[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/

                                 ______


                  U.S. GOVERNMENT PRINTING OFFICE
65-057                    WASHINGTON : 2011
-----------------------------------------------------------------------
For sale by the Superintendent of Documents, U.S. Government Printing Office, 
http://bookstore.gpo.gov. For more information, contact the GPO Customer Contact Center, U.S. Government Printing Office. Phone 202ï¿½09512ï¿½091800, or 866ï¿½09512ï¿½091800 (toll-free). E-mail, [email protected].  

                      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.]
                                     

                                     

                            A P P E N D I X

                              ----------                              


     Material Submitted for the Hearing RecordNotice deg.



                               Minutes deg.

                               
                               
                               
                               
                               Connolly statement deg.
                               __________
                               
                               
                               
                               
                                 
