is are we actually going to do something or are we
    just going to send more strongly-worded letters.
        Now let me ask the witness, the ITC back in the Year 2000
    predicted that granting most favored nation status to China and
    letting them into the WTO would be associated with roughly a $1
    billion per year increase in our trade deficit with China. It
    turned out that over the last 10 years you've been off by a
    little less than $2 trillion. Wouldn't that make you just a
    little bit shy about issuing any kind of projection for the
    effect of the proposed Korea free trade agreements?
        Ms. Laney. I would have to take a look at the basis upon
    which that prediction of $1 billion was made and compare that
    to what we're doing for our Korea analysis.
        Mr. Sherman. Most organizations when they make a $2
    trillion error, go back and look at that even without having to
    be prodded by a bald congressman from California, but I'm happy
    to play that role.
        Now picking up on the comments about China made by the
    chairman, our national approach with China does something by
    issuing this directive, unofficial as it may be, to all of
    their government-owned enterprises and provincial officials,
    they've already taken action to keep American intellectual
    property out of their procurement market. Our natural thing is
    to send a letter and then do nothing because that's what the
    most moneyed interests in our country would suggest that we do.
        What we could do instead is introduce and adopt legislation
    prohibiting state, local, and Federal Governments from
    procuring anything from China until such time as they sign the
    WTO agreement on procurement and are certified by our President
    to be in compliance. Would such legislation be in violation of
    WTO?
        Ms. Laney. I'm not prepared to comment on that.
        Mr. Sherman. Will you respond for the record?
        Ms. Laney. I will take that question back to my agency.
        Mr. Sherman. So you may just refuse to answer?
        Ms. Laney. No, sir. I just don't know the answer.
        Mr. Sherman. I know, but you'll go back to your agency and
    then respond for the record or are you committing to get me an
    answer?
        Ms. Laney. Yes, sir. I am. I am.
        Mr. Sherman. Okay. Looking at the Korea free trade
    agreement, you have made an estimate that it would reduce our
    trade deficit slightly. Now the agreement allows for products
    such as automobiles, automobile parts, ships, electronics, iron
    and steel to be 65 percent made in China and then only 35
    percent made in South Korea. And then the work done in South
    Korea can be done by Chinese guest workers in barracks. Does
    your estimate as the effect that the Korea free trade agreement
    will have on U.S. balance of payments reflect those two
    factors? That is to say the 65 percent made in China, the 35
    percent made in Korea access that this gives the Chinese and
    does it reflect the fact that South Korean firms can use
    grossly underpaid Chinese guest workers for products shipped to
    the United States? Are either of these in your estimate on the
    Korea free trade agreement?
        Ms. Laney. The employment, the guest workers calculation is
    not. The rules of origin related to the percentage of parts
    that are sourced from various places is captured in a larger
    factor in our model analysis that looks at non-tariff measures.
        Mr. Sherman. I don't think you're off by a couple trillion
    dollars per decade, but you're off, because Korea free trade
    agreement gives open access to the U.S. market to goods
    produced by Chinese labor, 65 percent in China, 35 percent
    guest worker in South Korea. I hope you will revise your
    estimates and not only does it give Chinese labor free access
    to U.S. markets, it does so without China making a single
    concession to the United States and they get a free trade
    agreement, in effect, and the resulting trade imbalance will be
    attributed to the South Koreans rather than the Chinese. There
    is nothing more beautiful about a trade agreement for China--
    you couldn't have a more beautiful agreement for China than the
    U.S.-South Korea free trade agreement. I yield back.
        Mr. Royce. Mr. Duncan from South Carolina, but before we go
    to you for questions, we've been joined by Mr. Poe from Texas.
    We appreciate his attendance.
        Go ahead, Mr. Duncan, with your questioning.
        Mr. Duncan. Thank you, Mr. Chairman, and Ms. Laney, thank
    you for being here today. I had the opportunity after reading
    the Friedman book, The World is Flat, back in 2005 to travel to
    China, so I've been to southern China and the Guangzhou area
    and then up to Beijing. Really thought it was a fascinating
    experience for me as a legislator in the state at the time and
    bring those experiences to Congress.
        I wanted to bring up the issue this afternoon of production
    of rare earth minerals. We use rare earth minerals in many
    energy technologies and high security, high-tech national
    security applications. I'm concerned that while the U.S. was
    once self reliant in domestically-produced rare earth elements,
    over the past 15 years we have become 100 percent reliant on
    imports primarily from China which controls more than 95
    percent of the world's rare earth supplies.
        The Wall Street Journal published an article on March 6th
    stating that China has begun building its stockpile which
    further increases the Chinese Government's power to influence
    the minerals' prices. As we discussed the possible threats of
    China's indigenous innovation trade and investment policies, I
    would like your thoughts regarding China's monopoly of rare
    earth elements and how that would affect U.S. technology.
        Ms. Laney, is the U.S. vulnerable to supply disruptions of
    rare earth elements? What effect would the disruption have on
    our military's ability to produce important defense
    applications like jet fighter engines, missile guidance
    systems, anti-missile defense, space-based satellites,
    communication systems, the technology things just go on and on.
    So if you will answer that?
        Ms. Laney. The United States is vulnerable at this time
    because we have no operating capacity in the United States.
    However, we do have access to some types of rare earth
    minerals. And so the effect of supply disruption would depend
    on how rapidly we could reopen and get up running, in part.
        Mr. Duncan. We're seeing China continually try to buy these
    in places like sub-Saharan Africa and South America and other
    places. What should the U.S. do about that, if anything?
        Ms. Laney. I'm not prepared to offer a suggestion regarding
    policy, sorry.
        Mr. Duncan. Okay. Mr. Chairman, I yield back.
        Mr. Royce. We'll go to Mr. Cicilline from Rhode Island.
        Mr. Cicilline. Thank you, Mr. Chairman, and thank you for
    holding this important and very timely hearing and welcome, Ms.
    Laney.
        My home state is Rhode Island and we have been especially
    hard hit in this recession. In fact, it was the first New
    England state to go into the recession and currently we have
    the fifth highest unemployment in the country. Particularly, in
    manufacturing, where Rhode Island, we were the birthplace of
    the American Industrial Revolution, and home to a very
    important and robust manufacturing sector that's been very hard
    hit in this recession. The Alliance for American Manufacturing
    concluded that there were 71,000 manufacturing jobs in Rhode
    Island in 2008. That number has dropped to 47,900. And 15
    percent of the manufacturing jobs lost in Rhode Island during
    that period were lost due to trade with China.
        And so with regard to the indigenous innovation policies
    that we're talking about today, I'd like to first note that I
    know many of the indigenous innovation policies are in
    different stages of development and haven't all been adopted
    yet and of course this practice really relates only to one area
    where the Chinese are undertaking a really conscious effort, I
    believe, to discriminate against U.S. exports and illegally
    promote their own exports.
        I have tremendous concerns in light of the history of what
    we see in Rhode Island and frankly, in states all across our
    country about what we are doing, what we can do about this. And
    so my question really is what kinds of retaliatory mechanisms
    do we have at our disposal to respond to this and other than
    filing dispute resolutions with the WTO, are there other things
    that we can do that can effectively respond to this? As Mr.
    Sherman said, this is a growing and serious problem that I
    think many members of this committee over many years are
    becoming increasingly frustrated with.
        Ms. Laney. I would say that in our research, one of the
    things that we heard over and over again was companies asking
    that the government continue to talk to China. That may not
    sound like it's sufficiently bold, but as Ms. Schwartz pointed
    out, a number of companies have concerns about being able to
    continue to operate in China and expressed their interest in
    continuing to have a dialogue with China, as opposed to
    punitive measures. These were the kind of information and
    suggestions that came to us as we did our research.
        Now with the questionnaire that we put out for our second
    study, we did ask for suggestions from companies. We asked them
    to give us information on what the economic impact has been to
    them, the employment impact, so there will be some concrete
    numbers and perhaps some more specific suggestions coming from
    the companies that we surveyed.
        Mr. Cicilline. I understand. I think suggesting that
    conversations would be ongoing makes sense, but at the same
    time I think people expect that there be some vigorous
    enforcement and we're arguing, I think, very hard for
    maintaining our investments in education, infrastructure, and
    innovation, because I think we all recognize that America is
    the home to ingenuity and innovation and we can compete in the
    world economy and succeed, but if at the end of that process,
    after we make that investment, we don't have a fighting chance
    because there's the kinds of violations that are present with
    respect to China, then we have no real opportunity to continue
    to grow our economy and succeed.
        And so I understand that conversations and negotiations
    continue, but I think many of us are looking for, and I know
    the manufacturers that I speak to back in my district are
    looking for enforcement and looking for protection of their
    intellectual property and compliance with their requirements
    with China with respect to trade. So I hope we will do that as
    vigorously as we talk and send letters. Thank you. I yield back
    the balance of my time.
        Mr. Royce. Thank you. We're going to go to Mr. Bill Johnson
    of Ohio. Before we do, let me just explain to the members that
    the International Trade Commission is a government agency, and
    as part of their charter, they don't make policy
    recommendations. That's Panel 2. So Ms. Laney would probably be
    in a little hot water back home if she tried to roll out policy
    recommendations for us here and so I just wanted to explain
    that. We'll be into all of that in the next panel.
        Go ahead, Mr. Johnson, with your questions.
        Mr. Johnson. Thank you, Mr. Chairman. Ms. Laney, you stated
    in your written testimony that the U.S. International Trade
    Commission performed two investigations on intellectual
    property infringement and indigenous innovation policies in
    China. In addition, you also mentioned the 21st U.S.-China
    Joint Commission on Commerce and Trade, the meeting this past
    December, which also focused on indigenous innovation. While I
    realize that the conclusions of the second investigation have
    not yet been released, let me ask you this, what similarities
    can be drawn between these recent inquiries into China's
    indigenous innovation policies, more specifically, how serious
    an effect do these policies have on American businesses that
    interact with China when compared to other trade practices such
    as currency manipulation and subsidies provided by the Chinese
    Government?
        Ms. Laney. The companies that we interviewed for our first
    investigation and those that attended the hearing, the 2-day
    hearing that the Commission held, by and large indicated that
    they were more concerned about the indigenous innovation
    policies going forward than they were about currency
    manipulation. They would say that subsidies are probably a part
    of that whole web of indigenous innovation policies. Because
    these policies are relatively new, most of what we heard was
    concern going forward. The government procurement draft that
    came out in November I think sounded a real alarm for a lot of
    companies, that China was moving more aggressively to favor
    their domestic industries, their high-tech industries.
        So in terms of what is of greatest concern to U.S.
    companies, that varies somewhat between sectors, but they're
    looking forward toward this web of policies. Some of them
    describe it almost as Whac-A-Mole, you fix one policy,
    something else pops up. But in terms of currency manipulation
    versus indigenous innovation, what we were hearing is that
    high-tech companies are more concerned with the indigenous
    innovation web.
        Mr. Johnson. Thank you very much. Mr. Chairman, I yield
    back.
        Mr. Royce. We'll go now to Ann Marie Buerkle from New York,
    who is the vice chair of this committee.
        Ms. Buerkle. Thank you, Mr. Chairman, and thank you, Ms.
    Laney, for being here today.
        My question has to do with the indigenous innovation
    policies, how you would characterize those? If we had to look
    at it and I would just like your opinion on this, is it more of
    an extortion toward American businesses or is it something
    where the American businesses just realize the risks and they
    realize the gamble that they have to take and they think it's
    worth it?
        Ms. Laney. I would say that in our experience during our
    investigation the answer to that question depends a little bit
    on the experience and even on the size of the company doing
    business in China. Companies who have been in the Chinese
    market for a while report a different experience and have a
    different characterization of the regulations than do smaller
    firms or firms that are brand new to the market. So for those
    companies that have been in the market for a while, by and
    large, I would probably not characterize it as extortion. It's
    a cost of doing business and one that they find discriminatory.
    But that is not a view that's necessarily held by brand-new
    small entrants to the market.
        Ms. Buerkle. I guess if you could clarify that for me,
    what--just because they've been in it longer, what is the
    reason why their view is so different than the newer?
        Ms. Laney. It would be speculation on my part to say why
    that is. I think when I'm talking about the size of a company,
    often large firms have more resources in order to understand
    what the legal system is, in order to deal with multiple
    government officials, those kinds of things. So there are
    resource issues that go to how a company interacts with and
    experiences the business environment in China.
        Ms. Buerkle. Thank you. I yield back.
        Mr. Royce. Ms. Laney, if you could pull your microphone
    closer?
        Ms. Laney. Yes.
        Mr. Royce. We'll go now to Ms. Ellmers from North Carolina.
        Ms. Ellmers. Thank you, Mr. Chairman, and thank you, Ms.
    Laney, for being here today with us.
        I'd like to go back to the currency manipulation issue that
    you discussed a moment ago for Mr. Johnson's question.
    Basically, considering the undervalued Chinese currency, 40
    percent undervalued, and I know that's estimation, it serves
    the government strategy for strong export market from China.
    And it affects us, of course, in our country, affecting our
    jobs and whatnot.
        What strategy should the United States Government be taking
    with this? Because I hear this continuously back home. This is
    of great concern to North Carolinians and what input can you
    give us on that?
        Ms. Laney. I'm sorry to say that I'm unable to provide you
    with anything today, with any recommendations concerning
    currency manipulation. It's really outside the scope of the
    indigenous innovation report that I'm here to summarize for
    you. I'm sorry.
        Mr. Royce. Ms. Laney, one idea I had was maybe you could
    just describe a couple of the options to us out there instead
    of making a set of recommendation. If you don't feel
    comfortable with that, that's okay, but it's an idea.
        Ms. Ellmers. If you could just give us an idea of some of
    the approaches that you have been taking, something that we can
    base some information, something that we can look forward to?
        Ms. Laney. The Commission is not involved in setting policy
    or negotiating, so what we're doing here is we're reporting the
    suggestions of companies that we've interviewed. As I
    indicated, most of them have been saying to us, ``We would like
    for you to keep talking. We would like to have the the WTO
    handle this. We appreciate the fact that this is coming under
    scrutiny.'' In fact, several of the industry officials with
    whom we spoke pointed to the fact that increased scrutiny was
    one of the factors, in their opinion, that led to the
    concessions of the JCCT in December. And they advocate that
    government, the Executive Branch, Congress, continue to shine
    the light on this and that the Chinese are willing to change
    and again, whether it's Whac-A-Mole or substantive long-term
    change can be debated, but the Chinese are willing to move on
    this when a spotlight is shined on this. This is what we're
    hearing from businesses.
        Ms. Ellmers. Thank you very much. I yield back.
        Mr. Royce. Thank you. Gerry, did you have any questions,
    Mr. Connolly? Go ahead, please.
        Mr. Connolly. Thank you, Mr. Chairman, and I'll try to be
    brief. I'll ask two. One is, Ms. Laney, regarding the American
    Chamber of Commerce in China, 31 percent of the 300 members
    cited discriminatory government policies and inconsistent legal
    treatment as being the largest single barrier to doing business
    in or with China.
        What's being done to try to make sure that we have a
    consistent commercial legal code in China and that it is
    consistently enforced?
        Ms. Laney. I would defer to USTR on that one. I know that
    there are a number of cases that have been brought to the WTO
    concerning violations to our international agreements, our
    international trade agreements. There are also various
    government programs which work on the legal aspects of trade
    and of business in China, is my understanding. I can look into
    that more for you, if you would like.
        Mr. Connolly. It would be helpful. Thank you.
        Ms. Laney. Okay.
        Mr. Connolly. What about, in the same category, the laws
    and the enforcement regarding intellectual property, how
    consistent are those laws under WTO rubric, international
    standards and how consistent is the enforcement of those laws?
        Ms. Laney. The enforcement is very inconsistent of the
    laws. It varies between the national level and different
    provincial and local levels. It is not transparent in many
    cases. There is a slightly different patent system in China
    which does not afford the same strong protection as some of our
    intellectual property mechanisms. Much of this is detailed in
    the report that we provided to the Senate Finance Committee and
    I'd be happy to send you a summary of that.
        Mr. Connolly. That would be very helpful. Thank you. Mr.
    Chairman, I know you want to move, so I yield back the balance
    of my time.
        Mr. Royce. Thank you, Mr. Connolly. We'll go now to Judge
    Poe from Texas.
        Mr. Poe. Thank you, Mr. Chairman. It seems to me that China
    operates under two systems, legalized theft and just old-
    fashioned theft. You can do business in my country of China if
    you show us how to make your product, and then on the sly,
    we'll copy it and we'll sell it ourselves. That's sort of their
    legalized theft system. And then the traditional, old-fashioned
    stealing, they pirate all kinds of things, movies is a prime
    example; software, whether it's the government or whether it's
    private industry or industry in China, and seems to be that is
    their trade policy.
        I agree with the ranking member, Mr. Sherman, that we ought
    to look at the most favored nation status that we bequeathed on
    China and review that very closely, especially in light of the
    fact that we now import these CFLs from China that have mercury
    in them and pretty soon that will be the only place on earth
    where we get them. We don't make them in the United States.
    We've gotten lead paint from China during the Christmas season
    of 2009, lead paint in toys. They send us dog food that had
    poison in them. Dry wall has been constructed throughout the
    United States that now turns out to have smelly sulphur gases
    and the dry wall falls down during a hot summer Texas heat. And
    now the FDA has taken Chinese toothpaste off the market because
    it's got life-threatening chemicals in it. So I'm not so sure
    we get a good deal on what we get from them.
        It concerns me, all of these matters, and my question to
    you, I believe in free trade, but I also believe in free and
    fair trade. If--I'm not asking policy--I asking you result, if
    we take away China's most favored nation status how would that
    affect United States companies?
        Ms. Laney. I'd like to think about that and get back to you
    on that one, if I may.
        Mr. Poe. I'll hold you to it, too.
        Ms. Laney. Okay.
        Mr. Poe. And the second question, how will that affect U.S.
    economy if we take away their most favored nation status?
        Ms. Laney. Okay.
        Mr. Poe. That's two questions. I expect an answer sent to
    the chairman and the ranking member. Do you have----
        Mr. Sherman. If the gentleman would yield?
        Mr. Poe. Certainly.
        Mr. Sherman. My bill is designed to create an immediate
    crisis. Six months to negotiate a whole new trade process with
    China, rather than just end all U.S.-Chinese trade.
        Mr. Poe. Reclaiming my time. How much money does the United
    States lose every year because China cheats? Do you know?
        Ms. Laney. No, sir.
        Mr. Poe. Can you find that out for me? Do you know what I
    mean by cheat?
        Ms. Laney. No, sir.
        Mr. Poe. It's their legalized theft and their sort of old-
    fashioned stealing. Can you quantify that for me?
        Ms. Laney. I'll tell you, in our second report, we do give
    some estimates based on the questionnaires that we have
    received, the questionnaire responses where companies have
    given us some estimates of what they believe their losses have
    been due to intellectual property infringement. And so
    certainly when that report is made public in May, I'll see that
    you get those figures that are based on U.S. company estimates
    and if there are further questions, we can follow up with you
    on those.
        Mr. Poe. Thank you, Mr. Chairman.
        Mr. Royce. Ms. Laney, the Harvard Business Review, December
    2010, has an article on this, ``China Versus the World.'' They
    go through a lot of pages to say what Mr. Poe said very
    succinctly, but they lay out the argument on the cheating that
    he discussed, both in terms of what they do by way of espionage
    and copyright infringement, as well as what was previously
    referred to by one of our members here, as extortion. But it
    will be laid out in economic terms in that piece for you and we
    would like a report on that. And I think we now go to Mr.
    Rohrabacher of California.
        Mr. Rohrabacher. I thought I would, by the way, I would
    like a copy of that report in May as well, if you could send
    that in my direction?
        Ms. Laney. Certainly.
        Mr. Rohrabacher. That would be very interesting. Mr.
    Chairman, an Orange County company run by someone you know and
    who I know, ran a dry cleaner cart manufacturing company. They
    had 150 employees, about 15 years ago, and it had been in
    business for 75 years. And they made the carts that you do--go
    to a dry cleaner or laundromat and you'd have these carts
    there. Well, about 5 years ago it came to my attention that
    Chinese, a group of Chinese businessmen had come to Orange
    County and purchased two of these dry cleaner and laundry
    carts. And a year later, the container arrived at the Port of
    Long Beach filled with exact replicas, exact replicas of the
    dry cleaner and laundry cart that this man's business had been
    and their family had been in business for 75 years and had
    about 150 employees.
        And it was such a copy that on the outside of the box, the
    box had been copied and they had a check mark red, black, or
    white for the different colored carts although the Chinese
    manufacturer only made one color which was black. The Chinese
    then went to my friend and said by the way, we can just keep
    doing this and drive you out of business or why don't we become
    partners? Why don't you hire us to do your manufacturing? I
    think it's called extortion and he agreed to this. And do you
    know what happened then? After a few years, guess what
    happened? There's not the 150 workers any more and he's being
    edged out of the company. And now it's all a Chinese company.
    So you have for 75 years an American company setting up a group
    of people in China to now make the laundry and the dry cleaning
    carts that used to be made by Americans.
        If we put up with this, shame on us, not shame on the
    Chinese. They're avaricious. They're out to make a buck.
    They're watching out for their own people. Who's watching out
    for the people of the United States of America?
        Now my question to you is, who would that dry cleaner
    complain to? Who in the government can help him so that over a
    5-year period he doesn't lose everything to an overseas group
    of people who are coming in and copying his product? Who in the
    government is it that he should go to? Who is not doing their
    job or at least who can we direct him to?
        Ms. Laney. I would say this is a legal issue which he needs
    to pursue.
        Mr. Rohrabacher. So who is that? You mean like hire a
    private lawyer and sue them? There's nobody in the United
    States Government that's responsible when entities from
    overseas, especially in China come in and basically commit
    extortion and pressure you into giving up what your family has
    built for 75 years? There's nothing in our Government that does
    this?
        Ms. Laney. I'm not aware of anything in the trade
    community.
        Mr. Rohrabacher. My theory is that there are entities in
    the Chinese Government that are there to help the thieves. But
    we don't have the entities here to help our people to protect
    themselves against organized foreign theft, especially that
    coming from China.
        By the way, the Chinese are not just stealing things like
    this. We are the victims of cyber attacks and everybody knows
    this. This is not something that has gone on without the
    Chinese Government's knowledge. They are aware that there are
    business people who are coming from their country into our
    country and committing these types of acts of extortion. They
    are aware that there are hackers coming into our system,
    stealing all of our--all the information they can get their
    hands on.
        Mr. Chairman, we've got to get tough or those people
    overseas who are tough, are going to run us over, and steamroll
    our people. And that's what's been going on and shame on us if
    we don't have the strength and courage to stand up to that kind
    of challenge. Thank you very much.
        Mr. Royce. Reclaiming the rest of Mr. Rohrabacher's time,
    let me just make an observation. From political scientists to
    economists to philosophers, one of the great achievements of
    this Republic was in its Constitution. This is a conclusion of
    the history of the United States. One of the great achievements
    here was that we had in our very Constitution laid out a
    protection for intellectual property, copyright. And I guess
    what's baffling is the fact that this was so obvious to the
    Founders of this Republic, the importance of this principle of
    protecting intellectual property.
        And I guess what is so obvious to us now is how cavalierly
    this has been treated both overseas and obviously by the United
    States, that we have turned a blind eye to a fundamental
    concept to protect human capital, to protect intellectual
    property, which is frankly the engine of our prosperity.
        So if we don't have a ready answer to what to do about it,
    then I think we better return to first principles and we
    understand that your role is--you cannot give us policy
    recommendations, but I think it is our role as members, and
    we'll hear shortly from the second panel who will give us those
    recommendations. But I think this highlights how important this
    is. And as for legal action, having gone through this with many
    of my constituents who have taken cases to court in China, I
    know just how futile that is, just how ridiculous it is to
    expect that to ever bear fruit, to see our own Government
    hesitate in terms of getting involved in what they call the
    Chinese legal system when that legal system frankly, from what
    I've seen of it, is not based on legality. It's not based on a
    rule of law.
        So we face a very real challenge here that must be
    addressed now and with that said, I think you had an unanimous
    consent request.
        Mr. Sherman. I ask for unanimous consent to insert in the
    record the report commissioned by the AFL-CIO titled
    ``Manufacturing and Security: America's Manufacturing Crisis
    and the Erosion of the Defense Industrial Base.''
        Mr. Royce. Very good. Again, I want to thank our witness.
    We have quite a few follow-up questions for the record. And we
    look forward to that information.
        Ms. Laney, thank you.
        Ms. Laney. May I say one other thing?
        Mr. Royce. Yes.
        Ms. Laney. To Mr. Rohrabacher's question about the dry
    cleaning cart. My colleague from the Commission reminded me
    that we do at the Commission have what we call 337 proceedings
    which are intellectual property. They're a legal way for U.S.
    companies to challenge the theft of their intellectual property
    when products are imported and a U.S. company thinks that their
    IP has been infringed. They can come to the Commission and file
    a legal proceeding there.
        Mr. Rohrabacher. 337?
        Ms. Laney. Yes, sir. Section 337 it's called.
        Mr. Rohrabacher. Very good.
        Mr. Royce. All right, we will go now to our second panel.
    Thanks, Ms. Laney.
        For our second panel, we're going to hear from Mr. Peter
    Brookes. He's a senior fellow for national security affairs at
    the Heritage Foundation. He also serves as a commissioner with
    the Congressional U.S.-China Economic and Security Review
    Commission. And prior to coming to the Heritage Foundation, he
    served as deputy assistant secretary of defense for Asian and
    Pacific affairs. He also served with the Central Intelligence
    Agency and was on active duty with the U.S. Navy.
        Mr. Philip Levy is our second panelist. He's been a
    resident scholar in economics at the American Enterprise
    Institute since '06. He also is an adjunct professor at
    Columbia University School of International and Public Affairs.
    In '05, he joined the State Department as a member of the
    Secretary's Policy Planning Staff. He was responsible for
    international economic issues, which encompassed developing the
    responsible stakeholder policy toward China. So we'll hear how
    that's working out.
        And then lastly, we have Ms. Thea Lee, deputy chief of
    staff at the AFL-CIO. Previously, she worked as an
    international trade economist at the Economic Policy Institute
    in Washington and as an editor at Dollars and Sense Magazine in
    Boston. Ms. Lee serves on several advisory committees including
    the State Department Advisory Committee on International
    Economic Policy and the Export-Import Bank Advisory Committee.
    She's also on the boards of directors of the Workers' Rights
    Consortium and the National Bureau of Economic Research.
        I believe all of you have appeared before this subcommittee
    before. I ask you to summarize your testimony and keep it
    within 5 minutes, if you would. We start with Mr. Peter
    Brookes.

        STATEMENT OF MR. PETER BROOKES, SENIOR FELLOW, NATIONAL
     SECURITY AFFAIRS AND CHUNG JU-YUNG FELLOW FOR POLICY STUDIES,
                        THE HERITAGE FOUNDATION

        Mr. Brookes. Thank you, Mr. Chairman. I also served as a
    staff member on this committee, many years ago under Ben
    Gilman. It was great to see him today.
        Mr. Royce. Welcome back.
        Mr. Brookes. Thank you. Mr. Chairman, members of the
    committee, good afternoon. It's a pleasure to be here to
    discuss China's policy of indigenous innovation and my role as
    a foreign affairs specialist and observer of and participant in
    U.S.-China relations for some 15 years now.
        The views I express today in my testimony are my own and
    should not be construed as representing any official position
    of the Heritage Foundation or any other organization with which
    I'm associated. I will summarize my testimony that has been
    submitted for the record.
        There's no question that China today poses a significant
    set of challenges for the United States and the international
    community. While its regional and global aspirations appear to
    be quite extensive, it has been reticent in publicly stating
    its grand ambitions.
        Nevertheless, we can observe a number of behaviors on the
    part of the Chinese that indicate that Beijing expects to see
    itself at or near the top of the international pecking order at
    some point in the not too distant future. As a result, we are
    faced with a number of current and potential problems posed by
    the Chinese that arise from their seeming ambitions to be a
    major power politically, militarily, and economically.
        China's role in international economics and trade is a
    concern, especially issues resolving around its export-driven
    economy, trade imbalances, market access for foreign firms,
    state subsidies, its WTO obligations, and the convertibility
    and value of its currency. These issues are all well known to
    committee members.
        Today, the question is on China's controversial policy of
    indigenous innovation. While there are differing definitions of
    this policy, generally, it might be considered the giving of
    preferential treatment to locally-developed technology and
    Chinese Government procurement which runs at about $105 billion
    annually. To be considered locally developed the Chinese
    Government must certify that technology involved in the product
    in question was developed or advanced in China. In return,
    foreign firms are allowed to do business in the potentially
    vast China market.
        But as many would agree, the indigenous innovation policy
    is the Chinese effort to gain access to foreign intellectual
    property which will, in turn, improve China's commercial
    competitiveness at home and abroad. Via this policy and other
    means, China intends to propel China into the company of the
    world's most technologically-advanced countries, including the
    United States.
        China's indigenous innovation policy is, in my view, an
    unfair practice that disadvantages the foreign firms that are
    subjected to it. It inhibits market access for foreign firms.
    It is also a threat to our economic competitiveness globally.
    And if it remains in force or is expanded, it may allow China
    to move from its place as a major global manufacturer to a
    high-technology innovator. That, of course, is China's goal.
        Finally, while there are U.S. policies and measures in
    place, we must also be wary of how any technology transfer,
    foreign or domestic, might affect our national security in
    light of China's military modernization which is a growing
    concern. The bottom line, while indigenous innovation is one
    way for China to gain access to desirable foreign technology,
    the fact is that protecting high-technology, intellectual
    property in China has been, is, and will be a significant
    challenge for foreign firms.
        Beijing is bent on China becoming an advanced technology
    economy as quickly as possible. As such, we should not expect
    the multi-vectored Chinese threat to American technology which
    is not limited to the indigenous innovation policy to abate any
    time soon. The question, of course, is what can be done.
        First, and quickly, it is my belief that firms could choose
    not to do business in the China market. This is, of course, a
    private sector corporate decision that the government should
    not interfere with. U.S. firms should be aware of the threats
    of intellectual property while doing government in China.
        Second, it should be a priority for the U.S. Government to
    get the Chinese Government or any other government to walk back
    policies to make technology transfer a condition for access to
    its market.
        Third, when appropriate, an available remedy, the U.S. in
    concert with others, if possible, should bring Chinese trade
    practices and policies before the World Trade Organization for
    remediation.
        Mr. Chairman, thank you for the opportunity to present my
    views on this vexing matter that faces foreign firms,
    especially those of the United States doing business in China.
        I'm happy to take your questions.
        [The prepared statement of Mr. Brookes follows:]

        Ms. Buerkle [presiding]. Thank you, Mr. Brookes.
        We'll now go to Dr. Levy.

    STATEMENT OF MR. PHILIP I. LEVY, RESIDENT SCHOLAR, THE AMERICAN
            ENTERPRISE INSTITUTE FOR PUBLIC POLICY RESEARCH

        Mr. Levy. Thank you, Madam Vice Chairman, Ranking Member
    Sherman, members of the committee. I appreciate the opportunity
    to testify today on the challenges posed by China's indigenous
    innovation policies. With your permission, I'd like to offer a
    brief summary of my testimony and submit the extended version
    for the record.
        China's approach to intellectual property and government
    procurement is and should be a real source of concern for the
    United States. It may well prove costly to American firms, but
    there are limits to how costly these policies can be.
        Indigenous innovation policies are unlikely to achieve
    their objective of vaulting China to the forefront of global
    innovation, a spot that the United States has traditionally
    enjoyed. The costs, instead, will be extracted from the gains
    that American firms would otherwise enjoy in the Chinese
    market.
        Contesting this policy should be a principal focus of U.S.
    commercial diplomacy with China.
        China's indigenous innovation policies are part of a deep-
    seated effort by the Chinese leadership to advance the country
    from its status as a prolific low-end producer of manufactured
    goods to a position of technological leadership. China is
    pursuing these policies out of a sense of economic weakness,
    not strength. This may seem somewhat baffling to an American
    audience. China often appears to be a paragon of economic
    accomplishment, yet the country faces enormous challenges. It
    remains a relatively poor country with a per capita income in
    2009 under $4,000, less than one tenth that of the United
    States.
        China's recent dominance of the global manufacturing scene
    is neither as secure, nor as lucrative, as it may seem. Prices
    and wages are rising in China and the supply of young workers
    has begun to dry up. There are new comers such as Vietnam and
    Bangladesh eager to take China's place. Further, China's
    impressive exports statistics and participation in production
    of advanced products often conceal a much smaller role when
    carefully assessed. One recent study of Apple iPods highlighted
    this and found an iPod with $194 of captured value, $80 went to
    Apple, and $4 went to the manufacturers in China.
        The indigenous innovation policies themselves are an
    attempt to spur Chinese innovation by giving Chinese companies
    privileged access to the substantial Chinese Government
    procurement market. A central and troubling feature of the
    policies is that they seem intent on extracting foreign
    technology as the price of access to the Chinese market.
        There are two broad points I think worth particularly
    noting about the indigenous innovation policies. One, they're
    malleable and in a state of flux. And two, the specific
    measures describing government purchase and preferences are
    just one aspect of the broader push to stimulate Chinese
    innovation, largely at foreign expense.
        The malleability of the policies suggest that this is an
    area in which diplomatic pressure could have an effect. China,
    as we've discussed, as others have discussed today, has been
    steadily revising its policies since these were first laid out
    in 2009. And in January of this year, as Chairman Royce
    described, China made commitments delinking government
    procurement and intellectual property protection. If those
    commitments were to be taken at face value, they would sound
    enormously promising. Their true value, of course, is going to
    depend on the way that they're implemented.
        One implication of the rapid pace at which the policies are
    evolving is that the economic impact is particularly difficult
    to analyze. A central important point to establish, however, is
    the Chinese approach to indigenous innovation is unlikely to
    succeed. There is little history to indicate that cutting edge
    technology can emerge from a stultifying, government-dominated
    approach. Appropriation of other countries' technological
    advances can facilitate catch up, but it is distinctly
    different from crafting a set of policies that will turn a
    country into a world leader. This means, in turn, that the
    economic impact on U.S. firms investing in China can be
    realized in a more conventional way. For such firms, China's as
    yet ill-defined policies can be thought of as a means of
    extracting a higher price for participating in the Chinese
    market.
        The inadvisability of China's approach to the promotion of
    innovation provides an opening for diplomatic dialogue. An
    alternative approach that shunned intellectual property theft,
    protected innovators of all nationalities, and supported basic
    research would be beneficial for both China and the West.
        China's recent concessions may reflect the fruits of a
    reorientation of U.S. diplomacy away from a fixation on China's
    undervalued exchange rate toward a set of policies that are
    arguably both more amenable to negotiation and more important
    to U.S. economic interests. At summit meetings, countries can
    only have a single top priority. There is an opportunity cost
    to pursuing one policy rather than another.
        To conclude, China is approaching the issue of
    technological leadership from a position of weakness, not
    strength. It faces a broad range of concerns about its economic
    future and is concerned about the economic effects of being
    relegated to a position of eternal, cheap, low-end
    manufacturing. The United States and China share an interest in
    seeing China emerge as a prosperous technological innovator,
    but this emergence should not come about through the
    expropriation of foreign technology or through skewed market
    access.
        China's indigenous innovation policies represent a serious
    misstep along this path. The policies do not threaten U.S.
    technological leadership in the long run, but they do threaten
    to impose substantial costs on U.S. businesses. The willingness
    of China's leaders to rethink some aspects of this policy is
    welcome, but a full reorientation is likely to require a
    sustained and focused prioritization of the issue in U.S.
    commercial diplomacy.
        Thank you.
        [The prepared statement of Mr. Levy follows:]

        Ms. Buerkle. Thank you, Dr. Levy.
        Ms. Lee?

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

        Ms. Lee. Thank you very much, Chair Buerkle, Ranking Member
    Sherman, members of the subcommittee. I appreciate the
    opportunity to testify this afternoon on behalf of the 12.5
    million members of the AFL-CIO on this important topic of
    China's indigenous innovation policies.
        In our view, these policies do pose a threat to the United
    States of America. Even as the U.S. Government has successfully
    challenged some of these policies, many of the damage and
    elements of indigenous innovation predated the official launch
    of the policy, just as some elements will survive the
    government's decision to step back somewhat in response to the
    challenge. I think Ms. Laney said before that this is like a
    game of Whac-A-Mole, that there are many different ways of
    achieving some of the goals that have been laid out.
        And one of the points I wanted to make in general is that
    the AFL-CIO has been raising the issues about job loss with
    respect to our unfair and imbalanced trade relationship with
    China for many years and what we said many, many years ago was
    that the manufacturing jobs move first, but the engineering and
    the know-how would surely follow. And I believe we are
    certainly at that place where we need to pay attention to this,
    as Ms. Laney said, for the future of American industry and the
    cutting edge technology that the United States has always
    enjoyed an advantage in.
        Our trade relationship with China remains enormously
    imbalanced and problematic. The Chinese Government has violated
    its international obligations with respect to workers' rights,
    human rights, currency manipulation, export subsidies and
    intellectual property rights. Last year's implementation of
    indigenous innovation policy simply extended and deepened this
    pattern of violation. Each one of these trade violations
    contribute to the erosion of our industrial base, costing us
    both our economic and national security.
        I want to make three big points today. First, indigenous
    innovation is a serious problem, but it does not exist in
    isolation. I think this is consistent with my fellow panelists.
    It is part of a much broader strategic pattern of behavior by
    the Chinese Government in violation of both U.S. and
    international trade law. And I would agree with the point that
    Mr. Rohrabacher made earlier, that it is the responsibility of
    the U.S. Government to enforce our laws more effectively and
    more aggressively than we have done in the past.
        The actions by the Chinese Government have led to the
    erosion of the U.S. industrial base, and this poses a direct
    threat to the nation's economic and national security. And
    third, the U.S. Government needs to take action on trade law
    violation at the same time as we establish appropriate domestic
    policies, priorities, and strategies to restore America's
    industrial leadership.
        The Chinese Government's economic growth strategy relies
    heavily on export growth, primarily to the U.S. market. The
    elements in the strategy include maintaining the undervalued
    currency, the industrial policy of targeting favored sectors in
    technologies through the low market rate loans and subsidies,
    and protecting domestic markets through overt and covert trade
    barriers such as indigenous innovation.
        The indigenous innovation procurement policy sets a
    specific goal of reducing the degree of dependence on
    technology from other countries from 50 percent to 30 percent
    or less by 2020. The timing coincided with massive public
    investments at the height of the economic crisis. This action
    made transparent what other government practices on technology
    transfer that been achieved by other means and some of the
    businesses that had been formerly reticent and I think we've
    heard about some of those today, have publicly declared they're
    gradually being squeezed out of the Chinese market by
    government policies that first demand technology transfer in
    exchange for market access and then favor domestic companies.
        I think Congressman Sherman mentioned before the enormously
    imbalanced trade relationship that the United States has with
    China with our trade deficit hitting $273 billion in 2010, up
    20 percent from the previous year. I think it's worth noting
    that fully one third of our trade imbalance with China is an
    advanced technology product, so $94 billion--we had a $94
    billion trade deficit with China in advanced technology
    products that exceeds our ATP deficit with the world, with the
    rest of the world taking outshine that we had a $12 billion
    surplus in advanced technology products but with China, we had
    a $94 billion deficit.
        I think it is worth focusing in on that one number because
    what it tells us is is that this is not a future problem for us
    that one day China may overtake us in advanced technology
    products. That day is here and we need to have policy that
    recognize the urgency of the immediate situation today.
        Let me conclude by reiterating the point that we have two
    responsibilities here. One is for the U.S. Government to
    aggressively address the Chinese Government's trade violations
    and the second, for us to establish our own strategic
    priorities and policies. In particular, a recommitment to
    investing in our infrastructure which we have seriously under-
    invested in, changing our tax policies to eliminate incentives
    to outsource production, to invest in renewable energy and
    clean energy so that we can be a leader in that important and
    growing field, to make sure that we are investing in innovation
    and in education and workforce policies so that our workers
    have the skills that they need to compete in the global
    economy.
        I thank you for your time and I look forward to your
    questions.
        [The prepared statement of Ms. Lee follows:]

        Ms. Buerkle. Thank you, Ms. Lee, and thank you to all of
    our panelists today. I yield myself 5 minutes.
        I know that you all differ with respect to the impact of
    China's implementation of its medium to long-term plan for the
    development of science and technology. And I also understand
    the disagreement regarding what the solutions to the issues
    raised by China's determination to transition from an economy
    on manufacturing to an economy determined to expand its
    technological development.
        My question to all three of you, what would a transition
    from this quiet diplomacy to a more intensified, active,
    commercial diplomacy entail? And do you anticipate that the
    Chinese Government would be more receptive to robust diplomatic
    overtures?
        I'll start with Dr. Levy.
        Mr. Levy. Thank you, Madam Chairman. I think we have been
    making a bit of this transition. I think it's a question of
    emphasis, when we are having summit meetings, we have a whole
    range of dialogues. There's the JCCT, the Strategic and
    Economic Dialogue, and we just had a Presidential Summit, the
    question is what to put forward as a top priority and what
    we've seen is when we make this issue a top priority, we at
    least see some movement. It is sufficient movement? Do we
    declare that we've achieved success and it's done? No. It
    hasn't gone that far. But we did see some movement.
        So I guess the early indications are that at that level,
    there seems to be some progress. And I think it's not entirely
    clear--people have different things in mind for more vigorous
    policy if it were something like withdrawing MFN status, I
    think that would have an entirely counterproductive effect.
        Ms. Buerkle. Mr. Brookes?
        Mr. Brookes. I think there's some value in turning up the
    heat on China. I think over the years, my experience with China
    that strong public messages can have an effect, whether you're
    talking about human rights or other issues.
        The challenge is that everything is important, then nothing
    is important in a certain sort of way. So I agree with Mr. Levy
    that you do have to choose what you find to be most important.
    And there are many, many issues on the table with regards to
    China. But I don't see any problem at all with raising the
    visibility of this issue in public discourse by the U.S.
    Government which has all the authority and instruments and
    responsibility for dealing with this, whether you're talking
    about indigenous innovation or any of the other things.
        So I think a more vigorous public sentiment expressed by
    the U.S. Government might be helpful, even though private
    diplomacy certain does have its place.
        Ms. Buerkle. Thank you, Mr. Brookes. Ms. Lee?
        Ms. Lee. I'd like to be a little more blunt. And I would
    say that our current diplomacy with respect to China is
    muddled, excruciating slow, and ineffective by design. And part
    of that is because it's not just that we have many priorities
    and none of them get achieved. I think part of it is that there
    is a serious disconnect between--within the business community
    in the United States of America. That you have two different
    groups, two very distinct groups. One is multinational
    corporations that may be operating both in the United States
    and in China. Some of those companies, let's be honest, are
    actually profiting from the Chinese Government's policies
    whether it's subsidies or violations of workers' rights and
    human rights, lack of democracy, not so much by indigenous
    innovation. And that's why for the first time we actually have
    the business community rising up in outrage that there are
    unfair trade practices going on with the country of China. They
    just noticed it and they're just getting active.
        But I think what's really important for the U.S. Government
    is to make sure that we are standing up for domestic producers,
    those companies, whether they're small and medium-size
    companies or large companies that are actually producing in the
    United States on American soil, certainly that's where my
    members live. My members can't outsource themselves. They need
    to find a good job here in the United States of America and
    they need their own Government to stand up for them in a much
    more consistent and coherent way than we've seen from our own
    Government so far with respect to currency, subsidies,
    intellectual property, and workers' rights.
        Ms. Buerkle. Thank you, Ms. Lee.
        Mr. Brookes, you mentioned and just in the short period of
    time we have left, turning up the heat, what would that entail?
        Mr. Brookes. Well, certainly, the President of the United
    States has a bully pulpit to talk about these issues, whether
    he's traveling in the region and he's in Washington or even in
    China. So there are opportunities because people do listen to
    the President and I think that's one of the ways to do it. Also
    with the Cabinet Secretaries. If they're going to go over
    there, they have an opportunity for blunt talk and they can
    talk about these issues here as well and will be certainly
    picked up in the region and also try to get others to speak
    out. We're not the only ones having this problem in trying to
    work in coalition with them to get them to make it clear to the
    Chinese that these policies aren't acceptable.
        Ms. Buerkle. Thank you all very much. I now yield 5 minutes
    to the gentleman from Rhode Island, Mr. Cicilline.
        Mr. Cicilline. Thank you, Madam Chair. It strikes me from
    the testimony from all of the witnesses today that it appears
    as if the principal way that you are recommending we deal with
    this challenge of indigenous innovation is diplomacy and then
    commercial diplomacy which from my perspective seems to have
    not been very effective. And so I'd like each of the panelists
    to tell me are there other strategies that we can engage in
    that are likely to produce better results than simply raising
    the public discourse? I think we can do that, but it strikes me
    we are doing that to some degree and is it, in fact, are we in
    fact, limited simply to engaging in conversation and commercial
    diplomacy? And coupled with that question is do we have the
    ability under the current system and the resources devoted to
    it to actually know the scope of the problem and to have the
    information we need to be aggressive in this commercial
    diplomacy? I ask each of the panelists to respond to that.
        Mr. Levy. Thank you, Congressman. I think there are a
    number of avenues through which we can pursue this. Diplomacy
    and sort of conversation about this--I think that's what we're
    putting--is one of them. There are other things that we can do
    and that we are doing. I think when there are clear-cut
    violations of the rules under the world trading system, the WTO
    and the GATT, we can and should and do pursue those.
        Sometimes those rules are not as comprehensive as we would
    like. We've already discussed how China is not a signatory to
    the agreement of government procurement. They are bound by some
    of the intellectual property restrictions, but we've already
    had fights with the WTO about just how extensive those
    obligations are. So I would put forward that one neat thing is
    to strengthen that global trading system because as Mr. Brookes
    said, we do have other nations which are facing similar
    problems and we strengthen our stance if we're commonly
    pursuing this. But a stronger WTO system and a successful
    conclusion to the Doha talks would address this. That would be
    one element. And we also have aspects of U.S. law such as
    Section 337 for intellectual property violations that were
    raised earlier.
        So there's a range of these, I think, but trying to
    influence China's behavior domestically, it is going to be
    diplomacy which is our major tool.
        Mr. Brookes. Beyond what Mr. Levy said and others on the
    panel talking about diplomacy and the WTO issue here, I think
    that one of the important things is to get our own economic
    house in order. I think that's critically important. Our
    economic competitiveness which China is undermining through
    these policies is critically important. While we're not
    economically competitive, economically powerful, it affects us
    in many ways besides the well being of the American people
    which is obviously a primary concern and it undermines our
    international influence. It also affects our military, our hard
    power, our ability to express, to do that as well.
        But I also think we also need to look forward to expanding
    free trade beyond China. I'm not necessarily calling it free
    trade with China, but free trade, in general. There are free
    trade agreements before the Congress that should be looked at.
    I think that's critically important providing opportunities for
    American business to do commerce elsewhere.
        I also think that we need, and I'm not an expert in this
    field, but just as a generalist, is that we need to continue to
    provide robust opportunities for research and development in
    this country. What has made America great in an economic power
    that it is, is our ability to innovate and that's why China
    wants to do exactly that because they saw what the United
    States did as opposed to what the Soviet Union did in becoming
    a world superpower, besides military power.
        So I think it's critically important and I don't know how
    you get to that, but that's something outside of my lane,
    something beyond my expertise, but the ability for us to be a
    great innovator to create the great new products I think is
    critically important, so those are a couple of other things
    beyond commerce and WTO.
        Mr. Cicilline. Thank you. Ms. Lee.
        Ms. Lee. Thank you. The first thing I would say is that we
    are talking ourselves into our own economic grave and time is
    not on our side in this discourse that there has been too much
    talk, there has been too much slowing--what we need is more
    remedies. We need concrete remedies. We need to take our cases
    to the WTO. We need to take them to a conclusion where we end
    up actually imposing trade sanctions where we win, and we win
    most of the cases because China is egregiously in flagrant
    violation of its WTO obligations on subsidies, on currency, on
    a whole number of things. I would, for one thing, certainly
    urge the Congress to go ahead, to move forward with the
    currency legislation, the Ryan-Hunter bill that has been put
    forward. I think that is a really important step. It's one big
    chunk of the economic disadvantage that the United States
    producers have in the Chinese trade.
        But I would respectfully disagree with Mr. Brookes about
    the need to do more free trade agreements. I think that's part
    of the mindset around the free trade agreements is part of what
    got us into this problem. And I also don't agree that we need
    to just innovate more. We innovate plenty. We have the
    technology. We have the education. We have the skills. We're
    just losing the economic advantage that goes along with that
    innovation. It's not a question of the United States not being
    smart enough or technologically advanced enough. Thank you.
        Mr. Cicilline. Thank you.
        Ms. Buerkle. Thank you. I yield 5 minutes to the gentleman
    from California, Mr. Rohrabacher.
        Mr. Rohrabacher. Thank you very much. Let me just ask a
    question of the panel very quickly. We have to go into
    discussion. There are two items, legislative items that might
    touch on what we're talking about today. Brad Sherman, who is a
    member of this subcommittee, has suggested that we pull most
    favored nation status from China if it continues in its unfair
    trade practices with the United States.
        Would you favor that, Mr. Levy?
        Mr. Levy. No, I would not.
        Mr. Rohrabacher. Mr. Brookes?
        Mr. Brookes. I've not seen the proposal.
        Mr. Rohrabacher. Ms. Lee?
        Ms. Lee. I think it's certainly something we should look
    into.
        Mr. Rohrabacher. There is a patent bill. For 20 years,
    there's been a group of us fighting what's been called patent
    reform. And in reality, it's a dramatic, how do you say,
    depletion of our patent protection for the American people.
    We've had these multinational corporations about 12 of them. We
    call them the dirty dozen, who are basically interested in
    manufacturing overseas and manufacturing in China in
    particular, but they have been trying to weaken the patent
    system in our country, saying that we need to harmonize it with
    the rest of the world, while the rest of the world, of course,
    has very weak patent protection. The United States has very
    strong patent protection.
        There is a new bill working its way through Congress. Those
    of us who are very strong for intellectual property protection
    are against this bill. Mr. Levy, is your organization for--have
    they taken a stand? Are you for or against this patent, so
    called reform?
        Mr. Levy. AEI doesn't take stands as an institution and I'm
    afraid I don't know enough about that particular bill to give
    an intelligent comment.
        Mr. Rohrabacher. Mr. Brookes?
        Mr. Brookes. I'm in the same situation.
        Mr. Rohrabacher. Okay, I would suggest that the two of you
    have your organizations look at this legislation. It is put out
    by the same people who have been trying to destroy the patent
    system for 20 years and we could use your opinion on it.
        Ms. Lee, what about the AFL-CIO?
        Ms. Lee. I haven't been following that bill closely. I can
    get you an answer.
        Mr. Rohrabacher. Let me suggest that you do so. It's very
    important. We have spent a lot of money. We spend lots of money
    in innovation. We spend lots of money on research, and a lot of
    it ends up in the hands of our competitor. It's a travesty.
    It's a travesty. We give a lot of these companies who end up
    going over to China to do manufacturing, a lot of them have
    been the recipient of major R&D grants by the United States
    Government. This is ridiculous. This is us paying to work
    against the well being of our own working people. I would
    suggest that we've got some really major issues at hand here.
        Let me ask about the market. You mentioned, Mr. Brookes,
    free trade. Now I believe I'm a free trader, just to let you
    know, and Ms. Lee, I tell you that. I'm a free trader, but I
    don't see how you can have free trade unless the people who are
    trading are both free. I say I'm for free trade between free
    people.
        How can you have free trade, Mr. Brookes, if the other side
    of the equation is controlled trade? So it's only one free
    trade system and then it leaves it up to being manipulated by
    the gangsters and the thugs who run these other countries. It's
    not really free trade, is it, if you don't have freedom on both
    sides of the equation.
        Mr. Brookes. I don't dispute that.
        Mr. Rohrabacher. Well, that's what's been happening to our
    relationship with Communist China for the last 40 years. They
    have used market access and subsidies and intellectual property
    theft and currency manipulation in order to control what's
    going on over there, while we have given them access to our
    markets, tried to make sure that we're even handed in terms of
    our currencies and our subsidies, and our own regulation of our
    own businesses here. So that type of--let me just note, this
    type of sincerity, I'm sure is deeply appreciated by the goons
    who control the power in Beijing. Those people look at us like
    we're fools. And our people are paying a big price and there's
    a lot of CEOs in this country who are going along with it
    because they can make a quick profit, a quick profit in China
    and put a big bonus in their pocket and then leave the scene by
    the time the real economic repercussions are felt from
    transferring all over the R&D and transferring over the
    investment and the machinery and the technology that we've
    developed in the United States.
        This is an issue that really needs a close look. I
    understand where Ms. Lee is coming from. I would hope that my
    friends on the conservative side of the spectrum start looking
    and realizing that we have to represent the interests of the
    people of the United States of America and just starting off,
    free trade, when you're allowing it to be manipulated on the
    other side by gangsters is a great disservice to our country.
    So with that, thank you very much, Madam Chair.
        Ms. Buerkle. Thank you, Mr. Rohrabacher. I now yield 5
    minutes to the gentleman from California, the ranking member,
    Mr. Sherman.
        Mr. Sherman. Thank you, Madam Chair. I do want to mention a
    word or two about the bill I'll be re-introducing.
        Mr. Rohrabacher. Which I mentioned before you came in and I
    support, Mr. Sherman.
        Mr. Sherman. Thank you, because, Madam Chair, I've been
    here for a while. This is not the first gripe session I've been
    to about China. I've been to these for 15 years and one option
    you'll have and the other new Members of Congress will have is
    to join for another 15 years of gripe sessions. You'll also
    have the joy of the sign-on letters, where you send letters to
    the Chinese Embassy and sign your name and if you think that
    accomplishes something, more power to you.
        But the other approach is for us to force a crisis in this
    relationship because I think we already have a crisis for the
    United States. For 6 months end MFN for China and tell the
    Chinese that if they want to export $400 billion worth of goods
    to the United States, they're going to have to import $400
    billion of goods from the United States. A balanced trade
    agreement with China will hopefully be the result, but we're
    certainly not going to get such an agreement from them, as long
    as they have free access to the U.S. market under the
    conditions partially described by today's hearings.
        Now it's unfortunate that our witness from the ITC has
    left. Not seeing any senior staff from ITC here, unless they
    identify themselves for the record, so I will make sure that
    our first witness gets the transcript of the second half of the
    hearing and I would hope that the Executive Branch would view
    congressional hearings not as a burden, but as an opportunity
    for learning.
        One of the things we learned from the ITC was that they do
    surveys of employers to see if we have any problems.
        Ms. Lee, did they ever survey organizations that represent
    workers?
        Ms. Lee. Not that I know of.
        Mr. Sherman. Wouldn't you be among the organizations that
    represent workers that they would typically--can you think of a
    larger organization than the one you represent that represents
    workers?
        Ms. Lee. No.
        Mr. Sherman. And as we've seen, there are at least some
    businesses who think that they can enjoy a profit by offshoring
    maybe just a short-term profit, so we ought to have an ITC that
    is worker-oriented, not just company-oriented.
        Ms. Lee, what would you think of the ITC no longer being an
    independent organization, but instead being part of the
    Department of Labor?
        Ms. Lee. I think it would certainly be a huge improvement
    if the ITC did take its job seriously as looking at the impact
    on workers, not just on businesses and the profitability of
    businesses, but they took seriously how working people might be
    impacted by different changes in trade policy. And course, you
    mentioned earlier that their economic modeling with respect to
    the job impact of trade agreements has been notoriously
    inaccurate over many years and yet it is still used as though
    those numbers are gospel.
        Mr. Sherman. They weren't within a couple trillion dollars
    over the last decade. And you criticize them. Are you always
    that tough?
        Let me move on to another question, Ms. Lee. One does not
    regularly associate organized labor with intellectual property
    concerns, perhaps because the creators of intellectual property
    are for the most part not unionized.
        Can you explain why IP protection, especially combating
    theft and compelled transfer of American IP by the Chinese is a
    significant concern for the AFL-CIO?
        Ms. Lee. I'd be delighted to. And first of all, we do
    represent a lot of both performers and writers and other people
    who make a living from intellectual property rights, musicians,
    and actors and so on, and we often hear from those unions that
    they are very much in favor of strengthening the intellectual
    property rights protections that we have overseas. They lose
    billions and billions of dollars worth of revenue, some of that
    is revenue to the performers themselves through the violations
    of intellectual property rights.
        In the music industry, for example, the Chinese music
    market is worth around $100 million, but it should be more than
    $1 billion. So that's $900 million worth of revenues that is
    lost to both American musicians and also companies because of
    Internet theft and because of other physical theft of
    intellectual property rights. So there certainly are a lot of
    jobs and there is income associated with the violation of
    intellectual property rights. That's also true, I think. Mr.
    Rohrabacher used the example of the carts, you know when the
    design of the carts is stolen and moved to China. Those hundred
    workers lost their jobs immediately. His friend, at least, was
    able to keep the ownership and do a joint venture for several
    years before he was edged out of the company, but those 150
    workers or so lost their jobs immediately.
        Mr. Sherman. I'm going to ask unanimous consent to be able
    to ask one more question?
        Ms. Buerkle. Without objection.
        Mr. Sherman. This Korea free trade agreement, it allows
    goods to be 65 percent made in China. For certain classes of
    goods that percentage is different, but 65 percent is what
    applies to auto, ships, electronics, boilers, aluminum, iron,
    steel. And then those goods can go to South Korea where Chinese
    guest workers living in barracks can do the other 35 percent of
    the work.
        Do you think that American workers will be at a
    disadvantage if they have to compete against goods that are
    made exclusively with Chinese labor and instead of most favored
    nation status, we have free trade agreement treatment of those
    goods? And do you think it's fair that goods that 100 percent
    Chinese labor can come into the United States with a free trade
    agreement totally duty free while China will have duties on all
    our goods, in other words, we'd have a one-way free trade
    agreement with China?
        Ms. Lee. We are always in favor of stronger rules of origin
    because we think that if we're going to negotiate a trade
    agreement with a country, the benefits should go to the country
    that makes the concessions, whether it's on intellectual
    property rights or market access or workers' rights or
    environmental protections. And so we were very concerned about
    the Korea FTA and the relatively weak rule of origin there that
    allows quite a large quantity of the final product to be
    assembled outside of South Korea, could be in China, could be
    in North Korea, it could be other places. And that is very
    troubling to us.
        It's also not good for Korean workers. It's not good for
    U.S. workers. We have been in contact with our Korean
    counterparts and they were also very concerned that the
    benefits of the agreement will not necessarily go to the two
    countries that have signed.
        Mr. Sherman. Thank you for mentioning the tremendous
    benefits that North Korea will get under this agreement, which
    I haven't mentioned up until now because those are the subject
    in part of our hearing tomorrow.
        Ms. Buerkle. Thank you, Mr. Sherman. Let me begin by saying
    thank you to our panelists and for taking time out of your busy
    schedules to come here today and testify. We appreciate that
    very much.
        Without objection, your full testimonies will be entered
    into and made part of the record. And members will have 5 days
    to add any questions or opening statements to the record.
        This subcommittee hearing is adjourned.
        [Whereupon, at 4:37 p.m., the hearing was concluded.]

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