    [House Hearing, 115 Congress]
    [From the U.S. Government Publishing Office]

     CHINA'S TECHNOLOGICAL RISE: CHALLENGES TO U.S. INNOVATION AND SECURITY

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

                                    HEARING

                                   BEFORE THE

                      SUBCOMMITTEE ON ASIA AND THE PACIFIC

                                     OF THE

                          COMMITTEE ON FOREIGN AFFAIRS
                            HOUSE OF REPRESENTATIVES

                         ONE HUNDRED FIFTEENTH CONGRESS

                                 FIRST SESSION

                                   __________

                                 APRIL 26, 2017

                                   __________

                               Serial No. 115-22

                                   __________

            Printed for the use of the Committee on Foreign Affairs

    [GRAPHIC(S) NOT AVAILABLE IN TIFF FORMAT]

    Available via the World Wide Web: http://www.foreignaffairs.house.gov/
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                          COMMITTEE ON FOREIGN AFFAIRS

                     EDWARD R. ROYCE, California, Chairman
    CHRISTOPHER H. SMITH, New Jersey     ELIOT L. ENGEL, New York
    ILEANA ROS-LEHTINEN, Florida         BRAD SHERMAN, California
    DANA ROHRABACHER, California         GREGORY W. MEEKS, New York
    STEVE CHABOT, Ohio                   ALBIO SIRES, New Jersey
    JOE WILSON, South Carolina           GERALD E. CONNOLLY, Virginia
    MICHAEL T. McCAUL, Texas             THEODORE E. DEUTCH, Florida
    TED POE, Texas                       KAREN BASS, California
    DARRELL E. ISSA, California          WILLIAM R. KEATING, Massachusetts
    TOM MARINO, Pennsylvania             DAVID N. CICILLINE, Rhode Island
    JEFF DUNCAN, South Carolina          AMI BERA, California
    MO BROOKS, Alabama                   LOIS FRANKEL, Florida
    PAUL COOK, California                TULSI GABBARD, Hawaii
    SCOTT PERRY, Pennsylvania            JOAQUIN CASTRO, Texas
    RON DeSANTIS, Florida                ROBIN L. KELLY, Illinois
    MARK MEADOWS, North Carolina         BRENDAN F. BOYLE, Pennsylvania
    TED S. YOHO, Florida                 DINA TITUS, Nevada
    ADAM KINZINGER, Illinois             NORMA J. TORRES, California
    LEE M. ZELDIN, New York              BRADLEY SCOTT SCHNEIDER, Illinois
    DANIEL M. DONOVAN, Jr., New York     THOMAS R. SUOZZI, New York
    F. JAMES SENSENBRENNER, Jr.,         ADRIANO ESPAILLAT, New York
        Wisconsin                        TED LIEU, California
    ANN WAGNER, Missouri
    BRIAN J. MAST, Florida
    FRANCIS ROONEY, Florida
    BRIAN K. FITZPATRICK, Pennsylvania
    THOMAS A. GARRETT, Jr., Virginia

         Amy Porter, Chief of Staff      Thomas Sheehy, Staff Director

                   Jason Steinbaum, Democratic Staff Director
                                     ------

                      Subcommittee on Asia and the Pacific

                         TED S. YOHO, Florida, Chairman
    DANA ROHRABACHER, California         BRAD SHERMAN, California
    STEVE CHABOT, Ohio                   AMI BERA, California
    TOM MARINO, Pennsylvania             DINA TITUS, Nevada
    MO BROOKS, Alabama                   GERALD E. CONNOLLY, Virginia
    SCOTT PERRY, Pennsylvania            THEODORE E. DEUTCH, Florida
    ADAM KINZINGER, Illinois             TULSI GABBARD, Hawaii
    ANN WAGNER, Missouri

                                C O N T E N T S

                                  ----------
                                                                       Page

                                   WITNESSES

    Mr. Dean Cheng, senior research fellow, Asian Studies Center, The
      Heritage Foundation............................................     8
    Robert D. Atkinson, Ph.D., president, Information Technology and
      Innovation Foundation..........................................    24
    Robert E. Scott, Ph.D., senior economist, Director of Trade and
      Manufacturing Policy Research, Economic Policy Institute.......    53

              LETTERS, STATEMENTS, ETC., SUBMITTED FOR THE HEARING

    The Honorable Ted S. Yoho, a Representative in Congress from the
      State of Florida, and chairman, Subcommittee on Asia and the
      Pacific: Prepared statement....................................     3
    Mr. Dean Cheng: Prepared statement...............................    10
    Robert D. Atkinson, Ph.D.: Prepared statement....................    26
    Robert E. Scott, Ph.D.: Prepared statement.......................    55

                                    APPENDIX

    Hearing notice...................................................    90
    Hearing minutes..................................................    91
    The Honorable Gerald E. Connolly, a Representative in Congress
      from the Commonwealth of Virginia: Prepared statement..........    92
    Written responses from the witnesses to questions submitted for
      the record by the Honorable Ted S. Yoho, a Representative in
      Congress from the State of Florida, and chairman, Subcommittee
      on Asia and the Pacific........................................    94

     CHINA'S TECHNOLOGICAL RISE: CHALLENGES TO U.S. INNOVATION AND SECURITY

                                  ----------

                           WEDNESDAY, APRIL 26, 2017

                           House of Representatives,

                     Subcommittee on Asia and the Pacific,

                         Committee on Foreign Affairs,

                                Washington, DC.

        The subcommittee met, pursuant to notice, at 2:32 p.m., in
    room 2172, Rayburn House Office Building, Hon. Ted Yoho
    (chairman of the subcommittee) presiding.
        Mr. Yoho. All right. The subcommittee will come to order.
    Members present will be permitted to submit written statements
    to be included in the official hearing record. Without
    objection, the hearing record will remain open for 5 calendar
    days to allow statements, questions, and extraneous materials
    for record, subject to length, limitations, and the rules.
        China's growth as a technological powerhouse is one of a
    number of momentous changes taking place in the U.S.-China
    relationship. Some changes are driven by pressing threats, like
    North Korea's belligerence and the resulting close
    communications between President Trump and President Xi. Others
    like the President's executive order on steel imports are
    simply the result of our change in administration. Still more,
    like the impending launch of China's first indigenous produced
    aircraft carrier, are symbolic of China's growing power.
        These changes will demand policy adjustments, which is no
    easy task. Our bilateral relationship is the most consequential
    in the world. We can't set policy based solely on short-term
    commitments by China to reign in its dangerous North Korean
    trading partner or predatory trade practices. During this time
    of recalculation, the United States must account for the
    complete picture, taking into account broader long-term trends.
    China's policies toward high technology and its conduct in the
    high-technology sectors make up concerning pieces of this
    picture.
        China is relentlessly pursuing long-term degradation of
    U.S. strategic and economic interests through its high-tech
    policies. As China has risen, it has not integrated itself into
    the existing rules and structures for global leadership and
    trade as many have hoped. In high-tech sectors and more
    broadly, China has undertaken mercantilist industrial policies
    to advance its business interests at the expense of others and
    pursued asymmetric strategic capabilities that erode
    traditional understandings of military operations.
        China has undertaken a comprehensive industrial strategy to
    advance domestic high-tech industry through nonmarket means.
    Massive state subsidies and zero sum tactics degrade foreign
    competitiveness, and the systematic and widespread theft of
    intellectual property and forced transfers of technology
    destroys innovation and research investments. Today is World
    Intellectual Property Day, a fitting time for a reminder that
    protecting U.S. innovation must be an inviolable part of our
    national strategy toward China.
        These predatory industrial policies are in full display in
    China's ongoing attempts to dominate critical high-technology
    supply chains such as semiconductor production. The economic
    stakes are high. The United States is the world's leader in
    semiconductors. The industry employs more Americans than the
    steel industry, and semiconductors are our fourth most valuable
    export.
        But the security concerns are also significant.
    Semiconductors are the enabling technology of all electronics,
    and a comprised supply chain could contaminate sensitive
    military technology with secret back doors.
        China's high-tech policy is also challenging U.S.
    leadership in space. China is expanding its scientific
    exploration and space-based military capabilities at a rate
    that may credibly make outer space into a bipolar domain. This
    is a significant strategic threat as top U.S. military
    strategists predict that space-based capabilities will be the
    key to all future conflicts. Under the status quo, China will
    own the Earth's only manned space station and will beat the
    United States back to the Moon in the coming years.
        Future conflicts also highlight the threat posed by China's
    cyber capabilities. It is believed that the U.S. critical
    infrastructure has already penetrated numerous times, putting
    it at risk if a conflict were to occur. The ability to threaten
    U.S. energy grids and utilities network mean that the homeland
    could suffer serious costs from conflicts that would otherwise
    be limited and regional.
        China's cloud has grown along with its economic power, but
    China has not matched its growing influence with behavior
    expected of a global leader. This is particularly concerning in
    high-tech fields which will be critical to future economic
    gains.
        China is the world's second largest economy, but in
    pursuing dominance in high-tech sectors, it regularly violates
    or disregards the practices that have contributed to global
    economic growth. The emerging strategic commons of cyberspace
    and outer space are critical for global security. But China's
    action in these domains and its track record in the South China
    Sea raises serious doubts that China can be trusted to act
    responsibly and follow international law in shared spaces.
        I thank the panel for joining us today to discuss the
    challenges to U.S. innovation and security presented by China's
    high-tech policies in these critical areas. I look forward to
    hearing your recommendations for U.S. policies.
        And without objection, the witnesses' written statements
    will be entered into the hearing record. I now am going to turn
    to our ranking member for any remarks he may have.
        [The prepared statement of Mr. Yoho follows:]

    [GRAPHIC(S) NOT AVAILABLE IN TIFF FORMAT]

                                  ----------

        Mr. Sherman. And believe it or not, I have a few.
        Friends trade with each other on a balanced and fair basis.
    I am glad to have another hearing focused on their trade
    relationship with China. Recently, we saw a phenomenal event at
    Mar-a-Lago, the total capitulation to President Xi on all
    economic issues. So much else was going on in the world that
    the press didn't bother to cover it, but the fact is that a
    President that promised to be tough on China trade let
    President Xi go home thinking we would do absolutely nothing.
        Now supposedly, this is in return for a promise that
    China's going to help us with regard to North Korea. First,
    what kind of friend needs to be bought off with American jobs
    in order to stop subsidizing and supporting a lunatic that
    wants to develop the capacity to incinerate American cities.
    That is not something that we should have to pay for in
    American jobs.
        But second, China isn't doing it. Refinement of uranium and
    creation of plutonium continues in North Korea. The missile
    tests take place every time there is the anniversary of one of
    the leader's forbearers. And China delays the purchase of one
    or two trains of coal. Of course, the country with perhaps the
    most polluted urban areas in the world when it comes to air
    might want to cut back on its coal imports anyway. This is an
    utter capitulation to China in return for basically nothing and
    certainly nothing that has made us safer.
        We are the global leader in technology and science. The
    recent budgetary proposals to cut back on scientific
    development aren't going to help that. China's Made in China
    2025 proposal is designed to take--to make the trade balance
    even more unbalanced by replacing those products that they
    import from us and exporting more to us. China's trade
    practices include, first and foremost, a rejection of the
    concept that there should be fair and balanced trade with the
    United States, and include historic currency manipulation,
    propping up state-owned enterprises, intellectual property,
    theft, forced technology transfer, dumping, barriers to
    importation, nontransparent trade laws and regulations,
    subsidies leading to overcapacity, et cetera, et cetera.
        Now, the--we had a $310 billion trade deficit with China.
    This is the largest persistent trade deficit in the history of
    the world. In 2015, it was $336 billion. We are told by the
    Washington/Walmart/Wall Street axis a variety of things. First,
    we are told it doesn't matter. Well, it does, because every
    billion dollar trade deficit translates into losing 10,000
    jobs. We are told our unemployment rate is low. Our
    unemployment rate is not low enough to create the labor
    shortage necessary so that Wall Street has to raise wages.
    Until we see a massive increase in wages, we need every good
    job we can get, and every billion dollars of unbalanced trade
    is 10,000 jobs.
        We are told that the trade deficit stems from a fair
    system, and that of course is absolutely false. And we now see
    that with advanced technological products, where China should
    be importing more from the United States, we ran a $114 billion
    trade deficit with China last year, and it's only going to get
    worse.
        Now, as to its practices, China's coproduction agreements--
    I mean, if China were to say, there is a 20-percent tariff on
    planes sent from the United States to China, oh, we would say,
    oh, that is a tariff. But if instead they say you can't sell a
    single plane until you build a fuselage factory here in China,
    we say, oh, we don't know what to make of that, so we will
    ignore it. Coproduction agreements are the theft of jobs and
    with regard to China, the theft of intellectual property. We
    allow them because the Wall Street/Walmart/Washington axis does
    not support the American working family.
        We can go on and look at the General Motors situation where
    we can't sell cars there unless we move the factories there. I
    have talked about how Boeing has set to open up its first
    factory line in China, not because of fair economics, but
    because we are not able to sell planes in China unless they
    extort that from us. So one would have to wonder on what basis
    we claim that China has given us most-favored nation status.
        So what is Trump going to do about it? He won the Midwest
    from Pittsburgh to Milwaukee saying he was going to solve this
    problem. Current law allows him to impose, depending, 10
    percent, another 15 percent, another 15 percent tariffs on
    Chinese imports or to threaten to do so. He has done neither.
    The trade deficit is running today as it has run in the past.
    There was a blip because of Chinese New Years, but that is a
    blip we would expect every time there is a Lunar New Year.
        So he's got the power, and the most obvious thing he can do
    is designate China a currency manipulator. Now, you can say,
    well, maybe they are not manipulating the currency today. How
    many factories have they built? What competitive advantage have
    they stolen from the currency manipulation in the past? Since
    when are you not a currency? That is like saying, I didn't
    murder anybody today; therefore, I am not a murderer. They
    benefit from their past currency manipulation.
        So the President told us he would do something. He
    campaigned--when it came to China, he campaigned with a big
    mouth and he governs with small hands.
        I yield back.
        Mr. Yoho. And you worked that in there.
        We are going to extend a minute to each of the members that
    want to speak, and we will start with Mr. Dana Rohrabacher out
    of California.
        Mr. Rohrabacher. One of the things I am proudest of is that
    I, early on in my career here in Congress, led the floor fight
    against most-favored nation status for China, and all those
    folks on the other side of the debate were telling us how
    making sure that China prospered by having the right kind of
    economic relationship would bring liberalism in a more peaceful
    world. Now we now what baloney that is and what baloney we have
    been fed about China all these years.
        China is an emerging threat to the United States and an
    emerging threat to people who want to live at peace in the
    world. They have more land claims and territorial claims than
    most any other country in the world against various other
    countries, which we ignore. And we now, of course, hear that
    our President now has not been tough enough with this visit of
    this Chinese leader. Let me just wait and see. I said, let's
    wait and see. Let's see if indeed these Chinese who have not
    done anything but steal and rob from us, undermining our
    national security all these years, let's see if they help us at
    least with this problem in North Korea, which is a horrendous
    problem. If they do, our President has accomplished a great
    accomplishment. So let's not just turn this into a totally
    political brouhaha.
        Mr. Yoho. Thank you.
        Next, we will go to Mr. Chabot from Ohio.
        Mr. Chabot. I thank the gentleman.
        Having been a past chair of this committee, we have had
    hearings like this in the past, and China just--and Mr. Sherman
    is nodding--we have been through this before a number of times.
    And now as chair of the Small Business Committee, we have seen
    things that are affecting small businesses all over the country
    relative to what China's shenanigans are.
        U.S. security contractors discovered preinstalled software
    in Android phones belonging to American cities. This software
    enabled them to effectively keep tabs not only on the owners'
    whereabouts but on their private conversations with friends and
    family members and business partners, et cetera. This
    unauthorized and private information was then silently
    transmitted back to a server located in China.
        I have only got a minute, so I can't go on nearly long
    enough on this. But China has been one of the bad actors on the
    world globe for far too long, and I am very, very looking
    forward to hearing--we had a couple of witnesses before, when I
    was chair, and we have got some good witnesses here. So I
    commend the chairman for bringing this panel together, and I
    yield back.
        Mr. Yoho. Thank you, sir.
        And I just want to remind members that votes are going to
    be called between 3 o'clock to 3:10, and we are going to have
    to take a break. If you guys would hold on, if you can, it is
    going to take us probably 20 to 30 minutes to do that and we
    can finish up. And if you can't, we understand.
        But with us today--and I am very thankful for this. I look
    to you guys as the experts to help us guide--to guide us to get
    policies that we can pass on to the State Department and this
    new administration to help direct policies on how we deal with
    an emerging China.
        And with us today we have Mr. Dean Cheng, senior research
    fellow at The Heritage Foundation, Asian Studies Center; Dr.
    Robert Atkinson, president of the Information Technology and
    Innovation Foundation; and Dr. Robert Scott, senior economist
    and director of trade and manufacturing policy research at the
    Economic Policy Institute.
        We thank the panel for joining us today. I really do look
    forward to hearing your testimonies because this is what--you
    know, as Chairman Chabot brought up, we have been here before.
    What I don't want to do is come back a year from now or 2 years
    from now and say, man, we talked about this 2 years ago. What
    did we do in the interim? I want to have some action items that
    we can go back and we can create legislation to have action
    statements.
        Mr. Cheng, we are going to start with you. Press your red
    button to speak, and your timer. I am going to try to hold you
    guys to 5 minutes. I know that is sometimes tough, but I do
    appreciate it. And so go ahead. Thank you.

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

        Mr. Cheng. Chairman Yoho, Ranking Member Sherman, members
    of the House Foreign Affairs Committee, my name is Dean Cheng,
    I am the senior research fellow for Chinese political and
    security affairs at The Heritage Foundation. Please let me note
    I am not an economist. I am honored to be here and testifying
    before you but must note that my testimony reflects only my
    opinions and do not represent those of The Heritage Foundation.
        Before addressing the specifics of the issues that are laid
    out before us, I think it is important to recognize a couple of
    framework aspects, one of which is that innovation in
    particular can often come in very different forms. We as
    Americans tend to focus on technological innovation, but there
    are other examples of innovation, including fundamental
    scientific breakthroughs, what are sometimes termed paradigm
    shifts; innovations in terms of organization; and innovation in
    terms of processes, especially production or delivery methods.
        This is important because it is also important to recognize
    that others have successfully innovated in the past, often
    building on top of our own breakthroughs. The best example
    here, of course, is Japan, who in the 1980s built on the
    American invention of VCRs by making significant innovations in
    the production processes so that they could manufacture VCRs
    more cheaply, and yet they would be much more reliable than
    those that were produced by the United States at the time.
        In this regards then, when we look at China in innovation,
    it is important to also recognize how much China is focused on
    information-related technologies. And this is in part because
    the Chinese leadership believes that we are now living in an
    information age. So the very nature of international power, the
    currency of international power has shifted from traditional
    industry, per se, the shareability to manufacture tanks or
    steel or generate power, toward the ability to gather
    information, analyze information, and exploit information.
        As a result, China believes that in a sense the global
    balance of power has been reset back to zero where everyone is
    starting from the same starting point and China can therefore
    catch up much more easily. At the same time, China has also
    recognized that this has implications for regime stability as
    well as national security.
        We see, for example, significant Chinese efforts at
    innovation in their space effort. Too often we are working off
    the very wrong perception the China space program is entirely
    rooted upon copying from others when, in fact, to begin with,
    China's space program really took off when it was isolated from
    all other players. It entered the space age in the 1960s when
    it had no relations with either the United States or the Soviet
    Union. Often, Chinese equipment, while externally similar, is
    in fact significantly different from the ostensible source. The
    Shenzhou manned spacecraft is bigger. Its power-generating
    capacity is significantly larger than the Soyuz to which it
    bears a superficial resemblance.
        And finally, we are seeing genuine Chinese innovation in
    space. They deployed the first quantum communication satellite,
    which is--probably enjoys unbreakable encryption. They have
    developed a direct descent antisatellite capability to threaten
    targets in the geosynchronous belt. No other country has
    developed that. They are deploying a communications satellite
    at Lagrange point 2 to support a mission to the far side of the
    Moon, which no other nation has done. And finally, their BeiDou
    Navigation Satellite has a backup communications capability.
    Again, a setup that no other country has done.
        We see the same actual innovation in terms of Chinese
    cyber. The great firewall of China is a form of innovation. It
    is something that obviously strikes at values like the free
    flow of information, but that is a values issue, not an
    innovation issue. PRC telecoms have demonstrated the ability to
    selectively shut down things like text messaging while--without
    shutting down mobile phone service. And the great canon allows
    China to selectively target different entities for DDOS, for
    distributed denial of service attacks, which no other country,
    frankly, has developed.
        China has also developed an organization involving hundreds
    of thousands of human censors to censor the internet within
    China. Again, not something that we would support, but it is a
    form of innovation.
        None of this is to argue that China does not engage in
    cyber espionage or that China does not engage in unfair trade
    practices. Rather, it is to suggest that it is important to
    recognize that they do those things, but that they also promote
    innovation within China. They are trying to catch up, including
    in terms of innovation in key areas such as space and cyber.
    One of the key areas that they are likely to follow up on is to
    push for access through venture capital and other entities in
    the United States that they will have had a hand in setting up.
        And I would strongly recommend to this committee thinking
    about a follow-on to the CFIUS process where we are not just
    simply limiting Chinese entry into our markets but what happens
    after they have already entered.
        Thank you very much.
        [The prepared statement of Mr. Cheng follows:]

    [GRAPHIC(S) NOT AVAILABLE IN TIFF FORMAT]

                                  ----------

        Mr. Yoho. Thank you.
        Dr. Atkinson.
        And they have just called votes, so we have got about 12
    minutes before we have to leave, then we will come back.

    STATEMENT OF ROBERT D. ATKINSON, PH.D., PRESIDENT, INFORMATION
                  TECHNOLOGY AND INNOVATION FOUNDATION

        Mr. Atkinson. Thank you Chairman Yoho, Ranking Member
    Sherman, and other members of the committee. It is a pleasure
    to be here.
        ITIF is a think tank here in Washington. We have focused on
    what we term Chinese innovation mercantilism for a number of
    years.
        I want to postulate that the challenge today is a little
    different than it has been for the last 15 years with regard to
    China. That challenge was largely about U.S. low- and mid-tech
    manufacturing on a commodity based goods, where they were able
    to hollow out U.S. manufacturing in a serious way, largely by
    currency, subsidies, other kinds of measures. And that does
    matter. I agree that the trade deficit does matter to our
    Nation's prosperity. But I would argue that the emerging
    challenge is somewhat different.
        The emerging challenge now is about the Chinese Government
    enacting a suite of policies to go after the U.S. leadership in
    our core advanced technologies. It is one thing to lose
    textiles, I feel bad for the textile workers and the textile
    communities, but the U.S. real core advantages in advanced
    industries, that is what the Chinese are going after. I think
    we should look at a world or at least consider a world where in
    15 years, U.S. technology jobs in industries like aerospace,
    chemicals, computers, motor vehicles, medical equipment,
    pharmaceuticals, software, semiconductors, are dramatically
    reduced from where they are today. I think that is the risk we
    have to look at.
        More importantly--or as importantly, once those are gone,
    the dollar could fall dramatically and we are not going to get
    them back. We can get a lot of commodity things back if the
    dollar falls enough, because it is not that hard to recreate
    them. Once you've lost an industry like semiconductors or
    aerospace, it is really, really hard to get it back.
        So the Chinese have a goal of mastering their own
    technologies, a very different goal than most countries which
    is around comparative advantage, and they are doing that in a
    wide variety of areas. Other members have mentioned some of the
    tactics. I have that in my testimony so I won't go into that.
        But let me talk briefly about the case of semiconductors.
    This is a leading U.S. industry. We enjoy a $420 billion trade
    surplus, more--or equally importantly, we specialize in the
    higher value added segments in industry, R&D design and
    advanced manufacturing. So that is a real core strength for us.
        The Chinese have a strategy now to eliminate semiconductor
    imports completely within 20 years and to grow their own
    national champions to come out and take market share away from
    U.S. companies. A key tactic in their 2014 strategy for
    national guidelines for development of promotion of integrated
    circuit industry is a $160 billion fund to basically subsidize
    their companies. For example, there is a company called XMC,
    which is a contract chip producer. It is owned by a Chinese
    provincial government. It has received fairly significant
    subsidies to build a massive 1 square kilometer plant to
    produce up to 300,000 RAM flash memory units per month. If they
    are able to do that, and they are already a third of the way
    through building that plant, they will flood the memory market,
    and they will significantly disrupt that, probably leading to
    some bankruptcies in foreign countries.
        So what do we need to do? I think first of all we need to
    do two things when it comes to trade. One is we need to limit
    the Chinese access to our crown jewels. The main way they try
    to get that is either through forced tech transfer or through
    acquisitions, and I will talk in a moment about CFIUS. And then
    secondly, to attempt to roll back. We are not going to
    eliminate, but we can and should roll back some of their
    innovation mercantilist practices.
        I think what that means, when it comes to trade policy for
    Congress and the administration, is that, I know it sounds
    simple, but to focus on China. That really is the biggest
    challenge in our trade policy. It is not other countries who
    are our allies where we might experience minor irritants over
    certain kinds of products; it is really China. And to the
    extent we get engaged in other kinds of trade sites, we reduce
    the ability of our allies to join with us to push back against
    China. A good example of that, both the Japanese and the Korean
    Governments are quite concerned with the same kinds of policies
    that I have talked about here, and they should be natural
    allies with us to do that.
        Secondly, with regard to our China policy, I would argue we
    really need to focus on advanced industries. That is the
    biggest threat. That is where the puck is going towards. While
    other industries are, you know, important certainly to their
    users, this is an important area.
        Third, we need to develop stronger organizational
    capabilities in the Federal Government. We still haven't
    translated some of the Chinese documents for their industry
    strategy. We don't even know what they say because we don't
    have enough Chinese translators or money to just translate
    these simple documents. I would argue also that within the
    National Intelligence Council, we need a dedicated unit that we
    have termed the national industrial intelligence unit; somebody
    in the Federal Government who tracks exactly what China is
    doing, what are the technologies they are going after.
        Two last quick things. I know my time is up. One, given
    that you have oversight of the State Department, I think the
    State Department is a challenge here in these negotiations.
    State is oftentimes the placater. The USTR is the one that
    tries to push hard. State is often the one that is trying to
    get USTR to back off or back down. I think that is a serious
    problem.
        And lastly, CFIUS. We need to update CFIUS. The Chinese
    Government essentially does not let U.S. firms go in and buy
    Chinese firms. I would argue that we need a similar level of
    reciprocity, particularly around advanced technology firms.
        Thank you.
        [The prepared statement of Mr. Atkinson follows:]

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                                  ----------

        Mr. Yoho. Thank you, sir.
        And, Dr. Scott, if you would, please.

    STATEMENT OF ROBERT E. SCOTT, PH.D., SENIOR ECONOMIST, DIRECTOR
      OF TRADE AND MANUFACTURING POLICY RESEARCH, ECONOMIC POLICY
                               INSTITUTE

        Mr. Scott. Thank you very much, Chairman Yoho, Ranking
    Member Sherman, and all the members of the committee. I am
    honored to testify here today. My name is Robert Scott, I am a
    senior economist with the Economic Policy Institute. We are a
    think tank focused on the impact of the economy and government
    policies and low- and middle-income workers in America.
        In my testimony today I am going to focus on the impact of
    the trade deficit with China and how it has affected the U.S.
    economy and on the issues raised in the hearing today. In
    particular, China's rapidly growing technical capabilities,
    fueled by hundreds of billions of dollars of public investment
    and channeled through its increasingly sophisticated industrial
    planning systems represents a tremendous challenge to U.S.
    high-tech industries and to the security of the United States.
        I want to call your attention to the following points:
    Starting with the economics, the rapid growth of U.S. trade
    deficits with China after that country's entry into the WTO
    eliminated 3.4 million U.S. jobs between 2001 and 2015. Nearly
    three-quarters of those--2.6 million--were in manufacturing.
        The largest growth in the trade deficits by industry was in
    computers, and electronic parts, where we lost 1.2 million jobs
    in that same period. As already noted, China has a massive
    trade surplus in advanced technology products, which in 2015,
    reached $120 billion with the United States.
        Now, these job losses that I have been talking about are
    just the tip of the iceberg when it comes to the negative
    impact of trade with China on the United States.
        Wage losses have hurt--much more. They have hurt many, many
    more people; in fact, all workers who don't have a college
    degree. There are roughly 100 million such workers in the
    United States. Growing competition with imports from China and
    other low wage countries has reduced the wages of all of these
    noncollege graduates by, in total, about $180 billion a year in
    2011 alone, or about $1,800 per worker, the median.
        Now, the reasons for China's large and growing surpluses
    with the U.S. go far beyond the free market, as you know and as
    you have expressed here today. China subsidizes and dumps mass
    quantities of exports. It blocks imports, pirates software and
    technology, invests in massive amounts of excess production
    capacity in a range of basic industries, often through state-
    owned enterprises, which leads to massive dumping. China has
    engaged in extensive and sustained currency manipulation over
    the past two decades, which has resulted in persistent currency
    misalignments. I emphasize that is a different concept,
    misalignment versus manipulation. We need to distinguish the
    two.
        I want to make two points here not raised in my written
    statement. First, the rapid growth of U.S. computer imports
    represents a threat to national security because it is
    connected to the outsourcing of U.S. defense products, as has
    been explained in a book and articles by Brigadier General John
    Adams. This outsourcing has eroded our capability for producing
    products for the defense base and has reduced our ability to
    engage in cost innovation, knowledge generation, and domestic
    employment.
        Secondly, China's support for its domestic champion firms
    and industries does threaten the U.S. industrial base, as we
    have already heard here today. China engages in forced
    technology transfer with foreign terms and theft of
    intellectual property. It also blocks or discourages imports,
    and it has of course become much less welcoming to foreign
    investors in recent years.
        Now, turning to policy solutions. China's actions do call
    for direct policy responses. We certainly need to begin by
    aggressively enforcing all fair trade laws and treaty
    obligations. We should self-initiate dumping and countervailing
    duty cases. We should make elimination of China's excess
    production capacity a priority in bilateral negotiations.
        In addition, the United States should continue to treat
    China as a nonmarket economy in fair trade enforcement, because
    if we stop doing that, it will allow China to flood this
    country with dumped imports. China should not be rewarded for
    market distortions with a bilateral investment treaty.
        And lastly, the United States must maintain currency
    vigilance. We must consider negotiating a new Plaza Accord to
    rebalance global trade and currencies. I would like to talk
    about how we might do that perhaps when we have time after the
    break.
        [The prepared statement of Mr. Scott follows:]

    [GRAPHIC(S) NOT AVAILABLE IN TIFF FORMAT]

                                  ----------

        Mr. Yoho. And I really appreciate that.
        And I want to thank our witnesses for the testimony.
        We stand in recess, and we will reconvene directly after
    votes.
        I am going to offer to you if you want to go in the back
    here, I think there is some coffee back there, for you guys,
    anyway. The rest of you can't have it.
        But we will be back as quick as we can, because I want to
    follow up on this. I mean, it is such an important topic. I
    look forward to gaining the information to where we can come up
    with policies that stick.
        Thank you.
        [Recess.]
        Mr. Yoho. We are going to call the meeting back to order.
    We have got people coming in. And respecting your time, we will
    start moving on. Being the chairman, it is nice because I get
    to ask opening questions.
        Dr. Scott, you brought up something very important talking
    about the way China subsidizes and kind of just rolls in and
    takes over different industries through subsidies. If we look
    at the past activity of people of nations, we can predict
    future actions. I sit on the Ag Committee also, and if we look
    at what they have done with, you know, cotton, they heavily
    subsidized that at $1.63 a pound, roughly. Cotton prices over
    here have plummeted, and they have kind of cornered the market
    on cotton. And we have seen that with other commodities, other
    industries. I wouldn't--I would think that this would be no
    different.
        So we know what the past is, we can kind of predict the
    future on past activities. So with that, my question to you is,
    the building blocks of the semiconductor industry, you made the
    reference to steel with automotives and the supply chain, but
    if we know they are doing that with semiconductors, my question
    to you, and all three of you really, is if we look at what
    happened in the past here in the last 2 years of the Obama
    administration, they approved at least 13 semiconductor
    acquisitions in the U.S. Has there been any studies to see what
    effect these acquisitions had on U.S. competitiveness,
    semiconductor supply, that supply chain? What industry sector
    were they in: Banking, military, other? And have these
    purchases by the Chinese Government-backed businesses
    jeopardized or weaken national security in any way?
        We will start with you, Dr. Scott, if you would be so kind.
        Mr. Scott. Thank you very much, Mr. Chairman. I have not
    studied these 13 specific acquisitions. I have studied general
    patterns of the impacts of foreign acquisitions of U.S.
    companies by foreign multinationals. I can say that it is
    almost universally true, that when foreign companies come into
    the United States and take over domestic firms, they are
    looking for two things. They are looking to have access to a
    distribution center for their own products that they are
    producing in their home markets, and they want to have access
    to technology.
        In my prepared testimony, I produced a chart which showed
    the trade trends of foreign--of U.S. subsidiaries of foreign
    multinationals, and that includes large numbers of firms that
    have been taken over by foreign multinationals. It showed those
    companies have a growing trade deficit with the United States.
    They are responsible for a deficit that reached about $300
    billion in 2014, up from about 200 billion in 2000--I am
    sorry--in 1997. So--I am sorry. The actual balance figures
    were--I am sorry, I was wrong. The deficit increased from $124
    billion in 1997 to over $300 billion in 2014. By 2014,
    responsible for about 40 percent of U.S. trade deficits.
        So companies buy up U.S. firms, they hollow them out, they
    export the technology. I think that is especially true in
    semiconductors, and I know that Dr. Atkinson has looked at this
    industry in some detail.
        Mr. Yoho. Right. And we have seen that even with the Apple
    industry. They came over and learned the technology, take it
    over there, and they take over the market. And so I think this
    is something that we really need to pay stronger attention to.
        And President Xi has prioritized advancing China's space
    program to strengthen national security. I know in some of the
    testimonies, we know that future conflicts or future
    disagreements between nations, we have to look at shutting down
    power grids. But why is this considered strengthening national
    security? And they seem to be really pushing this stronger than
    what I would think any other nation would--and I think it was
    you, Dr. Atkinson, talking about going to the backside of the
    Moon, or was that you Dr. Scott?
        Dean, it was you? So why is this so important for them to
    continue down this path? When you look at the previous nations
    that have been in space, we have had multinational
    collaboration in the space station for the future of
    development of science, it seems like. This seems more
    nationalistic, and it seems like a scary way. Do you want to
    comment on that?
        Mr. Cheng. China views space as something that they term
    very dense in high technology. When you look at space, it
    touches on such advanced areas as computing,
    telecommunications, advanced materials, high-carbon composites,
    high-tensile metals. It also involves systems engineering and
    systems integration, two skill sets that the Chinese themselves
    recognize that they are weak in.
        And they see it as an inspiration, that this will inspire
    the next generation of Chinese young people to go and become
    aerospace engineers and systems engineers and systems
    integrators. So developing space, they believe, is going to
    serve very much like a locomotive to pull the rest of China's
    economy forward, to train a new generation of Chinese workers
    in precision manufacturing and the like.
        But it also is important because it touches on information.
    Information is acquired from space; militarily, that is fairly
    obvious, but also even just day to day. More and more industry
    relies on things like precision navigation and timing
    functions, which for us is provided by GPS, and China wants it
    displaced through BeiDou.
        So all of these are skills--all of these are technologies
    and areas that, as China develops its space capabilities, it
    can then turn around and exploit better in terms of both
    exporting its own satellites, which it already does in
    competition with the United States, but also, for them,
    hopefully, they would like to then compete in advanced
    materials and computers and all of these areas.
        In terms of supply chains, it also provides a guarantee for
    all of the domestic industries that China is subsidizing and
    fostering that there will be this very large market of Chinese
    satellites, Chinese aerospace companies that are going to be
    basically saying, absolutely, I want to buy it, and, of course,
    I am going to prefer Chinese products.
        Mr. Yoho. Right.
        And I think I have heard both--maybe all three of you talk
    about how China--and we know this. I was at a briefing one
    time, and the NSA was there, and this is common knowledge
    there. He said, if you are on the internet, just assume China
    is in your computer. If we know that and we know they have put
    in backdoors in some of the phones and those systems--we were
    talking earlier about CFIUS, and maybe it is time for a second
    play on that, to make it stricter.
        Dr. Atkinson, do you have any ideas or any recommendations
    on how would you go about setting up information if a Chinese
    company came in legitimately and they got approved to buy
    here--you know, once they are here, that technology that they
    have acquired they start exporting. The military risk or the
    national security risk, how do we block that in a friendly way
    but preserving our IP, the intellectual property, and national
    security? Any recommendations?
        Mr. Atkinson. Yes. The Chinese acquire U.S. technology
    companies for one and only one reason, and that is to take the
    technology. They don't do it for market share or anything; it
    is about getting the technology. They are behind us in
    technology. If they acquire leading-edge technology and
    incorporate it into their production, they do better.
        There are multiple challenges with CFIUS, and I laid some
    out in my report. There is a longer report we wrote recently
    that incorporated a lot of CFIUS recommendations.
        One of the challenges in CFIUS is the Chinese don't look at
    technology the way we do. We tend to look at it as it is either
    military or it is not military. And so a lot of things get
    through the cracks in CFIUS that are ``not military'' and yet,
    when you connect the dots and you put the capabilities
    together, it ends up enabling their military capability. We
    don't look at it that way because it is not pure military.
        So I think CFIUS needs much, much stronger abilities to
    just simply deny Chinese technology acquisition, particularly
    ones that are backed by the Chinese Government.
        A case in point that CFIUS approved was a company called
    Lexmark, one of the global printer companies. The Chinese
    Government went to a Chinese printer company, who, by the way,
    was under several cases for violating the Lexmark and HP,
    Hewlett-Packard, patents on printer cartridges--they went to
    them and gave them $2.6 billion and told them to buy up Lexmark
    and become the dominant global printer company. In our view,
    this shouldn't have been approved because it wasn't a market-
    based capitalist transaction; it was a government strategy to
    take that technology.
        Mr. Yoho. I am going to give you free range to send
    recommendations to this committee through our committee staff
    here, and I would sure love to incorporate that in the next go-
    around.
        And, with that, I am going to yield to the ranking member,
    my good friend, Mr. Sherman.
        Mr. Sherman. Thank you.
        I would point out that culture can also be of strategic
    interest. The Chinese have bought, I believe, the second-
    largest movie exhibiter in the United States. Richard Gere will
    never make another movie about Tibet. They control our free
    speech through their ownership, and they control our free
    speech in China through all the devices that you have
    identified.
        Now, before the hearing, I talked--and two of the three
    witnesses said that they would have a solution, something that
    would eliminate or at least cut in half the trade deficit with
    China.
        Maybe I heard you wrong. Mr. Cheng is off the hook because
    he didn't make the promise. Do either of the two doctors here
    have a plan that would cut our trade deficits very
    substantially?
        Mr. Atkinson. Yeah. ITIF issued a report in late January,
    early February that was targeted to whoever the new President
    was going to be, President Clinton or President Trump----
        Mr. Sherman. What is in that plan that would cut the trade
    deficit in half?
        Mr. Atkinson. I wish I could give you a simple answer. Let
    me say two things. The first part of that is: Going through the
    WTO, doing these kind of legalistic procedure things isn't
    going to work. Much of what the Chinese are doing gets through
    the cracks of WTO----
        Mr. Sherman. I have got such just limited time. Do you have
    a plan that you think will cut the trade deficit in half within
    a few years?
        Mr. Atkinson. We have to work with our allies to inflict
    real pain on China if they don't change and make them----
        Mr. Sherman. How about just a 20-percent tariff on
    everything to start as opening stakes?
        But I will go to Dr. Scott.
        What do you got?
        Mr. Scott. I think that is moving in the right direction,
    but I think you need a broader plan. I think the first element
    of the plan has to be realigning exchange rates. The Chinese
    currency remains substantially undervalued. There have been
    calculations that show that in order to----
        Mr. Sherman. If it is undervalued, why is it that China has
    to intervene in the markets to cause its currency not to go
    down?
        Mr. Scott. Well, the United States has essentially given
    China carte blanche to open up its capital markets. In fact, we
    have been pressuring them to open their capital markets.
        What this has done is, since the Chinese savers have
    nowhere else to put their money, they are pouring it in the
    United States. We also have the Chinese Government pouring
    their money into the United States to buy up Chinese companies.
        All of it bids up the demand for the U.S. dollar, which has
    risen 25 percent in real terms in the last 3 years. That makes
    our goods much, much less competitive. Calculations have shown
    that in order to rebalance global trade, the Chinese RMB needs
    to rise perhaps as much as 35 or 40 percent.
        But I think we also have to look at other countries that
    have large surpluses, like China and the European Union. They
    also have large global surpluses. This is not just a China
    problem. I think if we focus on that, there may be less a
    problem----
        Mr. Sherman. Have the Chinese ever acknowledged that
    balanced trade over a period of time, not in any one year, is
    an appropriate goal? Or do they look at these trade deficits
    and say, that is healthy, that is the way they should continue?
    Or do they just avoid mentioning that they do have a trade
    surplus with the United States?
        Dr. Scott or anyone else?
        Mr. Scott. I think the Chinese claim that they are playing
    the game the way it should be played and that they are not
    engaging in unfair trade practices----
        Mr. Sherman. And, therefore, the resulting trade deficits
    are incredibly healthy because they result from a system that
    doesn't have all the things that you and I know that it has.
        Mr. Scott. Exactly.
        Mr. Sherman. Okay. So if we impose to start off with a 15-
    percent tariff on all their imports to the United States, with
    a proviso that if they were to retaliate then we would go to 30
    percent, what would be their reaction?
        Mr. Scott. Well, we saw an example of that in 1985 with the
    Plaza Accord. Congressmen Gephardt and Rostenkowski put forth a
    bill in this House, which was passed twice, which would impose
    a tariff of 27\1/2\ percent on imports from Japan and Europe.
    The bill passed the House twice, never got through the Senate,
    was never signed by the President.
        But it caused such concern to the finance ministers of
    those countries that they came to us, they came to James Baker
    and said, we have to find a solution, and that is why we
    negotiated the Plaza Accord. So we never----
        Mr. Sherman. I understand.
        I believe my time has expired. Thank you.
        Mr. Scott. I apologize.
        Mr. Yoho. Thank you.
        We will go to Mr. Dana Rohrabacher from California.
        Mr. Rohrabacher. Thank you, Mr. Chairman, and thank you,
    Mr. Ranking Member. I appreciate it. I have another thing that
    I have to run off to, so I appreciate the courtesy.
        Let me just state right off the bat that, Dean Cheng--is it
    mister? It is not doctor, but it is--right. Okay. Let me just
    say that I have a fundamental difference in analysis than you
    do. You seem to be giving credit to the Chinese Government and
    the Chinese people who are now under that government for many
    of the advances that I do not believe they deserve credit for.
        Let me just note that, again, I have been here 30 years
    now, as I have seen this come and go. But I remember full well
    in the 1990s when, during the Clinton administration, you had
    some of his biggest political backers who were channeling money
    from the aerospace industries in China to the Clinton campaign,
    and they were then transferring vitally important technologies
    to the Chinese.
        There is a fellow shaking his head back there. I
    investigated this for 6 months on my own. And while I found,
    for example--and the reason I was tipped off is I went to a
    meeting of aerospace workers who told me they had been in China
    solving China's rocket problem. They didn't even have stage
    separation, the engineers. Well, who sent them over there? I
    will tell you. Hughes Aircraft sent them over there. And then
    the Chinese, without any money for research and development,
    ended up being able to send things into the air MIRV'd, meaning
    carrying more than one warhead or one payload.
        No, I think that when you take a look at the advances that
    have been made in China, it has been made because you have
    people who have no R&D cost at the fundamental level. What we
    have is Chinese graduate students in our major universities,
    and they are saying, oh, well, you can't bring the records back
    with you, or you have to make sure they are in the security
    drawers. No, no, they remember.
        Just putting them through these courses have given billions
    of dollars, billions and billions of dollars of technological
    know-how that the American people and our companies have had to
    pay for, now transferred to what is not a benevolent government
    that evolved into benevolence by becoming so prosperous, as we
    were told would happen, but, no, a government today that is the
    world's worst human rights abuser, in the sense that they are
    the biggest human rights abuser on the planet, and a country
    that has, as we say, claims against neighboring countries,
    territorial claims, that are very damaging to the peace of the
    world.
        I would suggest that what we are talking about here--I am
    going to ask one question, because--okay. I believe the
    incredible enrichment and increasing power that we have
    provided since Bill Clinton's day as President of the United
    States, since those days, has resulted in the fact that America
    and free countries of the world and even the Chinese people
    themselves, who are in less a secure situation for their own
    potential freedom, that we are worse off, way worse off,
    because of this.
        Now, what I want to ask you--and I will be very quick. Are
    there groups of Americans, like the ones who were giving money
    to the Bill Clinton campaign, who have profited from this
    transfer of technology and continue--that they are not breaking
    the law, however; people who, without breaking the law, are now
    engaged in bolstering the strength and power of this rotten
    dictatorship in China, this crony capitalism that threatens
    their part of the world. Are there Americans that you can
    identify for us that are--not by name but by category--that
    have profited from this horrendous outcome?
        We will start with Mr. Scott--well, no, no, no. Mr. Cheng,
    go ahead.
        Mr. Cheng. Well, sir, I mean, given that we are talking
    about trade relations, presumably there are people who benefit,
    I guess starting with the lobbyists who work on behalf of the
    PRC Government. Certainly, they are going to benefit from being
    paid by the Chinese Government.
        Mr. Rohrabacher. How about levels of management in our
    corporations, that they benefit, and then we don't have--and
    that the people at the lower level of corporate structure in
    America is just damaged dramatically. Is that possible?
        Mr. Cheng. It is certainly possible, Representative. I am
    afraid I don't----
        Mr. Rohrabacher. Okay. Maybe Mr. Atkinson and then Mr.
    Scott.
        Mr. Atkinson. Yeah. I guess I would agree with Mr. Cheng.
    There is trade with China. I think the way to think about this,
    that I would urge you to think about, would be: The Chinese
    Government forces U.S. companies to do things, and if a CEO is
    unwilling to do it, they are going to pay a price. And, in my
    view, it is a little bit like the bully in the school and you
    need a bodyguard. I think the problem is the U.S. Government
    has refused or been unwilling to be the bodyguard and to stop
    the pressure, stop that kind of extortion.
        Mr. Rohrabacher. Well, could it be that the people in the
    management of our companies have short-term personal profit
    interest at heart, even though it has long-term horrible
    implications for their working people in the United States?
        Mr. Scott, go right ahead.
        Mr. Scott. I think I can answer that. My answer goes to
    that question. I think the people who benefit most from
    corporate takeovers--for example, Lenovo's purchase of IBM and
    the Chinese purchaser of the NextGear auto parts manufacturer,
    those directly benefit stockholders, they benefit the managers
    of those companies who get large bonuses for the sale of those
    companies, but my research has shown that millions of jobs have
    been eliminated through the purchase of these companies that
    buy them up and they hollow them out and then they ship parts
    here under those companies. That is the way it works.
        Mr. Rohrabacher. This is a lot deeper issue than that, but
    thank you very much.
        Sorry to take an extra minute.
        Mr. Yoho. Thank you, sir.
        We will next go to Mr. Scott Perry from Pennsylvania.
        Mr. Perry. Thank you, Mr. Chairman.
        Mr. Cheng, long time, no see.
        I don't know if the American people are aware of this, and
    I just want to have a conversation with you about the Chinese
    space program. It would be my assertion that they followed us
    into space but they are ahead of us in a couple different ways
    that Americans aren't aware of, and I think it has manifested
    in a couple different ways, which is a more aggressive use of
    space as a warfighting domain, a state-of-the-art technological
    breakthrough domain, and through groundbreaking civil space
    initiatives that have serious military implications. I don't
    know if you will agree with those, but I am hoping, if you
    don't, that you will explain that.
        I just want to ask you about a couple of things regarding
    their strategy, not the least of which is their quantum
    communications satellite. I don't know the science of these
    electrons that react to one another, whether they are on the
    other side of the galaxy or not, but, as I understand it, it is
    unhackable and unjammable. We are not in that domain at all, as
    far as I understand it.
        And then, when I understand that they are mapping the other
    side of the moon, they plan on going to the poles, I think they
    have satellites in orbit around the moon, I think that they are
    ostensibly for civil purposes, but I want to know if you can
    discuss the military implications.
        If you can verify what I said are the three, kind of,
    domains that they are operating in that we are behind them in.
        Mr. Cheng. Well, sir, to begin with, you left one out,
    which is manned space. At this point, the United States cannot
    put its own astronaut into space. We rely on the Russians. The
    Chinese do not rely on the Russians; they are able to send
    their own people up into space. That is a very sorry state for
    our manned space program to be in.
        In terms of warfighting, the Chinese military has
    reorganized itself to include now an information warfare
    service that specifically includes the space component. So it
    is very clear based on their doctrinal writings that they
    expect the next conflict to be about information, and space is
    a key means of acquiring and transmitting information.
        This is also where quantum computing comes in, because
    information needs to be secure. It needs to be secure
    physically, in terms of the servers and routers. It also needs
    to be secure in terms of being able to be hacked and tampered
    with. Quantum computing--which I must admit, I also am not a
    physicist, and I don't pretend to even play one on TV--
    nonetheless, does seem to have a set of capabilities. The
    Chinese want a quantum computing capability in orbit, which
    says something about their ability to miniaturize it, their
    ability to shield it from cosmic rays and other aspects.
        The Chinese are making a conscious push in terms of the
    array of capabilities that they have developed to be able to
    engage in military operations in space, everything from direct-
    ascent kinetic-kill vehicles, which you fire from Earth, which
    can reach all the way out to geosynchronous orbit, to lasers,
    which have been fired at American satellites, to cyber and
    jamming capabilities.
        And, finally, it is important to note that China's space
    program is essentially run through the People's Liberation
    Army. Every major space facility is manned by the People's
    Liberation Army, including through this new service. The idea
    that we could cooperate with China's space program, which I
    know has been an issue raised before this and other committees
    here on the Hill, means, at the end of the day, getting in bed
    with the People's Liberation Army.
        We have talked here about American security and is there a
    threat from Chinese acquisition of companies. I would suggest
    that openly getting in bed with the Chinese military is a more
    direct threat to our security.
        Mr. Perry. So if you were going to make a recommendation
    based on what you know or believe the Chinese to be pursuing,
    which seems to me, at least based on the last paragraph of your
    statement, regarding their military involvement, what should
    America be doing right now?
        Mr. Cheng. We do still have one of the foremost aerospace
    industries out there, but we seem to be lacking in direction.
    Much along the same lines as we have talked about here about
    defending our own high-tech crown jewels, are we intent upon
    being able to win any competition, including armed
    competition----
        Mr. Perry. Is this the business of NASA or DOD or both?
        Mr. Cheng. We need to coordinate both of them. NASA is a
    civilian agency. It is dedicated much more toward science, but
    it should recognize that it plays a role in terms of diplomacy.
    NASA has the best brand of any part of the U.S. Government, and
    yet it doesn't play that role.
        Mr. Perry. Thanks, Mr. Chairman.
        Mr. Yoho. Thank you for those questions.
        We will next go to Mrs. Ann Wagner from Missouri.
        Mrs. Wagner. Thank you, Mr. Chairman. And I thank you for
    holding this hearing and shining a light on China's
    technological advancements across sectors--frankly, a challenge
    that poses a threat to the rules of global trade.
        I hardly agree with Dr. Atkinson that to defend free trade
    and American jobs we should not advocate U.S. protectionism but
    actively respond to Chinese protectionism. There is no question
    that China's theft of American intellectual property, their
    state control of major industries, and WTO accession have cost
    the American people.
        So I am going to jump right into it. The last
    administration created a pathway to sanction foreign companies
    that steal American intellectual property through cyber
    activities in Executive Order 13694, but it appears that only
    Russian actors were ever sanctioned.
        Dr. Atkinson, or others, do you recommend that the Trump
    administration sanction Chinese companies that repeatedly steal
    American IP?
        Mr. Atkinson. I do. I think the only way that this is ever
    going to turn around is for the Chinese Government to realize
    that there will be actions in reaction to what they are doing.
    And those actions have to impose some level of pain, if you
    will.
        Mrs. Wagner. You said real pain, yes?
        Mr. Atkinson. Real pain, and not just pretend like we are
    going to do it at the next G20 meeting.
        Mrs. Wagner. Right.
        Mr. Atkinson. So we have to identify those pain points, if
    you will, and where we can apply them. But we have to do it in
    a way that is respectful. We have to do it in a way that is
    strategic and focused on real goals and things that we want to
    see the Chinese accomplish within a particular period of time.
        Mrs. Wagner. Dr. Scott, you have put together a compelling
    statement on jobs. China's market interference and
    anticompetitive subsidies hurt the U.S. economy. While I am not
    convinced that currency manipulation and the trade deficit are
    the key drivers of U.S. job loss, I am curious to hear your
    thoughts on the U.S.-China Bilateral Investment Treaty and
    where you think it should go under the Trump administration.
        Mr. Scott. Thank you very much, Congresswoman.
        I am very concerned about the Bilateral Investment Treaty.
    As I have documented in my testimony and elsewhere, my research
    has indicated that bilateral investment tends to lead to a loss
    of jobs, particularly with a country like with China, both in
    terms of when Chinese firms come here to take over U.S. firms,
    as we have been discussing, but also when U.S. firms go to
    China and outsource their production to that country.
        So I think that a passage or adoption of a bilateral
    investment treaty is not in our national interest at this
    point, especially with a country like China that is such an
    egregious violator of the norms of fair trade behavior.
        Thank you.
        Mrs. Wagner. Absolutely.
        Dr. Atkinson, last year, Congress created a private right
    of action for victims of trade secret theft in U.S. courts. And
    1 year later, have companies doing business in China begun
    taking advantage, do you know, of this cause of action?
        Mr. Atkinson. I would have to consult with my colleague
    Stephen Ezell, who follows that issue for us more carefully. My
    sense is they have not, and I think one of the principle
    reasons for that is retaliation.
        American companies are incredibly hesitant to raise any
    complaints because they know from real experience there will be
    retaliation and pain and consequences within that, which is why
    I think, again, it has to be the U.S. Government that leads
    this. The Chinese know how to divide and conquer among our
    firms and within particular industries, picking one firm off
    against another. The U.S. Government has to have essentially a
    policy that we will defend U.S. economic interests regardless.
        Mrs. Wagner. What about the Department of Justice? Should
    they be directing additional resources toward prosecuting trade
    secret theft, perhaps?
        Mr. Atkinson. One of the big problems that we have is that,
    if you look, for example, within the FBI at the commercial
    counterintelligence arm that we have, it is vastly underfunded.
    The folks who are doing that are very, very talented and
    hardworking agents, both in terms of counterintelligence and
    going after this. But that is an afterthought at the FBI right
    now. There are bigger fish that the FBI is focusing on, and
    they have really let that slide.
        There is a very good book, by the way, that two FBI
    counterintelligence agents wrote--and I will send that link to
    you--wonderful book about how the Chinese are going after our
    secrets and how limited their ability is to go after them just
    because of the resources.
        Mrs. Wagner. I wish I had more time, but it appears that I
    have run out, Mr. Chairman, so I shall yield back.
        Mr. Yoho. Thank you, ma'am.
        If you guys are up to it, if you guys want to ask an
    additional question or two, it would be okay--are you guys okay
    with that?
        Go ahead, Ann.
        Mrs. Wagner. Mr. Atkinson, are there additional efforts you
    would recommend to the new administration--I am sorry, Dr.
    Atkinson. Forgive me--to the new administration to safeguard
    U.S. intellectual property? How can we better safeguard from
    our Chinese cyber attacks?
        Mr. Atkinson. Well, a couple things.
        I mean, one is, clearly, we need better defensive measures.
    One of the challenges has been the U.S. Government itself has
    weakened our own commercial cybersecurity by not giving out
    information on zero-day exploits, for example, because they
    want to then use those weaknesses for their own purposes. We
    can have a good discussion about that, but it is clear that one
    of the results of that is to weaken our cybersecurity and allow
    the Chinese to be inside our systems. So that is a very
    important debate to have.
        A second area would be, again, I think we have to go back
    to results-oriented trade, if you will. Reagan did that in the
    eighties with Japan; it was results-oriented. We need to pick
    four or five key things--cyber theft and cyber attacks should
    be on the top of that list--and say, we need to see a reduction
    of that within X amount of months or else there will be
    consequences.
        Mrs. Wagner. Mr. Cheng, would you care to comment, please?
        Mr. Cheng. Two other key points.
        One is it is essential to recognize a Chinese cyber
    activity is not random. We are playing Whac-A-Mole. Oh, my
    gosh--or kiddie soccer. Oh, my gosh, something happens over
    here, and everybody rushes over there, and it is the OPM hack,
    or it is UnitedHealth, or it is some company.
        To recognize that there is a Chinese strategy behind their
    cyber activities means that we can stop addressing individual
    items, which are important but, at the end of the day, are
    tactical. If we can counter the Chinese strategy, whether
    through better investment in counterintelligence, perhaps by
    also improving the level of overall computing security in this
    country, then, in that case, that would go a far distance.
        Representative Perry asked about quantum computing. One of
    the great problems we have is this idea that, ``Well, but
    quantum computing will make the NSA's job almost impossible.''
    And there is a great deal of truth to that. But the answer is
    not to, therefore, stand in front of quantum computing and
    scream, ``Don't go there.'' It may be that, at the end of the
    day, we are all better off, American companies and the American
    Government, if we simply embrace quantum computing and think
    about other ways to then counter that issue rather than denying
    our own companies and government the benefits from that.
        Mrs. Wagner. Very good testimony. I appreciate that.
        Let me shift gears here, and I will just toss this out to
    whomever thinks that they are most schooled on this. The saga
    over rare earth minerals and Mountain Pass mine in California
    has been right out of a movie script. The Wall Street Journal
    reported this week that coal-mining magnate Tom Clarke may
    purchase the mine.
        To anyone who knows best, do you think that Mountain Pass
    could play a role in rebuilding a U.S. supply chain for rare
    earth minerals?
        Yes, Mr. Cheng.
        Mr. Cheng. Rare earths, one, aren't rare. They happen to be
    heavily localized in China, but India, Canada, the United
    States, and Australia all produce rare earths. Part of the
    issue is that rare earths are, however, incredibly
    environmentally damaging in terms of the refining process to
    get at it.
        So the interesting problem here is not can a domestic
    source be found. It is how important is it that we have a
    domestic source relative to EPA standards, EPA requirements. If
    we want to be dependent on the largest supplier, which is
    China----
        Mrs. Wagner. Right.
        Mr. Cheng [continuing]. That is one thing. If we want not
    to be totally dependent upon it, then we also need to recognize
    that there may need to be regulatory relief with regards to
    environmental----
        Mrs. Wagner. Well, you may have answered my followup
    question, which is: What can the U.S. do to compete with
    China's dominance in the rare earths production?
        Dr. Atkinson?
        Mr. Atkinson. So there are a couple things, I think.
        Certainly, the Chinese have used their monopoly on rare
    earth production to force U.S. companies to localize
    production. If you want to get that, we are not going to export
    that material to you, you have to come here to get it. Again,
    that violates the WTO. We should have brought a case against
    that.
        Mrs. Wagner. Right.
        Mr. Atkinson. In terms of domestic production, I agree with
    Mr. Cheng. We just have to decide that is a national priority.
    And, unfortunately, we haven't done that. We have chosen to
    believe that the Chinese will give us those materials.
        Then the third thing we have to do, because we have seen
    this from experience, is when a company tries to then get in
    the market, the Chinese then dump to bring down prices so that
    they can't get in the market. We have to be ready to go with a
    dumping case and dumping and pressure so that they can't use
    that to keep new entrants from getting into the marketplace.
        Mrs. Wagner. Thank you for your testimony.
        Yes, Dr. Scott.
        Mr. Scott. Just one final point. As an economist----
        Mrs. Wagner. Could you hit your mike, please?
        Mr. Scott. Yes. Speaking as an economist, these are clearly
    industries that are huge externalities because it is such a
    polluting industry. There may have to be public subsidies for
    the cost, and we may also have to regulate the industry, not
    export the product, and, as Dr. Atkinson says, respond when we
    are challenged by actions in China if they dump the product.
        Mrs. Wagner. Great. Thank you.
        I think this is very good testimony, Mr. Chairman, and
    testimony that certainly can be taken on board by this
    administration. So I thank you very much, and I appreciate the
    indulgence, sir.
        Mr. Yoho. Yes, ma'am.
        And I was going to follow up with that question. Mr. Perry,
    do you have another question?
        Mr. Perry. I do. Thank you for your indulgence, Mr.
    Chairman.
        Mr. Cheng, thinking about the Chinese, their incursions on
    the Moon, so to speak, satellite, you know, around-the-Moon
    mapping and communications on the back side of the Moon, what
    is the purpose of being on the other side of the Moon and
    mapping the other side of the Moon and endeavoring, I think, to
    go to the other side of the Moon in the next couple years? What
    would be the civilian purposes, and what are the military
    implications?
        Mr. Cheng. Well, the civilian purposes is probably to make
    contact with the Transformers base over there.
        That was intended as humor.
        No, almost certainly one of the most important aspects is
    prestige, to demonstrate, again, that China can be innovative,
    that China can do things that no other country has done.
        From a security perspective, however, it is the
    communications link with the far side of the Moon. Because of
    the way the Moon orbits around the Earth, the far side of the
    Moon never faces Earth. So communicating with the far side
    requires one of two options, either creating a lunar satellite,
    a satellite that orbits the Moon itself--no one has done that
    yet--or putting a satellite at certain key points in deep space
    that will allow you to communicate, which is what China has
    already announced it is going to do.
        It will deploy a communications satellite to Lagrange point
    2. No other country has done that. Countries have put
    scientific exploration satellites there, but no one has put a
    communications or application satellite there. Once there,
    China will have opened the door to deploy other satellites
    there.
        That is beyond the geosynchronous belt. It will complicate
    our ability to do space situational awareness. It will allow
    the Chinese to create essentially an on-orbit reserve of
    communication satellites, so, in the event of conflict, it will
    have, essentially, already in place additional systems to take
    up the slack.
        It could, in theory, bring those satellites back in,
    whether to populate geosynchronous to replace casualties in
    time of war or, alternatively, even as a potential form of
    anti-satellite capability. Because, of course, the satellites
    in geosynchronous are very predictable, so you could, in fact,
    come in from outside orbit and come in, whereas right now we
    are focused on going out to geosynchronous.
        Mr. Perry. Do we have any plans whatsoever that are similar
    to the Chinese in this regard to station, to map, to
    communicate on the back side? Do we have any of these plans
    whatsoever?
        Mr. Cheng. Not to the best of my knowledge. The closest is
    the deployment of the James Webb Space Telescope, which will
    also go to Lagrange point 2. But that, of course, is a
    dedicated scientific satellite which intends to base a
    supplement to Hubble. So, no, there is nothing like this, as
    far as in the public record, for either DOD or NASA.
        Mr. Perry. In my mind, in the way that you present it as
    well, it seems like they have, if they complete this task, an
    extraordinary military capability from a communications
    standpoint and from, if you think about a GPS satellite and how
    much the military depends--nobody reads a map in the military
    anymore, right? It is all GPS-based. Not saying it will always
    be, but right now that is the primary means of location.
        I mean, it presents, I think, a significant hazard. The
    door is wide open for them, if they chose to, to take military
    action on our communications and location array that is in
    geosynchronous orbit without any--there is almost nothing we
    can do.
        Mr. Cheng. Yes, sir. The Chinese, they publish an enormous
    amount of material, and they are very open in saying, the next
    war, one of the things we will try to do--we, the PLA--is
    establish space dominance. This is clearly a step in that
    direction.
        Mr. Perry. Is it something that we should be concerned
    about? I don't know when the next national military strategy or
    national security strategy comes out. Do we not care? Do we not
    take them seriously? Do we not see this as a problem? Or is
    this out of the realm of your expertise?
        Mr. Cheng. There is no evidence that we have taken this on
    board in the most recent national military strategy, national
    security space strategy, or national space strategy, sir.
        Mr. Perry. Okay. Thanks, Mr. Cheng.
        Thank you, Mr. Chairman.
        Mr. Yoho. Again, I appreciate you all, your patience
    staying here.
        I want to just touch base. There is no separation, from
    what I have studied--and I think you have alluded to this--
    between the Chinese Government, the Chinese military, and/or
    Chinese businesses. They are kind of one entity.
        The idea of national pride, going to the Moon, if China
    wants to do that, we can understand that in this country
    because we did that. We can remember how this Nation rallied
    behind that. I truly believe that was for national pride. It
    was a leap of faith and a giant step for mankind that the whole
    world benefited from.
        But what I am seeing here with the Chinese program, I am
    not seeing that. It is like I talked about before; if you look
    at a past activity, we can predict future actions. I wanted to
    touch on the rare earth comments that Mrs. Wagner talked about.
    As of late 2016, China produced more than 85 percent of the
    global rare earth mineral supply, which is used in the
    production of everything from smartphones to advanced weapons.
    I have heard reports that there are almost 2 tons of rare earth
    metals in some of our fighter jets.
        China's control of the market, however, enabled them in
    2010 to restrict rare earth exports by 40 percent and cut off
    supplies to Japan over territorial disputes. We remember that,
    the Japanese Coast Guard ramming the Chinese ship. China just
    backed up, says, ``Not a problem,'' and cut off their rare
    earth, crippling their market.
        So we have seen the story over and over again. And then
    their leader--and I remember this because I saw a documentary
    on it. It was from 1992. It was the Chinese leader, Deng
    Xiaoping. He said that the Middle East has oil, America and
    Japan are in technology. We can't compete with them, but we can
    compete with them on rare earth metals, and we are going to
    corner the market. And they have done that.
        I think we are at a point in this country--and this is
    something we have talked about on this committee--to develop a
    rare earth national security policy for the United States. I
    know they are difficult to mine and there are EPA things that
    we have to look at as far as regulations and make sure it is
    done right. But we would be foolish if the American Government
    didn't come together and say, we are going to procure and
    secure the rare earth metals needed from us instead of having
    to depend on any other country, I don't care who it is.
        One of the things I saw when I first came up here is we
    were arguing the farm bill, and one of the sentiments of some
    of the people up here was, why do we need a farm bill? Why
    don't we import our food? I am thinking, good God, we tried
    that on oil. Do we really want to go down here again? So to be
    dependent on another country for rare earth metals when we need
    them in everything, I think, is foolish, and I think we need to
    have that policy.
        The other thing is, as General Perry brought out about the
    intentions of China in space, I think that is very telling,
    again, by their past history. All we have to do in current days
    is see what they are doing in the South China Sea. They are
    going to do what is best for China.
        And then we know the IP Commission estimates that possibly
    up to $600 billion of intellectual property has been stolen--
    $600 billion. And, again, it points to future activity.
        So I guess a question I want to ask you, are there existing
    nation-to-nation or U.N. treaty and/or agreements that are
    satisfactory to prevent China's aggressive pursuit of space in
    something other than civilian purposes for exploration versus
    military? Are there sufficient treaties or agreements between
    nations, or is there something that needs to be written up on
    that?
        Go ahead, Mr. Cheng.
        Mr. Cheng. There is only a handful of international
    treaties governing space.
        Mr. Yoho. Right.
        Mr. Cheng. China and the United States and quite a few
    other countries are party to almost all of them. The U.S. is
    not a party to the Moon Treaty, but that is actually not
    specifically relevant here.
        The U.S. has resisted most efforts at creating a space arms
    control treaty because of the very real--two very large real
    problems. One, it is almost impossible to define what a space
    weapon is. The Chinese version of a treaty that they have
    forwarded actually would allow all of the anti-satellite
    activities that they have conducted and would ban any American
    militarization of space. Yes, it is a lovely treaty----
        Mr. Yoho. A great plan.
        Mr. Cheng. Exactly. And it goes directly to the other
    piece, sir, which is that the Chinese are excellent
    practitioners of legal warfare. You sign a bad treaty; it is
    not just like a bad contract, although we have seen examples of
    bad contracts here today. What happens is China will
    basically--and there will be an American community, both from
    the legal, academic----
        Mr. Yoho. Right.
        Mr. Cheng [continuing]. And arms control communities, who
    will basically say, if we signed it away, it doesn't matter
    that China has it and we don't.
        Mr. Yoho. I agree with you.
        Anybody else? Any comments?
        All right. Gentlemen, I appreciate your time. And what you
    see is a rare earth policy and a policy to secure our
    semiconductor industry are paramount. I think we need to rally
    this Nation. Through leadership is the only way that we are
    going to go back and do the things we used to do, of exploring
    space and going on to that next frontier. It would be a poor
    choice for us not to pursue that, and it is something we need
    to do. That comes from the top down and for America to put a
    focus out there.
        I want to thank you for you time, for your commitment to
    come here, for your patience while we voted.
        And, with that, this meeting is adjourned, and we look
    forward to having your statements submitted.
        [Whereupon, at 4:34 p.m., the subcommittee was adjourned.]

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