[House Hearing, 116 Congress]
[From the U.S. Government Publishing Office]





 THE IMPACTS OF STATE-OWNED ENTERPRISES ON PUBLIC TRANSIT AND FREIGHT 
                              RAIL SECTORS

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

                                (116-16)

                                HEARING

                               BEFORE THE

                              COMMITTEE ON
                   TRANSPORTATION AND INFRASTRUCTURE
                        HOUSE OF REPRESENTATIVES

                     ONE HUNDRED SIXTEENTH CONGRESS

                             FIRST SESSION

                               __________

                              MAY 16, 2019

                               __________

                       Printed for the use of the
             Committee on Transportation and Infrastructure


    
    
    
    
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     Available online at: https://www.govinfo.gov/committee/house-
     transportation?path=/browsecommittee/chamber/house/committee/
                             transportation 
                               __________

                      U.S. GOVERNMENT PUBLISHING OFFICE
                      
37-138 PDF                 WASHINGTON : 2020 
                             
                             
                             
                             
                             
                             
                             
                             
                             
                             
                             
                             
                             
                             
                             
                             
                             
                             
                             
                             
                             
                             
                             
             COMMITTEE ON TRANSPORTATION AND INFRASTRUCTURE

                    PETER A. DeFAZIO, Oregon, Chair
ELEANOR HOLMES NORTON,               SAM GRAVES, Missouri
  District of Columbia               DON YOUNG, Alaska
EDDIE BERNICE JOHNSON, Texas         ERIC A. ``RICK'' CRAWFORD, 
ELIJAH E. CUMMINGS, Maryland             Arkansas
RICK LARSEN, Washington              BOB GIBBS, Ohio
GRACE F. NAPOLITANO, California      DANIEL WEBSTER, Florida
DANIEL LIPINSKI, Illinois            THOMAS MASSIE, Kentucky
STEVE COHEN, Tennessee               MARK MEADOWS, North Carolina
ALBIO SIRES, New Jersey              SCOTT PERRY, Pennsylvania
JOHN GARAMENDI, California           RODNEY DAVIS, Illinois
HENRY C. ``HANK'' JOHNSON, Jr.,      ROB WOODALL, Georgia
    Georgia                          JOHN KATKO, New York
ANDRE CARSON, Indiana                BRIAN BABIN, Texas
DINA TITUS, Nevada                   GARRET GRAVES, Louisiana
SEAN PATRICK MALONEY, New York       DAVID ROUZER, North Carolina
JARED HUFFMAN, California            MIKE BOST, Illinois
JULIA BROWNLEY, California           RANDY K. WEBER, Sr., Texas
FREDERICA S. WILSON, Florida         DOUG LaMALFA, California
DONALD M. PAYNE, Jr., New Jersey     BRUCE WESTERMAN, Arkansas
ALAN S. LOWENTHAL, California        LLOYD SMUCKER, Pennsylvania
MARK DeSAULNIER, California          PAUL MITCHELL, Michigan
STACEY E. PLASKETT, Virgin Islands   BRIAN J. MAST, Florida
STEPHEN F. LYNCH, Massachusetts      MIKE GALLAGHER, Wisconsin
SALUD O. CARBAJAL, California, Vice  GARY J. PALMER, Alabama
    Chair                            BRIAN K. FITZPATRICK, Pennsylvania
ANTHONY G. BROWN, Maryland           JENNIFFER GONZALEZ-COLON,
ADRIANO ESPAILLAT, New York            Puerto Rico
TOM MALINOWSKI, New Jersey           TROY BALDERSON, Ohio
GREG STANTON, Arizona                ROSS SPANO, Florida
DEBBIE MUCARSEL-POWELL, Florida      PETE STAUBER, Minnesota
LIZZIE FLETCHER, Texas               CAROL D. MILLER, West Virginia
COLIN Z. ALLRED, Texas               GREG PENCE, Indiana
SHARICE DAVIDS, Kansas
ABBY FINKENAUER, Iowa
JESUS G. ``CHUY'' GARCIA, Illinois
ANTONIO DELGADO, New York
CHRIS PAPPAS, New Hampshire
ANGIE CRAIG, Minnesota
HARLEY ROUDA, California 




















                                CONTENTS

                                                                   Page

Summary of Subject Matter........................................     v

                   STATEMENTS OF MEMBERS OF CONGRESS

Hon. Peter A. DeFazio, a Representative in Congress from the 
  State of Oregon, and Chair, Committee on Transportation and 
  Infrastructure:

    Opening statement............................................     1
    Prepared statement...........................................     3
Hon. Sam Graves, a Representative in Congress from the State of 
  Missouri, and Ranking Member, Committee on Transportation and 
  Infrastructure:

    Opening statement............................................     4
    Prepared statement...........................................     5
Hon. Daniel Lipinski, a Representative in Congress from the State 
  of Illinois, and Chair, Subcommittee on Railroads, Pipelines, 
  and Hazardous Materials, prepared statement....................    87

                               WITNESSES

Scott N. Paul, President, Alliance for American Manufacturing:

    Oral statement...............................................     6
    Prepared statement...........................................     8
Brigadier General John Adams, U.S. Army (Retired), President, 
  Guardian Six LLC:

    Oral statement...............................................    15
    Prepared statement...........................................    17
Hamilton Galloway, Head of Consultancy for the Americas, Oxford 
  Economics:

    Oral statement...............................................    23
    Prepared statement...........................................    25
Frank J. Cilluffo, Director, McCrary Institute for Cyber and 
  Critical Infrastructure Security, Auburn University:

    Oral statement...............................................    29
    Prepared statement...........................................    30
Zachary Kahn, Director of Government Relations, North America, 
  BYD Motors LLC:

    Oral statement...............................................    37
    Prepared statement...........................................    38
Phillip A. Washington, CEO, Los Angeles County Metropolitan 
  Transportation Authority:

    Oral statement...............................................    41
    Prepared statement...........................................    43

                       SUBMISSIONS FOR THE RECORD

CRRC Tweet Submitted for the Record by Hon. Eric A. ``Rick'' 
  Crawford, a Representative in Congress from the State of 
  Arkansas, and Ranking Member, Subcommittee on Railroads, 
  Pipelines, and Hazardous Materials.............................    49
E-mail Submitted for the Record by Hon. Crawford.................    88
Letter from Scott N. Paul, President, Alliance for American 
  Manufacturing, Submitted for the Record by Hon. DeFazio........    88
Letter from Lonnie R. Stephenson, International President, 
  International Brotherhood of Electrical Workers, Submitted for 
  the Record by Hon. DeFazio.....................................    89
Statement of the Railway Supply Institute, Submitted for the 
  Record by Hon. DeFazio.........................................    90
Letter from Jeffrey D. Knueppel, General Manager, Southeastern 
  Pennsylvania Transportation Authority, Submitted for the Record 
  by Hon. DeFazio................................................    92
Letter from John Samuelsen, International President, Transport 
  Workers Union of America, AFL-CIO, Submitted for the Record by 
  Hon. DeFazio...................................................    93
Report, ``Assessing How Foreign State-Owned Enterprises' U.S.-
  Based Operations Disrupt U.S. Jobs,'' Oxford Economics, June 
  2019, Submitted for the Record by Hon. DeFazio.................    93
Statement of Ian Jefferies, President and Chief Executive 
  Officer, Association of American Railroads, Submitted for the 
  Record by Hon. Graves of Missouri..............................    93

                                APPENDIX

Questions from Hon. Henry C. ``Hank'' Johnson, Jr. for Scott N. 
  Paul, President, Alliance for American Manufacturing...........    97
Questions from Hon. Peter A. DeFazio for Brigadier General John 
  Adams, U.S. Army (Retired), President, Guardian Six LLC........    98
Questions from Hon. Eleanor Holmes Norton for Brigadier General 
  John Adams, U.S. Army (Retired), President, Guardian Six LLC...    99
Questions from Hon. Peter A. DeFazio for Hamilton Galloway, Head 
  of Consultancy for the Americas, Oxford Economics..............   100
Questions from Hon. Eleanor Holmes Norton for Hamilton Galloway, 
  Head of Consultancy for the Americas, Oxford Economics.........   101
Questions from Hon. Henry C. ``Hank'' Johnson, Jr. for Hamilton 
  Galloway, Head of Consultancy for the Americas, Oxford 
  Economics......................................................   101
Questions from Hon. Peter A. DeFazio for Frank J. Cilluffo, 
  Director, McCrary Institute for Cyber and Critical 
  Infrastructure Security, Auburn University.....................   102
Questions from Hon. Eleanor Holmes Norton for Frank J. Cilluffo, 
  Director, McCrary Institute for Cyber and Critical 
  Infrastructure Security, Auburn University.....................   103
Questions from Hon. Henry C. ``Hank'' Johnson, Jr. for Frank J. 
  Cilluffo, Director, McCrary Institute for Cyber and Critical 
  Infrastructure Security, Auburn University.....................   103
Questions from Hon. Peter A. DeFazio for Zachary Kahn, Director 
  of Government Relations, North America, BYD Motors LLC.........   104
Questions from Hon. Peter A. DeFazio for Phillip A. Washington, 
  CEO, Los Angeles County Metropolitan Transportation Authority..   104
Questions from Hon. Greg Stanton for Phillip A. Washington, CEO, 
  Los Angeles County Metropolitan Transportation Authority.......   105 
  
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                              May 14, 2019

    SUMMARY OF SUBJECT MATTER

    TO:       Members, Committee on Transportation and 
Infrastructure
    FROM:   Staff, Committee on Transportation and 
Infrastructure
    RE:       Full Committee Hearing on ``The Impacts of State-
Owned Enterprises on Public Transit and Freight Rail Sectors''

                                PURPOSE

    The Committee on Transportation and Infrastructure will 
meet on Thursday, May 16, 2019, at 10 a.m. in 2167 Rayburn 
House Office Building, to receive testimony on ``The Impacts of 
State-Owned Enterprises on Public Transit and Freight Rail 
Sectors.'' At the hearing, Members will receive testimony about 
recent entrants to the rolling stock market, current Federal 
policies, and the impacts on American workers, American 
taxpayers and transit riders. The Committee will hear from 
representatives of the Alliance for American Manufacturing, 
Guardian Six Consulting, Oxford Economics, McCrary Institute 
for Cyber and Critical Infrastructure Security, BYD, and Los 
Angeles County Metropolitan Transportation Authority.

                               BACKGROUND

    Capitalist markets thrive on fair and open competition to 
promote efficiency, reduce costs, and improve innovation. 
Foreign state-owned enterprises (SOEs) can undermine otherwise 
functioning free markets because they benefit from state 
subsidies and preferential treatment and use those benefits to 
undercut the competition.
    In China, a non-market economy, the central government owns 
51,000 SOEs, valued at $29.2 trillion USD and that employ 
approximately 20.2 million people.\1\ These SOEs benefit from 
Chinese SOE loan rates that averaged approximately 3.8 percent 
in 2012, while private companies in China paid approximately 
6.8 percent for their loans.\2\ In addition, Chinese SOE return 
on investment was less than half that of private companies in 
China. The ability to reduce their profit margins enables SOEs 
to undercut foreign competition.\3\
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    \1\ Korin Kane. Size and Sectoral Distribution of State-Owned 
Enterprises: Main Findings of the Latest Review. OECD. 28 September 
2017. https://www.oecd.org/industry/ind/Item_6_3_OECD_Korin_Kane.pdf
    \2\ Can a Tiger Change Its Stripes? Reform of Chinese State owned-
enterprises in the Penumbra State. Page 14. Working Paper 25475. 
National Bureau of Economic research. http://www.nber.org/papers/w25475
    \3\ Ibid. Page 17.
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CRRC STATE OWNERSHIP AND SUBSIDIES

    The state-owned China Railway Rolling Stock Corporation, 
known as CRRC, was formed in 2015 by the merger of China CNR 
and CSR, creating a monopoly within China that employs 176,000 
people. It is by far the largest train manufacturer in the 
world. As the rail construction boom across China begins to 
slow down, the Chinese government facilitated the merger to 
boost their international market share.
Top 10 rolling stock manufacturers ranked by estimated new 
rolling stock revenue 2017 [EUR billion]

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    As a SOE, CRRC has preferential access to cheap credit from 
Chinese state banks and remains heavily subsidized. In its 
listing announcement on the Shanghai Stock Exchange, CRRC noted 
that in 2014 and 2015, it received $194 million (RMB 1.3 
billion) and $268.7 million (RMB 1.8 billion) in government 
subsidies, respectively. The company stated that were its 
government subsidies reduced, it would have a ``definite 
negative impact on the company's business results and financial 
position.'' \4\ This access to capital and heavy subsidies 
allows CRRC to bid below market rates and undercut the 
competition.
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    \4\ Michelle Ker. China's High Speed Rail Diplomacy. U.S.-China 
Economic and Security Review Commission. 21 February 2017. https://
www.uscc.gov/sites/default/files/Research/
China%27s%20High%20Speed%20Rail%20Diplomacy.pdf.
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CRRC IN THE PUBLIC TRANSIT SECTOR

    Since 2015, CRRC won four consecutive transit rail rolling 
stock contracts with public transit agencies in the United 
States. These contracts were awarded to CRRC, because its bids 
were substantially lower than competitor bids. A summary of 
each contract follows:
    Boston: In 2015, Massachusetts Bay Transportation Authority 
(MBTA) awarded CNR, now part of CRRC, a contract for 342 heavy 
rail cars with a bid of $567 million. This was significantly 
lower than any of the other bids, with the closest coming from 
Hyundai Rotem at $720.6 million, Kawasaki at $904.9 million, 
and Bombardier at $1.08 billion. Above the rolling stock bid, 
CRRC built a new $60 million assembly plant in Springfield, MA, 
where the rail cars will be assembled.\5\ The original 342 rail 
car order amounts to $1.66 million per rail car. CRRC MA 
President Xiwei Lu said the company offered such a low bid, in 
part because it viewed the MBTA project as an entry point to 
the U.S. market: ``We are committed to be here. I want to enter 
this market. So I don't calculate all the investment in one 
project.'' \6\ In 2016, MTBA agreed to a no bid contract for 
$280 million for an additional 130 rail cars from CRRC.\7\ This 
second order, for the same cars, rose to $2.15 million per rail 
car, reflecting a 30 percent price increase over the initial 
order. Federal funding was not used to purchase the heavy rail 
cars because the RFP mandated that the final assembly take 
place in Massachusetts.\8\
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    \5\ Matt Murphy. Chinese Rail Company Won MBTA Contract over 
Objections of Other Bidders. Mass Live. 23 October 2014. 
www.masslive.com/news/index.ssf/2014/10/
chinese_rail_company_wins_out.html.
    \6\ Id.
    \7\ Matt Stout. MBTA's No-Bid Plan Barrels Along to Replace Red, 
Orange Line Cars. The Boston Herald. 13 December 2016. https://
www.bostonherald.com/2016/12/13/mbtas-no-bid-plan-barrels-along-to-
replace-red-orange-line-cars.
    \8\ Paul Tuthill. Gov. Baker Hails First Springfield-Built Subway 
Cars For The MBTA. WAMC. Dec 18, 2018 https://www.wamc.org/post/gov-
baker-hails-first-springfield-built-subway-cars-mbta.
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    Chicago: In 2016, Chicago Transit Authority (CTA) awarded a 
$1.3 billion contract to CRRC for 846 heavy rail cars if all 
options are exercised. This amounts to $1.53 million per rail 
car.\9\ Bombardier, which supplied 714 rail cars to CTA between 
2009 and 2015, bid $226 million higher. Above the rolling stock 
bid, CRRC built a new $100 million assembly plant in 
Chicago.\10\ Federal funding was used to purchase the heavy 
rail cars.\11\
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    \9\ CTA Press Release. CTA Chooses Manufacturer for Newest-
Generation Rail Cars. March 9, 2016. https://www.transitchicago.com/
cta-chooses-manufacturer-for-newest-generation-rail-cars.
    \10\ Mary Wisniewski. CTA Board Approves Contract to Replace Half 
of Rail Cars. The Chicago Tribune. 10 March 2016. https://
www.chicagotribune.com/news/local/breaking/ct-cta-board-rail-cars-0310-
20160309-story.html.
    \11\ Federal Transit Administration. Red and Purple Modernization 
Phase One Project Chicago, Illinois (December 2018)https://
www.transit.dot.gov/sites/fta.dot.gov/files/docs/funding/grant-
programs/capital-investments/130361/il-redpurple-line-mod-profile-
profile.pdf.
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    Los Angeles: In 2017, Los Angeles Metropolitan 
Transportation Authority (LA METRO) awarded a $647 million bid 
to CRRC for 282 heavy rail cars if all options are exercised. 
The price per rail car is $2.29 million.\12\ The rail cars will 
be assembled in the Springfield, MA plant. LA METRO did not 
release competitor bid information. Federal funding was used to 
purchase the heavy rail cars.\13\
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    \12\ Brenda Goh. China's CRRC Corp Wins LA Metro Contract Worth Up 
to $647 Million. Reuters. 27 March 2017. https://www.reuters.com/
article/us-crrc-usa/chinas-crrc-corp-wins-la-metro-contract-worth-up-
to-647-million-idUSKBN16Y0ZA.
    \13\ Progressive Railroading. L.A. Metro inks pact with CRRC for up 
to 282 new rail cars. March 24, 2017. https://
www.progressiverailroading.com/mechanical/article/LA-Metro-inks-pact-
with-CRRC-for-up-to-282-new-rail-cars--51154.
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    Philadelphia: In 2017, Southeastern Pennsylvania 
Transportation Authority (SEPTA) awarded a $137.5 million 
contract to CRRC for 45 commuter rail cars, plus an option for 
10 additional cars. Bombardier bid $171.5 million and Hyundai 
Rotem, which has a manufacturing plant in South Philadelphia, 
bid $184.7 million. The price per rail car is $3 million. 
Federal funding was used to purchase the commuter rail 
cars.\14\
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    \14\ SEPTA Press Release. SEPTA Board Approves Purchase of Multi-
Level Coaches for Regional Rail. March 23, 2017. http://www.septa.org/
media/releases/2017/03-23-2017.html.
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    Given that the other rolling stock competitors already have 
final assembly plants in the U.S., CRRC is merely shifting jobs 
from the competition to their new plants using their state-
owned enterprise advantage. This is evident from the recent 
closure of the Hyundai Rotem plant in Philadelphia.\15\
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    \15\ Joseph N. DiStefano. Philly railcar maker Hyundai Rotem gives 
up and leaves town. Philadelphia Inquirer. August 17, 2018. https://
www.philly.com/philly/blogs/inq-phillydeals/septa-hyundai-rotem-crrc-
rail-cars-philadelphia-20180817.html.
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CRRC IN FREIGHT RAIL SECTOR

    The United States freight rail sector could be affected by 
CRRC. Currently, a number of U.S.-based companies manufacture 
the majority of the freight rail cars that haul shipments 
acrossthe United States.\16\ However, the experience of CRRC 
entering, and then overtaking, the Australianfreight rail 
industry once dominated by domestic companies is illustrative 
of what could occur in the U.S.\17\
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    \16\ Oxford Economics, Will we Derail US Freight Rolling Stock 
Production? An Assessment of the Impact of Foreign State-owned 
Enterprises on the US Freight Rolling Stock Production. May 2017. p. 4.
    \17\ Oxford Economics, Will we Derail US Freight Rolling Stock 
Production? An Assessment of the Impact of Foreign State-owned 
Enterprises on the US Freight Rolling Stock Production. May 2017. p. 5.
---------------------------------------------------------------------------
    As recently as 2004, almost all of Australia's rail 
vehicles were designed and produced by Australian-owned 
companies. However, as CRRC entered this market, the Australian 
manufacturers' share of the domestic freight rail market 
dropped. In 2008, CRRC and its predecessors held a less than 40 
percent market share of the Australian freight car market, 
while the rest of the market was shared by Downer, UGL, and 
Bradken of Australia.\18\ By 2016, however, CRRC dominated 
freight rail car delivery, holding more than 95 percent of the 
market share. Bradken was the only remaining domestic player, 
with roughly less than 5 percent of freight railcar deliveries.
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    \18\ Oxford Economics, Will we Derail US Freight Rolling Stock 
Production? An Assessment of the Impact of Foreign State-owned 
Enterprises on the US Freight Rolling Stock Production. May 2017. p. 16 
citing SCI Verkehr data.
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    Notably, in an attempt to remain competitive with CRRC, 
Bradken had moved some of its manufacturing operations to China 
in 2010. By 2014, the company moved all freight rail car 
production out of Australia, yet it still struggled to compete 
with CRRC, and in 2017 became a wholly-owned subsidiary of 
Hitachi Machinery Company.\19\
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    \19\ Bradken Limited, May 2014, Annual Report to Shareholders. 
http://www.annualreports.com/HostedData/AnnualReportArchive/B/
ASX_BKN_2014.pdf.
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    The freight rail industry invests significant amounts of 
private funds into its network and systems, including the cars 
railroads use to haul goods. Such purchases of rail cars not 
using Federal funding are not subject to Federal Buy America 
standards. While the majority of freight rail cars used today 
are made by U.S. companies, the Australian experience suggests 
that a SOE could disrupt this manufacturing sector. Domestic 
freight rail car production supports approximately 65,000 jobs 
and an estimated $6.5 billion in GDP. This economic impact 
includes the direct impacts on the freight industry, the 
industry's supply chain, and lost spending in the economy.\20\
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    \20\ Oxford Economics, Will we Derail US Freight Rolling Stock 
Production? An Assessment of the Impact of Foreign State-owned 
Enterprises on the US Freight Rolling Stock Production. May 2017. p. 
31.
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NATIONAL SECURITY IMPLICATIONS

    New technologies intended to improve safety and efficiency 
are being incorporated in freight and transit rail sectors. 
These include advanced technologies and increasingly 
interconnected systems that should be properly secured to 
ensure they are not vulnerable to breaches.
    Concerns about breaches of systems by those with malicious 
intent are not unfounded. In May 2018, the Pentagon prevented 
service members from purchasing on military bases phones made 
by Chinese companies Huawei and ZTE, stemming from concerns 
that a dominant presence of Chinese-made technology could make 
it easier for hacking or spying.\21\ Congress later enacted the 
John S. McCain National Defense Authorization Act for Fiscal 
Year 2019 [P.L. 115-232], preventing Federal agencies from 
using telecommunications equipment made by those same 
companies, and in May of 2019, the FCC voted to block China 
Mobile from U.S. markets due to national security concerns.\22\ 
In December 2018, the Department of Justice indicted two 
individuals who, for at least 12 years, acted in association 
with the Chinese Ministry of State Security to hack into 
computers around the world, targeting intellectual property and 
confidential information. These individuals targeted a range of 
industries, including aviation and maritime technology as well 
as telecommunications.\23\ Following that indictment, a 
Department of Defense spokesman indicated that, ``the Chinese 
Communist Party's use of predatory economic practices like 
illegal states-sponsored cybertheft reinforce concerns about 
Chinese companies playing a role in critical infrastructure--
whether it be rail cars or 5G telecommunications networks.'' 
\24\
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    \21\ Hamza Shaban. Pentagon Tells U.S. Military Bases to Stop 
Selling ZTE, Huawei Phones. The Washington Post. 2 May 2018. https://
www.washingtonpost.com/news/the-switch/wp/2018/05/02/pentagon-tells-u-
s-military-bases-to-stop-selling-zte-huawei-phones/?utm_term=
.da5df9799503.
    \22\ David Shepardson, Sijia Jiang, China Urges U.S. to Respect 
Market Economy After China Mobile Denied Entry. Reuters. May 9, 2019. 
https://www.reuters.com/article/us-usa-fcc-china/fcc-votes-to-deny-
china-mobile-bid-to-operate-in-u-s-idUSKCN1SF1SX?feedType=RSS&feedName=
businessNews.
    \23\ Department of Justice. Two Chinese Hackers Associated with the 
Ministry of State Security Charged with Global Computer Intrusion 
Campaigns Targeting Intellectual Property and Confidential Business 
Information. 20 December 2018. https://www.justice.gov/opa/pr/two-
chinese-hackers-associated-ministry-state-security-charged-global-
computer-intrusion.
    \24\ Robert McCartney and Faiz Siddiqui. Could a Chinese-made Metro 
Car Spy on Us? Many Experts Say Yes. The Washington Post. 7 January 
2019. https://www.washingtonpost.com/local/trafficandcommuting/could-a-
chinese-made-metro-car-spy-on-us-many-experts-say-yes/2019/01/07/
00304b2c-03c9-11e9-5df-5d3874f1ac36_story.html?noredirect=on&utm_term=
.644e6da8bc91. quoting Air Force Lt. Col Mike Andrew, a Defense 
Department spokesman.
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    Nearly 10.2 billion rides occurred on U.S. public transit 
systems in 2017, during many of which passengers were connected 
to the internet through on-board wifi routers.\25\ Advanced 
technologies embedded on these rail cars could be exploited for 
``spying and hacking of riders' personal data to intentional 
disruptions of day-to-day operations to deliberate acts of 
terrorism.'' \26\
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    \25\ American Public Transportation Association. 2019 Public 
Transportation Fact Book. https://www.apta.com/wp-content/uploads/
APTA_Fact-Book-2019_FINAL.pdf page 12.
    \26\ Brigham A. McCown. China on the March: Cybersecurity and 
Hidden Risks. Forbes. 17 December 2018. https://www.forbes.com/sites/
brighammccown/2018/12/17/china-on-the-march-cybersecurity-and-hidden-
risks/#5a7f1b164b88.
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    The Department of Homeland Security (DHS) and the 
Department of Transportation are designated as the Co-Sector-
Specific Agencies for the Transportation Systems Sector. The 
U.S. freight rail network is designated by the DHS as being 
part of the country's critical infrastructure.\27\ The freight 
network hauls almost two billion tons of goods every year, 
including approximately 35 percent of all U.S. exports. These 
shipments include a wide array of goods ranging from 
agricultural products and construction materials, to auto 
parts, chemicals and energy products. Notably, freight rail 
transports a significant share of hazardous materials, 
including poisonous inhalation hazard and toxic inhalation 
hazard materials, in addition to flammable and combustible 
products.\28\ Protecting this material while in transport is 
critical to public safety and environmental safeguarding. 
Additionally, a 33,000-mile interconnected network of railroad 
corridors are designated as the Strategic Rail Corridor Network 
(STRACNET). Together with an additional 4,700 miles of 
designated lines, STRACNET includes the railroad lines most 
important to national defense, as they can serve U.S. defense 
installations and activities and help ensure the rail network 
infrastructure is robust and capable of quickly moving a large 
force for contingency deployments.\29\
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    \27\ See Department of Homeland Security. Critical Infrastructure 
Sectors. Available at: https://www.dhs.gov/cisa/critical-
infrastructure-sectors; see also Presidential Policy Directive PPD-21. 
The White House. 12 February 2013, available at: https://www.dhs.gov/
sites/default/files/publications/PPD-21-Critical-Infrastructure-and-
Resilience-508.pdf.
    \28\ See Pipeline and Hazardous Materials Safety Administration. 
Hazardous materials by Rail Liability Study. Pp. 16-17. https://
www.phmsa.dot.gov/sites/phmsa.dot.gov/files/docs/news/57011/report-
congress-hazardous-materials-rail-liability-study-nov-2017_1.pdf.
    \29\ United States Army. Strategic Rail Corridor Network (STRACNET) 
and Defense Connector Lines. October 2018. https://www.sddc.army.mil/
sites/TEA/Functions/SpecialAssistant/RND%20Publications/
STRACNET%202018_Reduced.pdf.
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BYD OWNERSHIP AND SUBSIDIES

    BYD asserts that it is a private company. It does benefit 
from Chinese state-owned investment funds and enterprises that 
hold equity interests in BYD and its subsidiaries. These 
investments from the Chinese investment funds are in addition 
to substantial Chinese government subsides, which totaled $191 
million (RMB 1.3 billion) in 2017 alone.\30\ In 2018, BYD 
recognized $338 million in (RMB 2.3 billion) in Chinese 
government grants in its income statement.\31\
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    \30\ BYD 2017 Annual Report, page 140.
    \31\ Kenji Kawase. For Some Chinese Companies, Generous State 
Subsidies Make up for Losses. Nikkei Asian Review. 24 April 2019. 
https://asia.nikkei.com/Spotlight/Cover-Story/For-some-Chinese-
companies-generous-state-subsidies-make-up-for-losses.
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    China's electric battery subsidies appear to be targeted 
specifically to BYD over other Chinese electric battery 
companies, allowing BYD a competitive advantage.\32\ China has 
poured more than $10 billion into the electric vehicle (EV) 
battery industry since 2012, equating to a subsidy of around 
$10,000 per electric car, and higher for electric buses. The 
government also shouldered much of the cost for battery 
plants.\33\ Despite this significant effort by BYD and the 
Chinese government to invest heavily in battery manufacturing 
in China, BYD is certifying its batteries as U.S. domestic 
content under Buy America rules. BYD calculates that these 
battery packs meet 53 percent out of 65 percent of the domestic 
content standard.\34\
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    \32\ Anjani Trivedi. Buffett's China Ride Is Losing Power With 
Investors. Bloomberg. February 19, 2019. https://www.bloomberg.com/
opinion/articles/2019-02-19/china-s-byd-backed-by-buffett-is-losing-
its-electric-car-edge.
    \33\ https://asia.nikkei.com/Economy/Brutal-culling-awaits-China-s-
EV-battery-makers-as-support-ends.
    \34\ Albuquerque City Inspector General. OIG 18-0001-R Report of 
Inspection: ART Project. Page 31.
---------------------------------------------------------------------------

BYD IN PUBLIC TRANSIT SECTOR

    BYD has won electric bus contracts with 45 entities, 
including Los Angeles, Albuquerque, and Indianapolis. Concerns 
about reliability, delivery schedules, and meeting the 
contracted specification of battery range have been publically 
raised for some of the orders.
    Los Angeles Metro returned five BYD buses in 2016, pulling 
these five buses off the road after less than five months of 
service. A recent Los Angeles Times report cited internal 
emails and other agency records in which agency staff called 
BYD buses ``unsuitable,'' poorly made, and unreliable for more 
than 100 miles.\35\
---------------------------------------------------------------------------
    \35\ Paige St. John. Stalls, Stops and Breakdowns: Problems Plague 
Push for Electric Buses. The Los Angeles Times. 20 May 2018. https://
www.latimes.com/local/lanow/la-me-electric-buses-20180520-story.html.
---------------------------------------------------------------------------
    The City of Albuquerque contracted with BYD for 20 electric 
buses at just under $23 million, using Federal Capital 
Investment Grant program funding. Bus delivery delays and 
concerns that the buses could not complete the route as 
specified in the contract led the city to seek an independent 
report from the Center for Transportation and the Environment 
(CTE). They modelled the bus route to test the buses and 
simulate various conditions that mirror real service in the 
corridor--running the doors, heat, HVAC and all other bus 
systems, and also loading weight onto the buses to simulate 
passengers. The simulations found that the operational plan 
developed for Albuquerque could not be achieved by the buses 
BYD delivered.\36\ The buses only averaged 177 miles on a 
single charge, as opposed to the 275 miles specified in the 
contract. The City Inspector General also found significant 
concerns with federally required post-delivery Buy America 
certification.\37\ Ultimately, the city returned all the BYD 
buses for failure to meet contract specifications and filed a 
lawsuit, which is still pending.\38\
---------------------------------------------------------------------------
    \36\ City of Albuquerque Files Lawsuit Against BYD. Intelligent 
Transport. 14 December 2018. https://www.intelligenttransport.com/
transport-news/74221/city-albuquerque-lawsuit-byd.
    \37\ Office of Inspector General. City of Albuquerque. Inspection 
of Albuquerque Rapid Transit Project Procurement. 6 June 2018. https://
media.krqe.com/nxs-krqetv-media-us-east-1/document_dev/2018/06/07/
Rep%20of%20Inspection%20ART_1528430650775_44821973_
ver1.0.pdf.
    \38\ Maddy Hayden. City Sues BYD Over ART buses. Albuquerque 
Journal. 7 December 2018. https://www.abqjournal.com/1254901/city-sues-
over-art-buses.html.
---------------------------------------------------------------------------
    In 2017, the City of Indianapolis approved a contract with 
BYD for electric buses using Federal Capital Investment Grant 
program funding.\39\ The IndyGo Bus Rapid Transit BRT Red and 
Blue lines will also use BYD electric buses, but the first 
buses delivered are also experiencing significant range issues, 
averaging only 205 miles during testing by IndyGo well under 
the contractual specification of 275 miles.\40\
---------------------------------------------------------------------------
    \39\ https://www.transit.dot.gov/sites/fta.dot.gov/files/docs/
funding/grant-programs/capital-investments/130096/indygo-red-line-
rapid-transit-fy-19-profile.pdf.
    \40\ Paris Lewbel. IndyGo Red Line Electric Bus Testing Results May 
Have Been Flawed. RTV6 Indianapolis. 13 March 2019. https://
www.theindychannel.com/news/call-6-investigators/call-6-indygo-red-
line-electric-bus-testing-results-may-have-been-flawed.
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PENDING LEGISLATION

    Senators Cornyn (R-TX), Baldwin (D-WI), Crapo (R-ID), and 
Brown (D-OH) introduced S. 846, the Transit Infrastructure 
Vehicle Security Act, a bill to prevent Federal funds from 
being used to buy transit rail cars or buses manufactured by 
Chinese owned, controlled, or subsidized companies, although 
pre-existing contracts would be continued. The bill also 
requires cybersecurity certification and 3rd party testing of 
critical hardware and software. A companion House bill is 
expected to be introduced by the date of this hearing.

                              WITNESS LIST

      Mr. Scott N. Paul, President, Alliance for 
American Manufacturing (AAM)
      Brigadier General John Adams, U.S. Army (Ret.), 
President, Guardian Six Consultancy LLC
      Mr. Hamilton Galloway, Head of Consultancy, 
Americas, Oxford Economics
      Mr. Frank Cilluffo, Director, McCrary Institute 
for Cyber and Critical Infrastructure Security, Auburn 
University
      Mr. Zachary Kahn, Director of Government 
Relations, BYD Heavy Industries
      Mr. Phillip A. Washington, CEO, Los Angeles 
County Metropolitan Transportation Authority

 
 THE IMPACTS OF STATE-OWNED ENTERPRISES ON PUBLIC TRANSIT AND FREIGHT 
                              RAIL SECTORS

                              ----------                              


                         Thursday, May 16, 2019

                  House of Representatives,
    Committee on Transportation and Infrastructure,
                                            Washington, DC.
    The committee met, pursuant to notice, at 10 a.m., in room 
2167, Rayburn House Office Building, Hon. Peter A. DeFazio 
(Chairman of the committee) presiding.
    Mr. DeFazio. I would like to have the committee come to 
order for today's hearing.
    This hearing today is not about any one company or one 
sector or one nation. This is about how Congress will respond 
to other nations, in this case specifically China, wiping out 
U.S. transit and rail manufacturing and yet taking away more of 
our high-paying, blue-collar jobs.
    I have been fighting these sorts of battles for many 
decades. I opposed every so-called free trade agreement since I 
have been here. I opposed China's ascension into the WTO under 
Clinton's premise that if we put them in the WTO, they would 
follow the rules. They do not and they have not.
    And I am going to use all of the tools we have to see that 
they do not decimate the freight industry in America like they 
did in Australia in a very short period of time, and that they 
do not decimate our passenger railcar and bus manufacturing in 
this country.
    It is not just about the ultimate assembly. It is about all 
of the parts that go into these vehicles and all of the jobs 
that they support.
    So today we are going to focus on that issue, state-owned 
enterprises.
    I was having a conversation with the President's Economic 
Advisor about the Jones Act, and he said, ``Well, you 
understand I am a free market guy. I like competition.''
    And I said, ``Well, Larry, is it competition for an 
American shipyard to compete with the Government of Communist 
China?''
    And he really had to kind of think about that for a minute, 
and he said, ``Well, yeah.''
    I said, ``Yeah. How about competition with a level playing 
field?''
    In this case, U.S. companies currently produce the majority 
of freight railcars. We have one of the most robust freight 
networks in the world, 65,000 jobs. But as I mentioned earlier, 
we saw that industry wiped out in Australia by China in a very 
short period of time.
    And I believe they have set their targets, and part of 
their 2025 plan is to take over that industry worldwide with 
unfair--subsidized in this case of the railcar company, CRRC, 
state-owned. Communist Government of China owns the company.
    And in the case of the BYD, we have a company that is very 
heavily subsidized by the Government of Communist China.
    You know, I strengthened. We had a long discussion. We did 
the FAST Act, and we moved up the Buy American standards of 
domestic content up to 70 percent, and we are phasing that in.
    Yet there are loopholes in the way things are defined, 
subassembly, assembly, component, you know, system, whatever. 
We have had these discussions before. Clearly, the law needs 
some clarification.
    And in the case of BYD, they send over all of these small 
batteries made in China, send over a battery case made in 
China, but workers here assemble it, and then they claim that 
was made in America, and it constitutes 53 percent of the value 
of the bus.
    I mean, clearly, there is something wrong with the way that 
is being scored, and that is not made in America.
    So and then I have a local example in my district. 
Sometimes politics is local. My LTD, my local bus company, 
ordered some of these spiffy BYD buses in 2016. After they 
finally were belatedly and outside the contract delivered and 
did not work, they were sent back.
    Albuquerque, of course, is in litigation with BYD for 
dysfunctional buses, and you know, I understand. Transit 
agencies are under a lot of pressure. The Federal Government 
has not been a good partner. We have got a $100 billion backlog 
for state of good repair in our transit, which could be one 
hell of a lot of American jobs if we go about this right.
    But the Federal Government has not had the will nor has 
Congress to raise the revenues necessary to better partner and 
begin to chip away at that deficit.
    So some transit agencies have turned to these below cost 
vehicles or very low-cost vehicles, and you know, again, I 
cannot totally blame them, but you know, for every U.S. transit 
railcar final assembly job, and, yes, some of these are union 
jobs, good jobs, and this is not about those workers. They are 
doing the best they can with what the Chinese ship here for 
them to put together.
    And they do not do the engineering and design work. All of 
that is done in China, where many of the problems lie.
    And for every one of those jobs we get as assembling 
Chinese parts over here, we lose 3.5 jobs in our economy, and 
that includes an assumption that they comply with Buy America, 
which, I think, in this case is very, very questionable.
    They are smart. They unionized. They put these plants in 
very strategic places. They did not know Democrats were going 
to take over the House. So they put the plant in Kevin 
McCarthy's district. I think they would put it in someone 
else's district if they had known Democrats would take over the 
House, but they are not dumb.
    So we are here today to get into this issue and see what 
remedies might lie. Legislation has been introduced in the 
Senate and in the House to address this issue. Harley Rouda, a 
member of this committee, is the sponsor in the House, and we 
will be looking and talking about that legislation here today 
in the hearing.
    With that I yield back the balance of my time and recognize 
the ranking member, Representative Graves.
    [Mr. DeFazio's prepared statement follows:]

                                 
   Prepared Statement of Hon. Peter A. DeFazio, a Representative in 
      Congress from the State of Oregon, and Chair, Committee on 
                   Transportation and Infrastructure
    Today's hearing is not about one company, one sector, or one 
nation. It is about how Congress will respond to other nations' 
systematically wiping out the U.S. transit and rail manufacturing base 
and our blue-collar workforce.
    I have been fighting similar battles for decades. I opposed 
multiple Free Trade Agreements that failed to protect U.S. 
manufacturers and American workers. I opposed China's ascension into 
the WTO. And I will continue to wage this battle with every tool in the 
toolbox to vigorously defend our domestic transportation manufacturing 
sector from state-subsidized entities.
    My views of trade policy are not ideological; they are informed by 
observing the long run effects that unfair trade has had on my 
district. For three decades, blue-collar workers have been getting 
shafted all in the name of free trade. I have watched industries suffer 
the fate of bad trade deals and foreign incursions into the U.S. 
marketplace. I have battled to save multiple industries including 
paper, lumber, furniture, solar, trucking, auto, maritime, and 
agriculture.
    And the hits keep coming. Today, state-owned enterprises and 
similarly subsidized corporations are beginning to enter the transit 
rail and bus market, using subsidies from foreign governments to 
undercut long-established manufacturers and grab American taxpayer 
dollars. State-owned enterprises are also eyeing the U.S. domestic 
freight rail market. Tens of thousands of U.S. jobs are supported by 
this domestic manufacturing sector, but it could be decimated by unfair 
foreign competition.
    Not on my watch.
    Today we will hear from several witnesses raising concern about 
state-owned enterprises and similar corporations undercutting the U.S. 
rail and bus rolling stock market, the potential long-term effect on 
U.S. workers, cybersecurity risks, and reliability problems. I share 
these concerns.
    Currently, U.S. companies produce the majority of the freight rail 
cars that haul shipments across the country. Nearly 65,000 jobs are 
supported by the production of these rail cars. But as the Australian 
domestic manufacturing sector experienced, if left unchecked, state-
owned enterprises can enter the market, dominate production, and 
squeeze-out domestic companies. We cannot let that happen in the U.S. 
Today's witnesses will help explain the dangers of letting domestic 
companies fall victim to state-subsidized companies as well as the 
security concerns that would be created if that occurred.
    I also want to hear today if these state-owned companies are truly 
complying with federal transit Buy America rules. Federal laws like Buy 
America protect taxpayer interests in preserving U.S. jobs when local 
transit agencies use federal funds to purchase rolling stock. In the 
FAST Act, I strengthened Buy America standards by increasing the 
domestic content percentage phased-in to 70 percent.
    Members of the House and Senate sharing these concerns have 
introduced the Transit Infrastructure Vehicle Security Act to prevent 
federal transit dollars from being used to procure transit rail rolling 
stock and transit buses from Chinese state-owned, controlled or 
subsidized enterprises. The House bill, H.R. 2739, was introduced by 
Representative Rouda, a Transportation and Infrastructure Committee 
member, along with several other Committee members who are original co-
sponsors of the bill. I look forward to hearing the views of today's 
witnesses on this pending legislation.
    I don't blame transit agencies for seeking cheaper rolling stock. I 
know they are severely underfunded, and the state of good repair back 
log continues to grow. That backlog is currently approaching $100 
billion nationwide and the federal government only provides 
approximately $12.5 billion a year to meet all transit needs.
    For example, in my district, the local transit agency, LTD, ordered 
five BYD buses in 2016. After years of delay and delivery of defective 
buses, they still do not have all five buses. Similar problems are 
found in several other transit agencies across the U.S. These poorly 
constructed buses only exacerbate the $100 billion backlog of state of 
good repair.
    I realize most products today are built with the goal of low 
initial cost, rather than durability. But dollar for dollar, it is 
cheaper to build for durability over the long run and that principal is 
enshrined in federal rules that require a bus to remain in service for 
12 years.
    I also understand that the state-owned enterprises with U.S. 
contracts have hired U.S. workers, and in some cases these workers even 
have union contracts. This hearing is not a criticism of those workers, 
or unions. In fact, I think the number of workers who benefit from a 
union contract ought to be much higher.
    However, nobody today can honestly believe that Chinese companies 
are pro-labor union. The unionization of these jobs is a tactic to 
dodge the real issues these state-owned enterprises bring to the table.
    State-owned enterprises have a history of using supply chains in 
low-cost countries and shipping the product to the destination country. 
Research suggests that for every U.S. transit rail car final assembly 
job created by a state-owned enterprise, the net loss is 3.5 jobs in 
the U.S. economy--and that estimate assumes the company complies with 
Buy America standards.
    State-owned enterprises ultimately pose serious risk to U.S. 
skilled workers, labor unions, and the existing companies who play by 
the rules. That's why we're holding this hearing. I thank the witnesses 
for being here and look forward to your testimony.

    Mr. Graves of Missouri. Thank you, Mr. Chairman.
    A modern transportation infrastructure system means a 
strong and secure America. Our public transit and freight rail 
systems are an integral part of our larger transportation 
network.
    Technology modernization, which has been a priority of mine 
for a long time, drives improvements in safety and congestion, 
and it creates efficiencies.
    However, as we adopt transportation technologies, safety 
and cybersecurity have to remain top priorities. And earlier 
this month, the Federal Government released a list of 55 
national critical functions, and it is no surprise that these 
functions include transportation by rail, and mass transit, 
along with transport by air, road, vessel, pipeline, all of the 
areas that this committee is responsible for overseeing.
    Any disruption or corruption to these functions or to our 
transportation network as a whole would have a very 
debilitating effect. This is why today we are going to study 
the effects of state-owned enterprises, of SOEs, on our 
infrastructure network.
    SOEs are either wholly owned, as has been pointed out, or 
partially owned by a government that receives government 
funding to subsidize its operations, and these subsidies allow 
SOEs to gain U.S. market share by underbidding on their 
contracts.
    And in addition, as an extension of a government, an SOE 
can carry out political, economic, and militarist interests of 
that state government. And make no mistake. We have to 
investigate the motivation and intent of SOEs when they enter 
our infrastructure markets.
    China, in particular, possesses sophisticated capabilities, 
and it does have a track record of committing economic 
espionage focused on data collection of trade secrets and 
intellectual property.
    And today we are focused on entrants to the rolling stock 
market and the impacts of these entrants on the public transit 
and freight rail sectors. Concerns have been raised about these 
recent entrants and particularly whether or not their ownership 
or access to government subsidies gave them an unfair 
advantage.
    One of those recent entrants, the China Railway Rolling 
Stock Corporation, or the CRRC, successfully won contracts from 
public transit agencies in major metropolitan cities across the 
country to provide railcars with significantly lower bids than 
the competition.
    Concerns exist that CRRC will also expand to the freight 
rail sector, and it is going to undermine a lot of U.S. 
companies. This committee plays an integral role in ensuring 
the safety and cybersecurity of the entire transportation 
network.
    I look forward to hearing about possible solutions to 
ensure that we protect U.S. interests and maintain the security 
of our transportation system.
    And with that I yield back.
    [Mr. Graves' prepared statement follows:]

                                 
  Prepared Statement of Hon. Sam Graves, a Representative in Congress 
     from the State of Missouri, and Ranking Member, Committee on 
                   Transportation and Infrastructure
    A modern transportation infrastructure system means a strong, 
secure America.
    Our public transit and freight rail systems are integral to our 
larger transportation network. Technology modernization, which has been 
a priority of mine, drives improvements in safety and congestion, and 
creates efficiencies.
    However, as we adopt transportation technologies, safety and 
cybersecurity must remain top priorities.
    Earlier this month, the federal government released a list of 55 
national critical functions. It is no surprise that these functions 
include transport by rail and mass transit, along with transport by 
air, road, vessel, and pipeline: all areas this committee is 
responsible for overseeing. Any disruption or corruption to these 
functions or to our transportation network as a whole would have a 
debilitating effect.
    This is why today we are studying the effects of state-owned 
enterprises (SOEs) on our infrastructure network. SOEs are either 
wholly or partially owned by a government and receives government 
funding to subsidize its operations. The subsidies allow SOEs to gain 
U.S. market share by under-bidding on contracts.
    In addition, as an extension of a government, an SOE could carry 
out political, economic, and militaristic interests of that state 
government.
    Make no mistake, we must investigate the motivation and intent of 
SOEs entering our infrastructure markets. China in particular possesses 
sophisticated capabilities and has a track record of committing 
economic espionage focused on data collection of trade secrets and 
intellectual property.
    Today, we are focused on entrants to the rolling stock market and 
the impacts of these entrants on the public transit and freight rail 
sectors. Concerns have been raised about these recent entrants, in 
particular whether or not their ownership or access to government 
subsidies gave them an unfair advantage.
    One of these recent entrants, the China Railway Rolling Stock 
Corporation (CRRC) successfully won contracts from public transit 
agencies in major metropolitan cities across the country to provide 
rail cars with significantly lower bids than the competition. Concerns 
exist that CRRC will also expand to the freight rail sector and 
undermine U.S companies.
    This Committee plays an integral role in ensuring the safety and 
cybersecurity of the entire transportation network. I look forward to 
hearing about possible solutions to ensure we protect U.S. interests 
and maintain the security of our transportation systems.

    Mr. DeFazio. I thank the gentleman for his opening 
statement.
    Now I would like to welcome our witnesses: Mr. Scott N. 
Paul, president, Alliance for American Manufacturing;
    Brigadier General John Adams, U.S. Army (Retired), 
president, Guardian Six LLC;
    Mr. Hamilton Galloway, head of consultancy for the 
Americas, Oxford Economics;
    Mr. Frank Cilluffo, director, McCrary Institute for Cyber 
and Critical Infrastructure Security, Auburn University;
    Zachary Kahn, director of government relations, BYD Heavy 
Industries; and
    Mr. Phillip A. Washington, CEO, Los Angeles County 
Metropolitan Transportation Authority.
    Thank you all for being here today. I look forward to your 
testimony.
    But before we do hear from the panel, I believe Mrs. 
Napolitano wanted to do a special introduction.
    Mrs. Napolitano. Yes, sir. Thank you, Mr. Chairman.
    I am, indeed, greatly honored to introduce Phil Washington, 
the CEO of Los Angeles Metro since 2015. He has been a 
transformative leader in our region, in southern California, as 
he has transitioned the L.A. Metro bus fleet to clean energy 
vehicles, and he has passed major transportation measures to 
construct rail transit lines and remove highway choke points 
through L.A.
    He is leading on innovation with first-mile and last-mile 
solutions, such as bicycle and pedestrian paths, and on-demand 
transportation services.
    He also is helping create the next generation of 
transportation workers with a workforce training partnership, 
practical labor agreements that support apprenticeship, and is 
even creating a transportation focus in high school for young 
people.
    Thank you, Mr. Washington, for being here. I thank you very 
much.
    I yield back.
    Mr. DeFazio. I thank the gentlelady.
    We now proceed to our first witness, Mr. Paul.
    Mr. Paul, you have 5 minutes. You can summarize or 
extemporaneously talk, whatever you want to do.

 TESTIMONY OF SCOTT N. PAUL, PRESIDENT, ALLIANCE FOR AMERICAN 
    MANUFACTURING; BRIGADIER GENERAL JOHN ADAMS, U.S. ARMY 
(RETIRED), PRESIDENT, GUARDIAN SIX LLC; HAMILTON GALLOWAY, HEAD 
  OF CONSULTANCY FOR THE AMERICAS, OXFORD ECONOMICS; FRANK J. 
 CILLUFFO, DIRECTOR, McCRARY INSTITUTE FOR CYBER AND CRITICAL 
   INFRASTRUCTURE SECURITY, AUBURN UNIVERSITY; ZACHARY KAHN, 
  DIRECTOR OF GOVERNMENT RELATIONS, NORTH AMERICA, BYD MOTORS 
    LLC; AND PHILLIP A. WASHINGTON, CEO, LOS ANGELES COUNTY 
             METROPOLITAN TRANSPORTATION AUTHORITY

    Mr. Paul. Thank you. I will not read the entire 5,500 
words.
    Mr. DeFazio. Thank you.
    Mr. Paul. Mr. DeFazio, I want to also thank you, and I 
appreciate your longstanding and enlightened view on trade 
policy. You have been proven to be correct about this.
    And I want to thank Mr. Graves and the members of the 
committee.
    On behalf of the Alliance for American Manufacturing, a 
labor-business partnership, thanks for the opportunity to 
testify.
    I am going to summarize my written testimony by making 
three points. First, China's state-owned enterprises and 
Beijing's economic policies that support these firms are a real 
threat to American jobs and security.
    Second, firms in the rail and bus transit space, such as 
CRRC and BYD, that have established a foothold in the United 
States, thanks in part to Government contracts financed by 
taxpayers, are part of this web and represent the tip of the 
iceberg.
    Third, you can protect American jobs and security and 
demand reciprocity through legislation and regulation.
    China's model of state-led capitalism has contributed to 
the loss of 3.4 million U.S. jobs and the hollowing out of our 
industrial base as dumped and subsidized imports surged into 
our market since China joined the WTO in 2001.
    China heavily subsidizes its 51,000 state-owned enterprises 
in almost every industry imaginable. These SOEs have devastated 
broad swaths of American manufacturing through dumping 
products, by building up over-capacity, and targeting American 
firms with cyber hacking and IP theft.
    The SOEs are also supported by policies, including, but not 
limited to, discriminatory loan rates, tax rates, direct 
subsidies, protected home markets, lax labor and environmental 
regulation, and exchange rate misalignment.
    Put simply, firms in the U.S. and elsewhere are not 
competing with other companies. Rather, they are competing with 
an entire nation which has amassed $29 trillion in value for 
these state-owned enterprises.
    And now these SOEs threaten the infrastructure arena. Two 
such firms, CRRC and BYD, have begun securing lucrative U.S. 
taxpayer financed contracts to supply our major cities with 
transit railcars and electric buses. Their ambitions are 
sizable, establishing a substantial foothold in public 
procurement as a means of expanding into private sectors, such 
as freight rail and passenger automobile markets, as I 
illustrate in my written testimony.
    CRRC is systematically working to drive established 
competitors out of the market and achieve a monopoly in transit 
railcar production. Now, if successful, this would be a 
disaster for taxpayers and for transit providers that are 
looking for legitimate, fair and broad competition for their 
contracts.
    And you can look at the Australian market for perspective. 
In just the last decade, CRRC undertook a similar campaign 
leading to the obliteration of that country's domestic rail 
manufacturing sector.
    And while final assembly of CRRC railcars may be local, 
components and parts manufacturing include heavy Chinese 
content. CRRC's U.S. assembly plants are a vehicle for this 
content to be delivered into the U.S. market. That puts 90,000 
highways jobs, many of them unionized, and 750 companies in 39 
States at risk of being displaced.
    Dominating the medium- and heavy-duty electric bus sector 
is also in Beijing's plans. A key feature of China's industrial 
policy is the support of national champions, such as BYD. BYD's 
revenue growth has coincided closely with the trend of 
government-supported subsidies, access to below-market-rate 
capital, and other industrial policies.
    And it is clear that BYD is also a delivery system for 
Chinese imports at taxpayer expense. An inspector general 
report issued by the city of Albuquerque calls into question 
the legitimacy of BYD's compliance with Federal Buy America 
laws.
    Further evidence to support these assertions include BYD's 
public comments to the USTR requesting section 301 tariff 
relief for made-in-China storage batteries, parts, and electric 
vehicles, specifically noting four electric bus models.
    Already the world's largest electric vehicle company by 
sales, BYD executives have been outspoken in their plans to one 
day sell passenger cars in the United States. Now, this model 
would threaten over 5,600 parts suppliers spread across the 
Nation employing 871,000 workers, the very heart of American 
manufacturing.
    My testimony today should not be read as an attack on the 
American workers employed by CRRC or BYD, nor on foreign 
investment. We must respect the dignity of work and encourage 
foreign investment.
    But this is no ordinary foreign investment. Our workers and 
firms in the supply chain are not competing with a company in 
CRRC or BYD. They are competing with an entire country.
    I have policy recommendations that I am happy to discuss in 
Q&A, and I want to thank you for your time, Mr. Chairman.
    [Mr. Paul's prepared statement follows:]

                                 
 Prepared Statement of Scott N. Paul, President, Alliance for American 
                             Manufacturing
    Chairman DeFazio, Ranking Member Graves, and members of the 
Committee, on behalf of the Alliance for American Manufacturing (AAM), 
thank you for the opportunity to testify at today's hearing on the 
Impacts of State-Owned Enterprises on Public Transit and Freight Rail 
Sectors.
    The Alliance for American Manufacturing is a non-profit, non-
partisan partnership formed in 2007 by some of America's leading 
manufacturers and the United Steelworkers. Our mission is to strengthen 
American manufacturing and create new private-sector jobs through smart 
public policies. We believe that an innovative and growing 
manufacturing base is vital to America's economic and national 
security, as well as to providing good jobs for future generations. AAM 
achieves its mission through research, public education, advocacy, 
strategic communications, and coalition building around the issues that 
matter most to America's manufacturers and workers.
                              introduction
    For years, we have seen the destructive impacts of China's model of 
state-led capitalism on our domestic manufacturing sector, and the 
damaging ripple effects on thousands of communities across our nation. 
Between 2001, when China entered the World Trade Organization (WTO), 
and 2017, 3.4 million U.S. jobs were lost or displaced because of our 
massive bilateral trade deficit with China.\1\ This economic carnage 
has been fueled by predatory trade practices and disruptive economic 
policies, including heavy subsidization of state-owned enterprises 
(SOEs) and other firms that Beijing has deemed strategically important 
for their own security and economic interests.
---------------------------------------------------------------------------
    \1\ ``The China toll deepens: Growth in the bilateral trade deficit 
between 2001 and 2017 cost 3.4 million U.S. jobs, with losses in every 
state and congressional district,'' Robert E. Scott and Zane Mokhiber. 
Economic Policy Institute. 23 October 2018.
---------------------------------------------------------------------------
    A threat is growing in the infrastructure arena. China's state-
owned, state-subsidized, and state-supported enterprises are setting up 
assembly operations right here in the United States. Backed by deep 
government support, two such firms--China Railroad Rolling Stock 
Corporation (CRRC) and Build Your Dreams (BYD)--have begun securing 
lucrative, U.S. taxpayer-supported contracts to supply our major cities 
with transit rail cars and electric buses. Their ambitions are 
sizeable, that is to establish a substantial foothold into our market 
as a means of expanding into private sectors such as the freight rail 
and passenger automobile markets.
    On a local level, it is understandably a positive outcome that 
these firms have established assembly operations and are hiring 
American workers--in many cases, skilled, union workers that deserve 
our utmost respect. However, it is the duty of this committee and of 
Congress to examine how these firms are systematically destroying the 
competitive national landscape for U.S. rolling stock manufacturing. 
With the seemingly endless backing of a foreign, non-market economy 
government and the stated goal of dominating these sectors, these firms 
pose a grave danger to established competitors. And, because their U.S. 
assembly operations are merely a supply line for imported components, 
ultimately the jobs of millions of American workers throughout our 
domestic supply chains are at risk.
    It is essential that we scrutinize these investments and implement 
appropriate policies to protect against any deceptive or predatory 
actions that harm American workers and domestic companies, the U.S. 
supply chain, and the national security of our nation. At the 
conclusion of my testimony, I offer a number of policy recommendations 
for your consideration.
            china railroad rolling stock corporation (crrc)
    The Chinese government has shown its intention to dominate the 
global rail industry through various high-level, government 
initiatives, like Belt & Road and Made in China 2025. And it is 
carrying out this effort through its state-owned enterprises (SOE) like 
CRRC that benefit from an array of government subsidies and supports. 
China is not a fair player, and neither is CRRC.
    In 2014 the Massachusetts Bay Transportation Authority (MBTA) made 
what I believe to be a shortsighted decision to award a $566 million 
contract to a Chinese SOE that would ultimately become CRRC (after 
merging with another Chinese SOE that was disqualified from the same 
bidding process). At the time, I wrote to then-Massachusetts Governor 
Deval Patrick warning that CRRC would drastically alter the competitive 
landscape for domestic railcar manufacturing. ``As a basic principle of 
fairness,'' I wrote, ``all bids should play by the same set of market 
rules and none should be allowed to benefit from the backing of a 
foreign government . . . It is cheating, plain and simple, and should 
not be rewarded using taxpayer dollars.'' CRRC's bid was more than $200 
million below the next lowest bidder and roughly half that of another 
established firm. Because of CRRC's promise to build an assembly 
facility in Springfield with 120 jobs, local policymakers put potential 
short-term gains ahead of our collective, longer-term interests. They 
even gave CRRC an additional $277 million add-on contract in 2016.
    Unfortunately, this warning was ignored, and the concerns outlined 
in that letter five years ago have become reality. Once MBTA 
legitimized CRRC with its first major U.S. contract, the SOE quickly 
secured an additional $2 billion in transit rail car contracts in 
Philadelphia, Los Angeles, and Chicago by again submitting implausibly 
low bids that no private-sector competitor could possibly match. In 
Philadelphia, another bidder was quoted as saying, ``I cannot grasp how 
they are able to do it at that cost.'' \2\ With potential deals in 
Washington, DC and New York City in CRRC's sights, the consequences are 
enormous for maintaining competition, national security, innovation, 
and jobs.
---------------------------------------------------------------------------
    \2\ ``Mass.-based company with Chinese backing beats local group 
for SEPTA car contract,'' The Philadelphia Inquirer. 21 March 2017.
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CRRC is Disrupting the Marketplace.
    With the financial backing of Beijing, CRRC is systematically 
working to drive established competitors out of the market and to 
achieve a monopoly in transit rail car production. If successful, this 
would be a disaster for taxpayers and for transit providers that are 
looking for legitimate, fair and broad competition for their contracts. 
Once established competitors are driven out of the U.S. market, it is 
reasonable to assume that the lowball bids of CRRC will disappear and 
U.S. customers will be at their mercy in terms of pricing. If you don't 
think this is possible, I suggest you look at the Australian market for 
perspective. In just the last decade, CRRC undertook a similar campaign 
leading to the obliteration of that country's rail manufacturing 
sector.\3\
---------------------------------------------------------------------------
    \3\ ``China to bid on D.C. Metro rail deal as national security 
hawks circle,'' Reuters. 09 May 2019.
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    Already, established companies in the U.S. rail manufacturing space 
are facing unprecedented economic pressure to stay afloat. And, high-
wage jobs throughout the domestic rail manufacturing supply chain are 
at risk of being displaced by workers operating under harsh conditions 
and little pay in China. To be fair, Boston, Los Angeles, and Chicago 
each stipulated that final assembly of rail cars be completed locally, 
but there are few guarantees that component and parts manufacturing 
will be conducted in the United States. CRRC's U.S. assembly plants are 
a vehicle--both literally and figuratively--for Chinese content to be 
delivered into the U.S. market.
    According to the BlueGreen Alliance, there are more than 750 
companies in at least 39 states that manufacture components for 
passenger rail and transit rail. This includes: 24 major locomotive, 
railcar, and streetcar assembly facilities; 188 direct suppliers that 
manufacture major propulsion, electronics, and body components and 
systems; and, in the Midwest and Mid-Atlantic alone, 540 additional 
companies manufacturing sub-components, materials, track and 
infrastructure, as well as providing repair and re-manufacturing to the 
industry. All told, the U.S. rail manufacturing sector supports 90,000 
jobs.\4\
---------------------------------------------------------------------------
    \4\ ``Passenger Rail & Transit Rail Manufacturing in the U.S.'', 
BlueGreen Alliance and the Environmental Law & Policy Center. January 
2015.
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Security Concerns.
    CRRC's ascent also raises alarming questions about Beijing's access 
to, or operational control over, critical technology embedded in our 
rail infrastructure--such as GPS, sensors, and other safety features. 
This is why security experts have raised concerns that the Washington 
Metropolitan Area Transit Authority (WMATA) may award its pending 
procurement contract for its 8000-series car to CRRC--putting rail cars 
manufactured by a Chinese state-owned firm underneath the Pentagon and 
in close proximity to other sensitive locations. Doing so would 
potentially provide an adversary with operational control of or access 
to a major U.S. transit system and potentially expose sensitive data 
and communications of riders.
    CRRC's entry into the transit procurement market is almost 
assuredly a precursor to entering the freight rail market, a sector 
that not only supports 65,000 manufacturing jobs but is also 
responsible for moving 40 percent of all goods in the United States.\5\ 
This is a clear security risk.
---------------------------------------------------------------------------
    \5\ ``Will we derail US freight rolling stock production: An 
assessment of the impact of foreign state-owned enterprises on US 
freight rolling stock production,'' Oxford Economics. May 2017.
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                        build your dreams (byd)
    The medium- and heavy-duty electric bus sector is also in Beijing's 
sights. In 2013, BYD Motors, Inc.--a subsidiary of BYD Company, Ltd. 
(short for ``Build Your Dreams'')--established an electric bus assembly 
facility in Lancaster, California, signaling its intention to compete 
for taxpayer-funded transit contracts in U.S. cities. As of September 
2018, BYD says it has delivered more than 270 buses in North America, 
has more than 80 more in production, and has 300 bus orders with 
options in place. It has expanded its facility to produce up to 1,500 
electric buses each year.\6\
---------------------------------------------------------------------------
    \6\ BYD Press Release. 25 September 2018.
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BYD Benefits from Government Subsidies, Policy Direction, and a 
        Protected Home Market.
    A key feature of China's industrial policy is the support of 
``national champions.'' These are industry leaders that Beijing 
believes to have a high potential for growth, innovation, and the 
ability to advance China's industrial and other policy goals. Hence, 
BYD has been the beneficiary of a mix of government support, including 
a lower corporate tax rate, loans from state-owned and policy banks, 
and generous grants and subsidies.
    China started its government support for new energy vehicles with a 
2009 pilot program that evolved into a national program targeting 
battery, hybrid, and fuel cell electric vehicles, covering both 
passenger and commercial vehicles.\7\ According to a 2019 Bloomberg 
article, ``The company received new energy vehicle subsidies equal to 
380 percent of its electric-car sales . . . The Shenzhen-based company 
gets about 8.2 billion yuan ($1.2 billion) from the central government 
and 4.4 billion yuan [$647 million] from local governments . . . 
Official aid even enabled BYD to push into making electric commercial 
vehicles.'' \8\ BYD's revenue growth has coincided closely with the 
trend of government support subsidies, access to below-market-rate 
capital and other industrial policies. While the initial stream of 
direct electric vehicle subsidies has now declined, many of the other 
programs not only remain in place but are buttressed by Beijing's 
continued push to achieve the goals of President Xi to advance the 
country's national champions and promote global competitors.
---------------------------------------------------------------------------
    \7\ Compiled from Government of China Announcements
    \8\ ``Buffett's China Ride Is Losing Power With Investors,'' 
Bloomberg. 19 February 2019.
---------------------------------------------------------------------------
    New energy vehicles have been deemed a priority, high-technology 
industry important to China's mid- and long-term growth strategy. Two 
national-level industrial plans have outlined the development objective 
and strategic importance of the new energy vehicle sector: the 13th 
Five-Year Plan for Strategic and Emerging Industries Development and 
the Made in China 2025 Strategy, which identified new energy vehicles 
as one of 10 priority sectors for developing indigenous innovation 
capability. Made in China 2025 leverages state resources to rework and 
generate prejudicial advantage on a global scale. This unparalleled 
state-driven intrusion will continue to destabilize the market, causing 
artificially reduced prices, and distort U.S. manufacturing and 
innovation of medium- and heavy-duty electric buses. Meanwhile, BYD has 
enjoyed nearly exclusive access to its home market of Shenzhen, a city 
of 12 million people, where it has supplied upwards of 80 percent of 
the city's 14,000 electric buses.\9\
---------------------------------------------------------------------------
    \9\ ``100% Electric Bus Fleet For Shenzhen (Population 11.9 
Million) By End Of 2017,'' Clean Technica. 12 November 2017.
---------------------------------------------------------------------------
BYD is Not Your Average ``Privately-Owned Company.''
    Despite BYD's assertion that the company is ``privately-owned,'' a 
closer look raises legitimate questions about its connections to the 
Chinese government. For example, while Berkshire Hathaway is a major 
investor in BYD, there are several Chinese state-owned investment funds 
that hold equity interests in BYD or its subsidiaries.\10\ This 
indicates that the central government has confidence in BYD as a leader 
in a priority industry, which, in turn, attracts private investment. 
And, as the U.S.-China Economic & Security Review Commission has noted, 
``some private Chinese companies operating in strategic sectors are 
private only in name, with the Chinese government using an array of 
measures, including financial support and other incentives, as well as 
coercion, to influence private business decisions and achieve state 
goals.'' \11\ BYD certainly falls in that category.
---------------------------------------------------------------------------
    \10\ BYD 2017 Annual Report and BYD Financial Releases
    \11\ US-China Economic and Security Review Commission, 2017 Annual 
Report to Congress, at 3.
---------------------------------------------------------------------------
    BYD's leadership have past and current ties to local and national 
Chinese governments. Its Chairman and CEO Wang Chuanfu, who owns a 
significant stake in the company \12\, was a delegate of the People's 
Congress of Shenzhen from 2000 to 2010 and held a position with the 
city legislature from 2005 to 2015. Zou Fei, an expert of the 
``Thousand Talents Program'' of the Organization Department of the 
Central Committee of the Communist Party of China, serves as a 
supervisor on BYD's Board.\13\ Zou was previously the managing director 
of the special investment department of the China Investment 
Corporation, a sovereign wealth fund responsible for managing China's 
foreign exchange reserves. Also, the deputy general manager of Norinco 
Group--a state-owned defense company--serves as a supervisor on BYD's 
Board.\14\
---------------------------------------------------------------------------
    \12\ BYD 2017 Annual Report
    \13\ BYD 2017 Annual Report
    \14\ BYD 2013 Interim Report
---------------------------------------------------------------------------
BYD Relies on the Battery Power System to Meet Buy America Laws.
    U.S. domestic content preference laws--including the Buy America 
law applied to transit federal assistance--are an important policy to 
incentivize domestic capital investment and ensure that American 
workers supply the materials and components used to build our vehicles 
and infrastructure. The statutory Buy America law for rolling stock 
procurements funded with Federal Transit Administration (FTA) grants 
requires that assembly occur in the United States and that domestic 
content account for a minimum of 65 percent as measured by total 
material cost. The cost of the components and subcomponents produced in 
the U.S. increases to 70 percent or more for Fiscal Year 2020 and 
beyond.
    A critical area of concern is the way battery power systems with 
Chinese subcomponents are accounted for as part of the Buy America 
calculation and certification. In our view, this issue sets BYD aside 
from its competition. An Inspector General (IG) report issued by the 
City of Albuquerque calls into question the legitimacy of BYD's 
compliance with federal Buy America laws. In the case of buses provided 
to the City of Albuquerque, BYD met the 65 percent threshold with 53 
percent of the total cost of materials attributed to its Power Battery 
System, which appears to have been manufactured by another BYD 
subsidiary. This, in turn, means that all other domestic components--
such as seats and the farebox--accounted for as little as 18 percent of 
the total cost of materials.\15\ Meanwhile, other major elements of 
BYD's buses, such as steel chassis, are imported directly from China.
---------------------------------------------------------------------------
    \15\ ``Inspection of Albuquerque Rapid Transit Project 
Procurement,'' Peter Pacheco, Office of the Inspector General, City of 
Albuquerque. 6 June 2018.
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    America is still gaining its footing with regard to designing, 
developing, and deploying cutting-edge battery technology that can meet 
the needs of companies. We need to dramatically enhance the capacity to 
meet this growing demand. Unfortunately, it appears that BYD imports 
large quantities of battery cells from another BYD subsidiary in China. 
They are likely combined into a battery pack in the United States, 
allowing Chinese state-subsidized foreign content to qualify as a 
domestic component.\16\
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    \16\ BYD's U.S. Imports Derived from Shipping Manifests, 2017 and 
2018 YTD as of Nov. 28, 2018, Obtained from Panjiva, Inc.
---------------------------------------------------------------------------
    We must recognize that short-term market limitations exist for the 
domestic production of battery packs and a supporting supply chain. For 
the long-run, however, we must take appropriate steps to ensure that 
millions of new energy vehicles--both passenger and mass transit--rely 
on domestic production rather than Chinese imports. Congress and the 
administration should work together to establish a mix of incentives 
and policies to maximize the utilization of new energy vehicles and to 
expand the supply chain for the domestic production of batteries. 
Adopting the right kind of transition policies would also ensure that 
the recently-negotiated update of the North American Free Trade 
Agreement--which requires that advanced batteries, including the cells, 
originate in the United States--will advance the interests of the 
United States, Canada, and Mexico.\17\
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    \17\ Office of the United States Trade Representative, ``Estimated 
Impact of the United States-Mexico-Canada Agreement (USMCA) on the U.S. 
Automotive Sector,'' April 18, 2019, at 5.
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An Individual was ``Pressured'' to Validate Buy America Compliance.
    Based on the comments of individuals interviewed as part of the 
Albuquerque IG report, there is ample cause for concern that BYD is 
misrepresenting the already meager amount of domestic content in its 
buses. An individual identified in the report as ``TD-1'' indicated 
that he felt ``pressured'' to validate [Buy America] compliance by 
signing documents representing that he personally validated the 
origination of the components. Upon being told that ``signing the 
document was just a 'formality' to ensure compliance,'' he said that he 
felt ``uncomfortable'' signing. He later told the IG ``that he felt he 
was under duress in being pressured to sign the document.'' Meanwhile, 
the IG report indicates that BYD provided the ``summary of calculations 
for the percentages of United States made parts'' to the auditor tasked 
with ensuring Buy America compliance. This raises serious questions as 
to the accuracy of that information and how thorough of an audit was 
conducted.
``Everything Appeared to Originate in China.''
    According to the Albuquerque IG report, a BYD official said ``that 
only the frames of the buses were made in China, and that all of the 
other assemblies and components were manufactured in the United States 
by American suppliers.'' Yet, city inspectors interviewed offered 
sharply different accounts.
    An individual identified as TD-5 observed that ``many of the 
shipping labels for various components had Chinese characters.'' TD-6 
said that based on package markings, discussions with BYD personnel, 
and other factors he believed that the chassis, walls, drive train, 
axles, motor, and modules were made in China. TD-7 said that when 
asking about the assembly process status for electric lights, seating, 
seat belts, and other components, he was told ``it's on the boat.'' He 
said that as far he knows, it seemed everything appeared to originate 
in China based on responses to his questions. And, TD-9 said ``the 
majority, if not all, parts were manufactured in China and shipped to 
the United States.''
    Further evidence to support these assertions includes BYD's public 
comments to the Office of the U.S. Trade Representative (USTR) 
requesting Section 301 tariff relief for storage batteries \18\, air 
conditioning machines, seats, parts and accessories \19\, and electric 
vehicles, specifically noting its K9S \20\, K9MC \21\, K7M \22\, and 
K8S \23\ electric bus models. BYD submitted Section 301 tariff 
exclusion requests to USTR for its electric buses, which were all 
denied. USTR's General Counsel stated that the ``request was denied 
because the request concerns a product strategically important or 
related to ``Made in China 2025'' or other Chinese industrial 
programs.''
---------------------------------------------------------------------------
    \18\ BYD America Corp. comments and appendix, Proposed 
Determination of Action Pursuant to Section 301: China's Acts, 
Policies, and Practices Related to Technology Transfer, Intellectual 
Property, and Innovation, Docket No. USTR-2018-0005, May 14, 2018.
    \19\ BYD Motors LLC comments, China's Acts, Policies, and Practices 
Related to Technology Transfer, Intellectual Property, and Innovation, 
Docket No. USTR-2018-0026, Sept. 6, 2018.
    \20\ Exclusion Denied, BYD Motors Inc., Electric bus, HTS 
8702903100, USTR-2018-0025-7530, Oct. 26 2018.
    \21\ Exclusion Denied, BYD Motors Inc., Electric bus, HTS 
8702903100, USTR-2018-0025-7528, Oct. 26, 2018.
    \22\ Exclusion Denied, BYD Motors Inc., Electric bus, HTS 
8702903100, USTR-2018-0025-7346, Oct. 25, 2018.
    \23\ Exclusion Denied, BYD Motors Inc., Electric bus., HTS 
8702903100, USTR-2018-0025-7347, Oct. 25, 2018.
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Press Reports Document BYD's Quality and Consistency Issues.
    The City of Albuquerque has resorted to legal action against BYD 
for delays and incomplete certification testing.\24\ According to city 
officials, the bus batteries limited the bus range to 177 miles on a 
single charge, far short of the 275 miles stipulated in its contract. 
The buses also experienced serious safety issues, including brake 
pressure issues, door issues, cracked and missing welds compromising 
the integrity of the buses, malfunctioning wheelchair accessibility, 
and exposed high voltage cables that created a risk of electrical 
fire.\25\
---------------------------------------------------------------------------
    \24\ City of Albuquerque v. BYD Motors, Inc., No. 1:2019-cv-00012 
(US Dist. Ct., NM).
    \25\ ``BYD faces Albuquerque lawsuit: City claims bus firm didn't 
live up to deal,'' Antelope Valley Press. 08 December 2018.
---------------------------------------------------------------------------
    According to the Los Angeles Times, ``Internal emails and other 
agency records show that agency staff called them 'unsuitable,' poorly 
made and unreliable for more than 100 miles.'' Buses used in Los 
Angeles experienced white smoke, wouldn't start, lost charge, and 
stalled on the road. Others experienced door and air system failures. 
In Denver, bus doors would not open or close. In Columbia, Maryland, 
passengers were ``jolted by an explosion and a wheel fire.'' \26\
---------------------------------------------------------------------------
    \26\ ``Stalls, stops and breakdowns: Problems plague push for 
electric buses,'' Paige St. John. Los Angeles Times. 20 May 2018.
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BYD Aspires to Dominate the Global Electric Vehicle and Battery Market.
    Already the world's largest electric vehicle company by sales, BYD 
executives have been outspoken in their plans to one day sell passenger 
cars in the United States. The Los Angeles Times reported that in 2008 
BYD's chairman ``boasted of plans to dominate world auto sales by 
2025.'' Reuters reported that in 2017 a BYD executive said the company 
planned to sell passenger cars in the United States in ``roughly 2 to 3 
years.'' And, in the meantime, the company is planning to raise funds 
through a public listing of its battery business in order to build 
vehicle-battery factories in Europe and the United States.\27\
---------------------------------------------------------------------------
    \27\ ``Warren Buffett-Backed Electric Vehicle Maker Plans Battery 
Unit IPO,'' Bloomberg. 05 December 2018.
---------------------------------------------------------------------------
    Allowing BYD to extend its non-market influence and operations into 
the U.S. auto market would put hundreds of thousands of jobs at risk. 
BYD's economic model of assembling vehicles in the United States, but 
relying on imported parts and components, would threaten over 5,600 
auto parts suppliers spread across the nation, employing 871,000 
workers.\28\
---------------------------------------------------------------------------
    \28\ ``State of the U.S. Automotive Industry,'' American Auto 
Policy Council. August 2018.
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         state-owned chinese firms are an exception to the rule
    My testimony today should not be read as an attack on the hundreds 
of American workers employed by CRRC or BYD. These dedicated 
individuals get up and go to work each day focused on providing for 
their families. Many have the protections of a union which, as anti-
union activity in the U.S. rises, cannot be overlooked. As a former 
shop steward for the CWA and policy advocate for the AFL-CIO who has 
walked picket lines with, marched with, and represented these workers, 
I urge you to respect the dignity of work. That's an entirely separate 
question from the impact of state-owned enterprises on our economy. 
Tens of thousands of American jobs are supported by a competitive, 
market-based ecosystem of companies that do not benefit from aggressive 
foreign government support to bankroll anti-competitive behavior. 
Ultimately, millions of our jobs are still at risk, while millions more 
have been vanquished by shifts of production and import competition 
over the past two decades.
    Neither should our criticisms be read as an attack on international 
competition. Foreign investment is welcomed in our economy, and many 
foreign firms that manufacture in the United States provide high-wage 
jobs and contribute to economic growth. This includes foreign firms 
that manufacture buses and rail cars for our transit procurement 
markets. State-owned, state-subsidized, and state-supported Chinese 
firms, though, are an exception to the rule. Short-term promises of 
assembly jobs belie the long-term economic damage being done to our 
economy--it is an unhealthy proposition to allow foreign government-
funded competition to push market-based firms into bankruptcy.
                         congress needs to act
    It is timely that action be taken to promote fair competition, 
ensuring that the next generation of transit vehicles supported by U.S. 
taxpayers at the federal, state, and local level and deployed in major 
U.S. cities are made by American workers and rely on a robust domestic 
supply chain. Even though CRRC and BYD have made substantial 
investments in our market, it is not too late to implement policies 
that will prevent the destruction of the competitive landscape for 
rolling stock manufacturing. I wish to outline a series of 
recommendations for this committee and Congress to consider.
    First, we urge your support for the bipartisan Transit 
Infrastructure Vehicle Security Act, which has been introduced in the 
House and Senate. This bill would prohibit federal funds from being 
used by transit agencies to purchase rail cars or buses manufactured by 
foreign-government-owned, controlled, or subsidized companies. 
America's tax dollars should not be used to support Chinese SOEs 
seeking to undermine legitimate competition.
    Second, it is necessary to apply further pressure to transit 
systems that aim to employ clever accounting as a means of using non-
federal resources to award contracts to these Chinese SOEs. The 
Washington Metropolitan Area Transit Authority (WMATA) is currently 
reviewing bids--including one from CRRC--to supply its 8000-series rail 
cars. The procurement of CRRC rail cars would hurt thousands of workers 
throughout the rail supply chain and it poses security risks as it 
serves countless government and private-sector contractor employees in 
our nation's capital. WMATA should not be permitted to allocate ``non-
federal'' resources for the procurement of rail cars from CRRC when it 
also receives hundreds of millions annually from the federal 
government.
    Third, it is necessary to make improvements to longstanding Buy 
America laws by closing loopholes and adding additional teeth to 
prevent erosion of our supply chains. The U.S. Department of 
Transportation and Federal Transit Administration (FTA) need to 
promptly modernize Buy America rules as it pertains to battery-electric 
power propulsion systems on buses. A long-term plan, with appropriate 
recognition of the need for transition strategies, must be adopted.
    Fourth, we urge that both CRRC's and BYD's Buy America 
certifications be audited to ensure compliance. Individuals interviewed 
as part of the City of Albuquerque IG Report said that they were 
``pressured'' to validate domestic content and felt as if they were 
``under duress'' to do so. Others suggested that ``everything was made 
in China.''
    Fifth, even if bids by firms like CRRC and BYD were to abide by 
market-based pricing, it is necessary that we address security concerns 
related to Chinese state-owned, -invested, and -supported firms having 
operational access or control over critical infrastructure systems. 
These firms must be required to provide the source code for U.S. 
government experts to analyze for any signs of suspicious activity, 
including any installed software, patches, updates, upgrades, and any 
other modifications. It is simply not enough to accept the word of 
these firms that they will structure their operations in a manner that 
resolves our security concerns. Extensive oversight is vital for the 
safety and security of Americans.
    Sixth, we must protect our freight rail sector with unprecedented 
transparency and limitations on Chinese state involvement. Any U.S. 
entity seeking to procure freight rail cars from a Chinese state-owned, 
-controlled, or -subsidized firm, should be required to publicly 
disclose the details of that purchase and assume full liability for any 
future misdeeds that may occur.
    Seventh, we must insist on reciprocity in procurement. No U.S.-
based firm may enter the Chinese procurement market the way in which 
CRRC and BYD have entered the American market. China is not a signatory 
to the Government Procurement Agreement (GPA). Put simply, the United 
States should consider banning all Chinese products and firms from our 
procurement market until there is demonstrable progress on reciprocity 
in law and in practice.
    Last, but certainly not least, we encourage you to continue the 
hard work of passing a substantial infrastructure investment paired 
with strong Buy America requirements. A lack of adequate, consistent 
funding puts added pressure on transit agencies to find ways to cut 
costs, even if that means sourcing rolling stock from companies with 
lingering quality issues, dubious Buy America compliance, security 
issues, and clear designs on leveraging state backing to grab market 
share from their competitors.
                               conclusion
    I applaud the Committee for holding today's hearing and for drawing 
attention to impacts of China's state-owned, state-subsidized, and 
state-supported entities on our public transit and freight rail 
sectors.
    Thank you for the opportunity to testify. We look forward to 
working with you to strengthen America's economy and national security 
through smart infrastructure and procurement policy.

    Mr. DeFazio. I thank the gentleman.
    Next would be Brigadier General Adams.
    General Adams. Good morning, Chairman DeFazio.
    Mr. DeFazio. Yes, there you go. That is better. Thanks.
    General Adams. Good morning, Chairman DeFazio, Ranking 
Member Graves, and members of the committee. I want to thank 
you for inviting me to testify at this critically important 
hearing on securing our freight and transit rail sectors 
against Chinese state-owned enterprises.
    My name is John Adams, and I am a 30-year veteran of the 
U.S. Army and president of Guardian Six Consulting.
    We depend upon the freight rail system to provide safe, 
reliable and effective transportation for our defense and 
homeland security infrastructure. Our national survival depends 
upon these rail links to transport, for example, military 
equipment, hazardous waste, toxic substances, and a range of 
products and commodities that support our entire economy.
    U.S. freight rail is a strategic asset, the health and 
integrity upon which our Armed Forces rely.
    Today I would like to draw the committee's attention to 
China's strategic targeting of the U.S. rail manufacturing 
sector with aggressive, strategic, and anticompetitive actions 
that threaten to turn this system from a bedrock strategic 
asset into a potentially crippling vulnerability.
    These efforts are being driven by a Chinese SOE called the 
China Railway Rolling Stock Corporation, a massive conglomerate 
wholly controlled by the Chinese Government as part of 
coordinated efforts to advance Chinese industrial policy, such 
as Made in China 2025.
    So what are some of the tactics that CRRC uses to 
infiltrate our rail industry?
    First, they have unlimited resources since they are backed 
by the Chinese Government. They can easily underbid their 
competitors. Just in the last 5 years, CRRC's underbidding has 
allowed them to establish rail assembly operations for transit 
railcars in two States, along with research and bidding 
operations in several others.
    Emboldened with contract victories in four cities, CRRC 
continues to target other U.S. cities, including our Nation's 
Capital where the request for proposal includes video 
surveillance, monitoring and diagnostics, data interfaces, and 
automatic train control systems that are susceptible to 
cyberattacks.
    Whomever is selected to supply railcars for WMATA will 
become a partner in in the day-to-day operations of a Metro 
system whose stops include the Pentagon and the Capitol, as 
well as unfettered access to our Nation's tunnels and 
underground infrastructure.
    The prospect of the Chinese Government using these trains 
for intelligence gathering is alarming. Chinese built-in 
surveillance cameras could track the movements and routines of 
passengers, searching for high-value targets from whom 
intelligence officials could vacuum data using the train's 
built-in Wi-Fi systems.
    China already boasts of using the latest advances in 
artificial intelligence and facial recognition technology, 
creating a very real chance that they have the capacity and 
interest in doing so here in the United States.
    Even more alarming is that CRRC can easily pivot into 
freight rail assembly, a subsector of rail that does not 
benefit from the same Buy America protections as transit rail.
    Concerns about CRRC's transition to freight rail 
manufacturing are best illustrated by the recent experiences of 
third-country markets like Australia, whose freight rail 
manufacturing sector CRRC decimated in less than 10 years.
    The Department of Defense has a longstanding reliance on 
freight rail. Most of the military's heavy and track vehicles 
are transported by freight rail, meaning that freight rail runs 
through every military base in the United States.
    Freight rail is also core to the U.S. Transportation 
Command, DoD's global defense transportation system, 
coordinating transportation assets around the world.
    The national security concerns related to CRRC cannot be 
underestimated. Chinese intelligence awareness of U.S. rail 
logistical movements could provide China with a destabilizing 
strategic and economic competitive edge, and of course, Chinese 
access to U.S. freight rail also means that the risk of 
malicious incursions into our rail infrastructure, including 
those carried out by terrorists, would become much more 
difficult for U.S. operators to detect or counter.
    While Congress has recognized and taken steps to address 
similar threats to products, such as computer chips and 
cellular technology, it is equally important that policymakers 
enact legislation to stop immediately the scope and impact of 
China's ongoing incursion into an increasingly digitized rail 
network.
    I greatly appreciate the committee's interest in addressing 
these critical issues. We must safeguard our U.S. rail system's 
health and integrity before we lose it.
    We owe it to the American people to ensure that the 
American freight rail sector continues to be a vibrant and 
secure element of our Nation's infrastructure.
    Thank you, again, for the opportunity to testify. I look 
forward to answering your questions.
    [General Adams' prepared statement follows:]

                                 
     Prepared Statement of Brigadier General John Adams, U.S. Army 
                 (Retired), President, Guardian Six LLC
                              introduction
    Chairman DeFazio, Ranking Member Graves, and members of the 
Committee, I want to thank you for inviting me to testify at this 
critically important hearing on securing our freight and transit rail 
sectors against Chinese state-owned enterprises (SOE). My name is John 
Adams and I am a 30-year veteran of the US Army and President of 
Guardian Six LLC, (Guardian). Guardian Six is a defense and national 
security consulting firm, which specializes in understanding, 
assessing, and mitigating against national security threats to our 
Nation's defense industrial base. Guardian Six is also a national 
security advisor to the Rail Security Alliance (RSA) which is a 
coalition of North American freight railcar manufacturers, suppliers, 
steel interest and unions committed to ensuring the economic and 
national security of our freight and transit rail systems. Notably, on 
October 22, 2018, Guardian Six published a report titled ``National 
Security Vulnerabilities of the U.S. Freight Rail Infrastructure and 
Manufacturing Sector--Threats and Mitigation,'' which systematically 
examines, among other things, the threats posed by SOEs in this 
industry.
    Our country depends upon the freight rail system to provide safe, 
reliable, and effective transportation for our defense and homeland 
security infrastructure. I know first-hand that our national survival 
depends upon these vital rail links as the primary transportation for 
U.S. military equipment, infrastructure logistics, hazardous waste, 
toxic substances, and the range of products and commodities that 
support our entire economy. U.S. freight rail is a strategic asset, the 
health and integrity upon which our armed forces depend to maintain 
readiness and preserve our defense capacity. Our freight rail system 
connects ports to rural and urban inland hubs, military bases to each 
other, and to key logistics nodes throughout our Nation. It also links 
the U.S. by land to key allies and trading partners Canada and Mexico 
and enables transportation between coastal and inland military and 
homeland infrastructure nodes. On the passenger side, millions of 
Americans rely on transit rail systems every day. The U.S. rail system 
is also highly sophisticated, relying on a constantly expanding network 
of technology and digitization that dramatically increases its risk to 
cyber-attack and hacking.
    Today, I would like to draw the Committee's attention to China's 
strategic targeting of the U.S. rail manufacturing sector, with 
aggressive, strategic and anti-competitive actions. China is making 
substantial economic inroads into our rail system's supporting supply 
chains, as well as rolling stock asset ownership and management. 
Beijing's 2015 ``Made in China 2025'' plan leverages state resources 
and industrial policy, specifically aiming for a comparative advantage 
in the global advanced rail sector among nine other sectors. China's 
strategy to capture the U.S. rail system's supply chain threatens the 
system's cyber-security, reliability, and safety. Any Chinese dominance 
of the U.S. rail system would turn the system from a bedrock strategic 
asset into a potentially crippling vulnerability.
     china's state-owned enterprises target u.s. rail manufacturing
    The United States has seen a growth in Chinese foreign direct 
investment over the last few decades, exceeding $140 billion in 
2018.\1\ Much of this investment is targeted in several sectors 
including energy, telecommunications, and transportation--industries 
that make up key pillars of our country's critical infrastructure. In 
the rail transportation sector, this investment has been spearheaded by 
a Chinese SOE called the China Railway Rolling Stock Corporation 
(CRRC). Specifically, CRRC is a massive conglomerate that is wholly 
owned by the Chinese government, with deep ties to the Communist Party 
of China. Not only does CRRC possess 90 percent of China's domestic 
market to produce rail locomotives, bullet trains, passenger trains and 
metro vehicles, but it has dramatically and strategically increased its 
investment and footprint in the United States. This fact raises serious 
questions and concerns about the current and future safety and security 
of our Nation's railroads.
---------------------------------------------------------------------------
    \1\ Rhodium Group, China Investment Monitor: Capturing Chinese 
Foreign Investment Data in Real Time. https://rhg.com/impact/china-
investment-monitor/
---------------------------------------------------------------------------
    The ``Made in China 2025'' initiative, a key component of China's 
13th Five-Year plan,\2\ identifies the rail manufacturing sector as a 
top target for Chinese expansion. This initiative has systematically 
and deliberately driven strategic investment and financing activities 
of the SOE CRRC in third-country markets and the United States.\3\ In 
2015, CRRC reported revenues of more than $37 billion \4\--
significantly outpacing the entire U.S. railcar market, which had $22 
billion of output during the same year.\5\ According to Chinese state 
media, CRRC plans to increase overseas sales to $15 billion by next 
year alone. This represents about double the level of export orders 
from just four years ago \6\ and according to CRRC's own presentation 
materials the U.S. market remains a prime target to, as they put it, 
``conquer.'' \7\
---------------------------------------------------------------------------
    \2\ U.S.-China Economic and Security Review Commission, 2016 Report 
to Congress, November 2016, at 100.
    \3\ Langi Chiang, China's largest train maker CRRC Corp announces 
12.2 billion yuan in contracts, South China Morning Report, July 23, 
2015. https://www.scmp.com/business/companies/article/1842983/chinas-
largest-train-maker-crrc-corp-announces-122-billion-yuan
    \4\ CRRC Corporation, 2015 CRRC Annual Report, https://
www.crrcgc.cc/Portals/73/Uploads/Files/2016/8-23/636075436968234671.pdf
    \5\ Oxford Economics, Will We Derail US Freight Rolling Stock 
Production? May 2017, at 24.
    \6\ Brenda Goh, China Trainmaker CRRC to build more plants abroad 
in expansion plan: China Daily, REUTERS, Dec. 5, 2016, http://
www.reuters.com/article/us-crrc-expansion-idUSKBN13U0EJ
    \7\ @CRRC global, ``Following CRRC's entry to Jamaica, our products 
are now offered to 104 countries and regions. So far, 83% of all rail 
products in the world are operated by #CRRC or are CRRC ones. How long 
will it take for us conquering the remaining 17%?'' Twitter, January 
11, 2018. [Tweet deleted]
---------------------------------------------------------------------------
    CRRC's bylaws direct that the company seek guidance from the 
Communist Party of China on significant matters affecting the company's 
operations.\8\ Three of CRRC's current board members previously held 
high-level positions at several state-owned defense companies 
including, Aviation Industry Corporation of China (AVIC), which 
produces fighter and bomber aircraft, helicopters, and unmanned aerial 
vehicles for the Chinese Army, and China Shipbuilding Industry 
Corporation (CSIC), which produces submarines, warships, and other 
naval equipment for the Chinese Navy. Furthermore, two former CRRC 
board members held positions at AVIC and China North Industries Group 
Corporation Limited (NORINCO), a state-owned defense company that 
supplies tanks, aircraft, missiles, firearms, and related products for 
the Chinese military.
---------------------------------------------------------------------------
    \8\ ``CRRC Corporation Limited Articles of Association,'' CRRC 
Corporation Limited, at 70. http://www.crrcgc.cc/Portals/73/Uploads/
Files/2018/6-4/636637164457871915.pdf
---------------------------------------------------------------------------
    The latter two of these entities, CSIC and NORINCO, have been 
subject to allegations of espionage and sanctions evasion by the U.S. 
government, raising serious questions about the link between CRRC board 
members and these compromising activities. Coupled with these facts, in 
2007, AVIC was reputed to have stolen data on the F-35 fighter jet from 
Lockheed Martin and used it to build the Chinese J-31 fighter.\9\ 
Similarly, CSIC was indicted in 2016 by the U.S. Department of Justice 
for entering into contracts with another Chinese company for the 
purchase of industrial materials that were created using stolen trade 
secrets from an American company.\10\ NORINCO has also been sanctioned 
by the U.S. State Department on six occasions for contributing to 
Iranian Weapons of Mass Destruction (WMD) development.\11\ Two of 
CRRC's board members were respectively employed in high-level positions 
at CSIC and NORINCO at the time these offenses occurred, suggesting 
that they were likely aware of, if not complicit in, this illicit 
activity.
---------------------------------------------------------------------------
    \9\ ``America's most expensive weapons system, the F-35, is a key 
symbol of Trump's trade gripe with China,'' CNBC, March 22, 2018 
https://www.cnbc.com/2018/03/22/americas-most-expensive-weapons-system-
the-f-35-is-a-key-symbol-of-trumps-trade-gripe-with-china.html
    \10\ ``Chinese Nationals Stole Marine Technology to Benefit Chinese 
Regime, According to US Justice Department,'' Epoch Times, April 30, 
2018. https://www.theepochtimes.com/chinese-nationals-stole-marine-
technology-to-benefit-chinese-regime-according-to-u-s-justice-
department_2509135.html
    \11\ ``United States Imposes Sanctions Against Chinese Firm,'' 
Nuclear Threat Initiative, September 22, 2004. https://www.nti.org/gsn/
article/united-states-imposes-sanctions-against-chinese-firm/
---------------------------------------------------------------------------
    Using state-backed financing, subsidies, and an array of other 
government resources, CRRC has strategically targeted and sought to 
capture the U.S. railcar manufacturing sector. In just the last five 
years the United States has witnessed CRRC establish rail assembly 
operations for transit railcars in two states, along with additional 
research and bidding operations in several others. By beginning with a 
business strategy to take market share in the U.S. transit rail 
manufacturing sector and deploying near-limitless financing from its 
home government to help ensure the well below-market bids for new U.S. 
metropolitan transit projects, CRRC has quickly established itself as a 
formidable force and major competitor in the U.S. transit rail system.
    Thus far China has secured four U.S. metropolitan transit 
contracts, totaling $2.6 billion, largely by utilizing anticompetitive 
under-bidding practices. In each case, CRRC leveraged massive subsidies 
and other resources from the Chinese government to dramatically 
underbid its competitors, and in one case going as much as fifty 
percent below the bid submitted by another competitor. The trains 
purchased by those U.S. metropolitan transit agencies will contain Wi-
Fi systems, automatic train control, automatic passenger counters, 
surveillance cameras, and the Internet of Things (IoT) technology that 
will be thoroughly integrated into the information and communications 
technology infrastructure of transit authorities, all designed and 
built by the Government of China.
    The fact that the advanced technologies in these trains is sole-
sourced from a Chinese state-owned enterprise is alarming and the risk 
is very high that Chinese-built-in surveillance cameras could track the 
movements and routines of passengers, searching for high-value targets 
that intelligence officials can then identify to vacuum data from using 
the train's built-in Wi-Fi systems. Some argue that these risks are low 
and manageable; however, I beg to differ. Already, China is openly 
developing a system of ``algorithmic surveillance'' that leverages 
advances in artificial intelligence and facial recognition technology 
to enable the Chinese Communist Party to monitor the movements and 
patterns of its own citizens, purportedly as a means of combatting 
crime. China boasts about how it has utilized the latest advances in 
Artificial Intelligence (AI) and facial recognition technology to 
identify and track its 1.4 billion citizens,\12\ creating a very real 
prospect that they have the current capacity and interest in doing the 
same here, in the United States.
---------------------------------------------------------------------------
    \12\ Surveillance Cameras Made by China Are Hanging All Over the 
U.S., The Wall Street Journal, November 12, 2017. https://www.wsj.com/
articles/surveillance-cameras-made-by-china-are-hanging-all-over-the-u-
s-1510513949
---------------------------------------------------------------------------
    Several recent cases involving CRRC bids for new transit rail 
projects serve as compelling examples of the strategy being employed by 
China to capture our rail systems. For example:
      CRRC bid $567 million to win a contract with the 
Massachusetts Bay Transit Authority (MBTA) in Boston in 2014, coming as 
much as 50 percent below other bidders.\13\
---------------------------------------------------------------------------
    \13\ Bonnie Cao, After Winning MBTA Contract, China Trainmaker CRRC 
Plans American Expansion, Boston Globe, Sept. 11, 2015. https://
www.bostonglobe.com/business/2015/09/11/after-winning-mbta-contract-
china-trainmaker-crrc-plans-american-expansion/jnS1kU7uHWFGR
9gjWmDEjM/story.html
---------------------------------------------------------------------------
      CRRC won a 2016 contract to provide transit rail for the 
Chicago Transit Authority (CTA), bidding $226 million less than the 
next-highest bidder.\14\
---------------------------------------------------------------------------
    \14\ Corilyn Shropshire, First Step to New CTA Rail Cars: Build the 
Factory in Chicago, Chicago Tribune, Mar. 16, 2017. http://
www.chicagotribune.com/business/ct-cta-new-railcar-plant-0316-biz-
20170315-story.html
---------------------------------------------------------------------------
      CRRC bid $137.5 million in 2017 for a contract with 
Southeastern Pennsylvania Transportation Authority (SEPTA) in 
Philadelphia, underbidding the next-lowest bidder-which had a robust 
local manufacturing presence-by $34 million.\15\
---------------------------------------------------------------------------
    \15\ Jason Laughlin, Mass.-Based Company with Chinese Backing Beats 
Local Group for SEPTA Car Contract, The Philadelphia Inquirer, Mar. 21, 
2017. http://www.philly.com/philly/business/transportation/Mass-based-
company-with-Chinese-backing-beats-out-local-group-for-SEPTA-car-
contract.html
---------------------------------------------------------------------------
      CRRC finalized a contract with the Los Angeles County 
Metropolitan Transportation Authority in 2017 for its transit rail 
system worth up to $647 million.\16\ Again, China did this by 
leveraging below-market financing, which in turn undercut other 
bidders.
---------------------------------------------------------------------------
    \16\ Keith Barrow, Los Angeles Orders CRRC Metro Cars, 
International Railway Journal, Mar. 24, 2017. http://
www.railjournal.com/index.php/north-america/los-angeles-orders-crrc-
metro-cars.html
---------------------------------------------------------------------------
    Emboldened with these contract victories, CRRC continues to target 
other U.S. cities, including our nation's capital. In September, the 
Washington Metropolitan Transit Authority (WMATA), which is the second 
largest mass transit system in the country, issued a Request for 
Proposals (RFP) for the new 8000-series metro car. This RFP includes 
video surveillance, monitoring and diagnostics, data interface with 
WMATA, and automatic train control systems that are susceptible to 
cyber-attacks. In response to concerns expressed by a number of 
lawmakers, including the Vice Chairman of the Senate Intelligence 
Committee, WMATA re-issued its RFP to include additional cybersecurity 
protections.\17\
---------------------------------------------------------------------------
    \17\ Sean Lyngaas, D.C. Metro system beefs up supply-chain 
cybersecurity provisions for new railcars, Cyberscoop, February 6, 
2019. https://www.cyberscoop.com/metro-dc-subway-cyberscecurity-rfp/
---------------------------------------------------------------------------
    Most concerning is that whomever is selected to supply railcars for 
WMATA will become a partner in the day-to-day operations of a Metro 
system whose stops include the Pentagon and the Capitol, as well as 
unfettered access to our Nation's tunnels and underground 
infrastructure. We couple this reality with two additional critical 
facts. First, a classified report written by WMATA's Inspector General 
recently concluded that there were significant shortcomings in WMATA's 
enterprise-level cybersecurity posture.\18\ Second, the New York Times 
recently noted that ``businesses and government agencies in the United 
States have been targeted in aggressive attacks by . . . Chinese 
hackers . . . '' \19\ So, in light of China's pervasive history of 
cyber espionage and hacking, we cannot trust a Chinese SOE to build, 
own, or operate U.S. critical infrastructure.
---------------------------------------------------------------------------
    \18\ Ryan Johnston, D.C. Metro needs to improve its cybersecurity, 
audit finds, Statescoop, July 9, 2018. https://statescoop.com/wmata-
incident-response-audit-calls-for-improved-cybersecurity-plan/
    \19\ Nicole Perlroth, Chinese and Iranian Hackers Renew Their 
Attacks on U.S. Companies, New York Times, February 18, 2019. https://
www.nytimes.com/2019/02/18/technology/hackers-chinese-iran-usa.html
---------------------------------------------------------------------------
    As troubling as these developments in our transit rail sector are, 
they are even more alarming because they provide CRRC the opportunity 
to pivot into freight rail assembly, a subsector of rail not protected 
by the same Buy America requirements as transit rail, and one that 
represents a dangerous vulnerability if overtaken by the Government of 
China. The Chinese government is banking on the fact that once CRRC 
secures sufficient U.S. municipal transit contracts, it can pivot 
quickly and inexpensively toward the more strategically important 
freight rail sector. With 140,000 miles of rail lines across the United 
States, the North American freight rail system transports five million 
tons of goods and materials each day. By providing a means for safe, 
reliable and effective transportation, freight rail keeps our nation's 
economy thriving while helping to ensure the security of our homeland. 
Penetrating our freight rail market will allow China to unload much of 
its current freight car manufacturing capacity oversupply--offsetting 
its own, slowing domestic market, while continuing its strategy of 
using exports to sustain its own employment base.
    CRRC is making steady and deliberate headway into the freight rail 
sector with the launch of Vertex Rail Corporation and American Railcar 
Services. Vertex Rail Corporation is now a defunct freight rail 
assembly facility that was based in Wilmington, North Carolina. On the 
other hand, American Railcar Services is a separate assembly facility 
headquartered in Miami, Florida, that maintains assembly operations in 
Moncton, New Brunswick.
    Concerns about CRRC's transition into freight rail manufacturing 
are best illustrated by the recent experiences of third-country markets 
like Australia, whose freight rail manufacturing sector CRRC entered in 
2008. In less than ten years, CRRC effectively decimated the sector, 
forcing the four domestic suppliers out of business and out of the rail 
market which left only CRRC standing. Today, almost no meaningful 
Australian passenger or freight rolling stock manufacturing exists--
CRRC's Australia footprint is almost exclusively that of an assembler 
of Chinese-made parts and a financier of purchases from CRRC. That 
cannot happen here.
                     national security implications
    As stated earlier in my testimony, the threat of Chinese dominance 
of our freight and transit rail sectors is more than just a market 
concern. The Department of Defense (DoD) has a longstanding reliance on 
freight rail in the United States. Unlike the U.S. maritime shipping 
industry, whose security is protected by the Jones Act, a measure that 
requires vessels transporting goods between U.S. ports to be U.S.-built 
and majority U.S.-owned, freight rail in America has been left 
comparatively unprotected. Yet, the Department of Homeland Security 
(DHS) deems the U.S. rail sector as part of the nation's critical 
infrastructure,\20\ noting that 140,000 rail miles enable U.S. freight 
rail to run through every major American city and every military base 
in the nation. Most of the military's heavy and tracked vehicles are 
transported by freight rail meaning that freight rail runs through 
every military base in the United States.\21\ The DOD's Military 
Traffic Management Command (MTMC) has designated nearly 40,000 miles of 
freight rail track as being uniquely important to our Nation's defense, 
and thus part of the Strategic Rail Corridor Network, or ``STRACNET.'' 
STRACNET serves 193 U.S. defense installations, connecting military 
bases with maritime ports of embarkation and other key points across 
the country. Because of the deep reliance of our military on U.S. 
commercial rail, MTMC monitors and evaluates data on railroad industry 
construction, industry mergers, bankruptcies and other similar events 
to determine how they may affect DoD's mobility and readiness 
capabilities.
---------------------------------------------------------------------------
    \20\ Presidential Policy Directive 21 (PPD-21) identifies 16 
critical infrastructure sectors, including ``Transportation Systems.'' 
The Department of Homeland Security defines ``Freight Rail'' as one of 
the seven key subsectors. See generally, PPD-21, Critical 
Infrastructure Security and Resilience, Feb. 12, 2013, https://
www.whitehouse.gov/the-press-office/2013/02/12/presidential-policy-
directive-critical-infrastructure-security-and-resil and Transportation 
Systems Sector, Dep't of Homeland Sec., Mar. 25, 2013, http://
www.dhs.gov/transportation-systems-sector
    \21\ ``Strategic Rail Corridor Network (STRACNET),'' Global 
Security, 2012. https://www.globalsecurity.org/military/facility/
stracnet.htm
---------------------------------------------------------------------------
    Freight rail is also core to the U. S. Transportation Command 
(TRANSCOM), DoD's global defense transportation system, coordinating 
people and transportation assets around the world. The Surface 
Deployment and Distribution Command (SDDC), a component of TRANSCOM, 
operates 10,000 containers and some 1,350 rail cars to deliver 
equipment and supplies for deployed members of the Army, Navy, Air 
Force, Marines, and Coast Guard. SDCC also leverages commercial freight 
rail to provide important components of DoD's surface transportation 
requirements.\22\ SDCC uses a fleet of 1,850 specially designed heavy-
duty flatcars managed by a company owned by the major freight 
railroads.
---------------------------------------------------------------------------
    \22\ ``About SDDC,'' U.S. Army Military Surface Deployment and 
Distribution Command, 2016. https://web.archive.org/web/20110818114337/
http://www.sddc.army.mil/What/default.aspx
---------------------------------------------------------------------------
    The specter of Chinese dominance over our freight rail system 
presents a myriad of national security concerns. The implications of 
U.S. industry and military interests being forced to rely on Chinese 
government-manufactured railcars are jarringly self-evident: Chinese 
penetration of the rail system's cyber-structure would provide early 
and reliable warning of U.S. military mobilization and logistical 
preparations for conflict. Were the Chinese to gain access to advanced 
U.S. freight car technology (notably specific rolling stock asset 
health, waybill commodity information on loaded freight cars, or 
precise GPS train location) the potential exists for the generation of 
a false negative (or positive) sensor activation--something 
particularly worrisome given that freight rail transports most of our t 
nuclear waste and hazardous material. A false sensor reading (e.g. tank 
car outlet dome cover is secure) could lead to a false level of 
confidence that tank car service valves are secure. If service valves 
are disturbed and that disturbance is undetected, a release of toxic 
chemicals could have catastrophic consequences and cost American lives. 
Moreover, Chinese intelligence about U.S. rail freight logistical 
movements could provide China with a destabilizing economic competitive 
edge. Last and certainly not least, Chinese access to U.S. freight rail 
would also mean that the risk of malicious intrusions into our rail 
infrastructure, including those carried out by terrorists, would become 
more difficult for U.S. operators to detect or counter.
    Predatory Chinese efforts to penetrate our freight rail market also 
create the potential for disruption to the most advanced technologies 
upon which our rail system depends for safety and efficiency. 
Commercial railroads are, of course, aware of the risks they face from 
potential cyber-security incursions and are investing in cybersecurity 
capabilities. Even so, we significantly increase the risk of Chinese 
cyber-espionage or even cyber-terrorism by allowing CRRC to displace 
U.S. rail interests and shift our freight rail supply reliance to the 
Government of China. If allowed to penetrate the U.S. freight rail 
system, Chinese government-backed entities could simply vacuum data 
from individuals and firms connected to the rail network.
    China's history of cyberattacks on U.S. interests, combined with 
the Chinese Government's known efforts to use facial recognition and 
artificial intelligence for tracking its own citizens through ``a vast 
and unprecedented national surveillance system'' make this security 
risk all the more acute.\23\
---------------------------------------------------------------------------
    \23\ Paul Mozur, ``Inside China's Dystopian Dreams: A.I., Shame and 
Lots of Cameras,'' The New York Times, July 8, 2018. https://
www.nytimes.com/2018/07/08/business/china-surveillance-technology.html
---------------------------------------------------------------------------
    As noted in my 2018 report on the vulnerabilities of freight 
rail,\24\ our rail system's rapidly expanding IoT capabilities present 
an array of national security challenges that include:
---------------------------------------------------------------------------
    \24\ National Security Vulnerabilities of the U.S. Freight Rail 
Infrastructure and Manufacturing Sector--Threats and Mitigation, 
Brigadier General John Adams, US Army (Retired), October 22, 2018.
---------------------------------------------------------------------------
      Digitized railroad network/IoT: Integrated teams of data 
scientists, software developers, and engineers develop and apply 
technology across every aspect of the nationwide freight rail network, 
effectively increasing the vulnerability of industrial control systems, 
train operations, and perhaps even the industry's metadata warehousing 
centers to cyber threats.
      Rail Signaling: Congress has mandated the installation of 
positive train control (PTC) systems on much of the nation's rail 
systems as a means of preventing specific accidents. A malicious cyber 
breach of PTC or underlying existing rail signaling systems could wreak 
havoc and cause accidents or derailments on the highly interdependent 
freight railway network.
      Locomotives: Rail locomotives rely upon hundreds of 
sensors to monitor asset health and performance of train systems.
      Onboard Freight Car Location & Asset Health Monitoring: 
Thousands of freight cars are equipped with telematics or remote 
monitoring equipment, many of which are carrying hazardous materials 
like chlorine, anhydrous ammonia, ethylene oxide, and flammable 
liquids. This tracking technology includes a wireless communication 
management unit to track precise near-real time location via GPS, 
direction of travel, speed, and dwell time within the Transportation 
Security Administration (TSA)'s 45 designated high-threat urban areas 
(HTUAs).\25\
---------------------------------------------------------------------------
    \25\ The Transportation Security Administration defines an HTUA as 
an area comprising one or more cities and the surrounding areas, 
including a 10-mile buffer zone.
---------------------------------------------------------------------------
      End-of-Train Telemetry (EOT): The FRA requires all 
freight trains operating on excess of 30 mph to be equipped with a 2-
way EOT device that tracks GPS location and can allow a locomotive 
engineer to initiate an emergency brake application, a critical safety 
feature for trains that can stretch upwards of 10,000 feet long.
    The presence of these evolving technologies underscores the clear 
danger of a foreign country, and particularly the Government of China 
and its SOEs, having unfettered control of freight manufacturing in the 
U.S. market. Already, there are reports of Chinese manufacturers 
investigating the production of their own ``telematics'' technology to 
allow the monitoring and control of their rail cars.\26\
---------------------------------------------------------------------------
    \26\ China plans `smart trains' to take on global rail companies, 
CHINA DAILY, March 10, 2016, page 1 http://english.chinamil.com.cn/
news-channels/2016-03/10/content_6952271_2.htm
---------------------------------------------------------------------------
    We depend on technology, machinery and a robust system of 
intellectual property protections to support our national security; 
when we allow foreign states to interfere--especially our strategic 
competitors--we risk that security. While Congress has recognized and 
taken steps to address similar threats to products such as computer 
chips and cellular technology, it is equally important that 
policymakers enact legislation directed to stop immediately the scope 
and impact of China's ongoing incursion into an increasingly digitized 
rail network.
                               mitigation
    Chinese intrusion into the U.S. rail system's supply chain 
threatens the health and sustainability of this vital economic pillar, 
especially in a national emergency. Were China to gain inroads into 
those operations, management, and supply chains, the ability of U.S. to 
effectively utilize and leverage the freight rail network in a crisis 
could be crippled. Moreover, the extensive telematics and digitization 
of the American rail network, while integrating the most modern 
technology, also exposes the system and those who use it to a wide 
array of cyber risks.
    In other U.S. economic sectors where Chinese SOEs have engaged 
aggressively, the U.S. Government has responded with targeted 
restrictions to mitigate clear security risks. Such measures have 
included a reported U.S. government ban on the purchase of Chinese 
drones \27\ and the removal of Chinese-made security cameras from U.S. 
military bases.\28\ In April 2018, DoD reportedly also banned Huawei 
and ZTE cell phones from sale in U.S. military exchanges world-
wide.\29\ We have yet to do the same to protect Chinese incursions into 
the U.S. freight rail manufacturing base.
---------------------------------------------------------------------------
    \27\ Alwyn Scott, ``China drone maker steps up security after U.S. 
Army ban,'' Reuters, August 14, 2017. https://www.reuters.com/article/
us-usa-drones-dji/china-drone-maker-steps-up-security-after-u-s-army-
ban-idUSKCN1AU294
    \28\ Max Greenwood, ``US Army base removes Chinese-made 
surveillance cameras,'' The Hill, January 12, 2018. http://thehill.com/
policy/defense/368710-us-army-base-removes-chinese-made-surveillance-
cameras
    \29\ Hamza Shaban, ``Pentagon tells U.S. military bases to stop 
selling ZTE, Huawei phones,'' The Washington Post, May 2, 2018. https:/
/www.washingtonpost.com/news/the-switch/wp/2018/05/02/pentagon-tells-u-
s-military-bases-to-stop-selling-zte-huawei-phones/?utm_term=.bf1e
99041b11
---------------------------------------------------------------------------
    While there is no single solution that will mitigate the concerns 
and risks described in my testimony today, I suggest that we must 
modernize our national policies to reflect these security risks. It is 
difficult to overstate the potential impact on our national security 
and our economic future if we do not take a comprehensive and long-
range approach to CRRC specifically, and SOEs generally.
    Considering these security risks, both chambers of Congress last 
year attempted to pass a ban on federal funding going to CRRC through 
the appropriations process. This year 30 Senators have so far signed 
onto legislation that would place a permanent ban on Federal funding 
going to CRRC and the House just recently introduced a bill as well. I 
would urge members of this Committee to join their colleagues in co-
sponsoring the Transit Infrastructure Vehicle Security Act. Congress 
also passed legislation last year that would mandate DHS, in 
coordination with the Committee on Foreign Investment in the United 
States and the Department of Transportation, to produce a report on the 
national security threats of Chinese SOE investment in our rolling 
stock manufacturing sector.\30\
---------------------------------------------------------------------------
    \30\ See. H.R.5515--John S. McCain National Defense Authorization 
Act for Fiscal Year 2019, Sec. 1719(c)
---------------------------------------------------------------------------
    It is now time for our Nation's leaders to put an end to CRRC's 
infiltration of the U.S. rail manufacturing industry by developing 
comprehensive restrictions to ensure the integrity of our Nation's 
transportation systems. In that vein, I recommend that Congress and the 
Administration giver serious and immediate consideration to:
      Developing comprehensive restrictions and additional 
reviews on investments from SOEs in critical infrastructure integral to 
our national defense.
      Ensuring that appropriate federal agencies, in 
coordination with states and localities, develop robust standards for 
cyber and data integrity applicable to any rail or transit sector 
contracts involving foreign state-owned entities.
      Strengthening oversight of Buy America laws to ensure 
that existing laws and regulations are adhered to in Federally-funded 
transit and rail procurements including railcar manufacturing, and 
explore new avenues to further protect the manufacturing capabilities 
of freight rail and other core domestic industries that are integral to 
support and maintain our defense industrial base.
                               conclusion
    We need urgent action to safeguard our U.S. rail system's health 
and integrity. Chinese control of our rail system's supply chains, much 
less control of the system through cyber-intrusion or outright firm 
ownership, threatens this vital national security asset. The strategic 
targeting of our Nation's infrastructure by the Government of China and 
its state-owned enterprises poses a fundamental threat to the fabric of 
our critical infrastructure and is a pressure point for malicious cyber 
actors to threaten not only the economic and national security of the 
United States, but to our standing as a global power.
    We greatly appreciate the Committee's interest in addressing these 
critical issues. We must take action to safeguard our U.S. rail 
system's health and integrity before we lose it. We owe it to the 
American people to ensure that the American freight rail sector 
continues to be a vibrant and secure element of our Nation's 
infrastructure, keeping us safe and carrying our economy into the 
future.
    Thank you again for the opportunity to testify. I look forward to 
answering your questions.

    Mr. DeFazio. Precisely on time. I thank you, General.
    Mr. Galloway.
    Mr. Galloway. Chairman DeFazio, Ranking Member Graves, and 
members of the Committee on Transportation and Infrastructure, 
thank you for inviting me to testify today.
    My name is Hamilton Galloway, and I am the head of 
consultancy for the Americas at Oxford Economics, a leader in 
global forecasting in quantitative analysis.
    Oxford Economics has conducted several economic impact 
studies, including those within the rail industry. A September 
2018 study that Oxford did with the Rail Supply Institute found 
that the rail supply industry supports 650,000 mostly middle-
income jobs, generates $74 billion in U.S. GDP, and touches 
every State.
    This sector also supports hundreds of producers of parts 
and components and systems for the rail supply industry.
    Now, nested within this rail supply industry lies a sector 
that manufactures public transit and freight railcars and 
rolling stock. This sector employs over 21,000 middle-class 
workers in the U.S. and supports nearly 190,000 jobs in the 
U.S.
    In other words, every job in the public transit and freight 
railcar and rolling stock manufacturing sector supports nearly 
eight additional jobs in the U.S. economy. It is these jobs 
that are under threat by foreign state-owned enterprises.
    Foreign competition from SOEs is an increasing challenge 
for the U.S. economy because they operate with a different 
business model. Their core purpose is to fulfill a social or 
economic need in their own country's economy.
    But in recent decades several SOEs have become 
multinational. SOEs pose a risk to us because they enjoy 
advantages like state-direct subsidies, concessionary financing 
from state-owned banks, and regulatory exemptions.
    These anticompetitive practices displace private-sector 
competitors causing cascading negative effects upon business 
owners, workers, and families in the U.S.
    In 2017, Oxford Economics researched the potential 
disruption of SOEs in the U.S. freight railcar manufacturing 
sector. We found a pattern of anticompetitive behavior in 
countries outside the U.S. with respect to pricing.
    To cite one example, this led to the collapse of 
Australia's freight railcar manufacturing industry, and we 
concluded that if similar practices were to occur here in the 
U.S., it would threaten 65,000 American jobs.
    Under one worst-case scenario, if just $1 billion in 
freight railcar sales were lost to an SOE, nearly 13,000 jobs 
would be lost in the U.S., and $1.3 billion would be lost to 
U.S. GDP. The bulk of this loss would be felt across the supply 
chains of freight railcar manufacturing, recalling that these 
supply chains span every State in the Union.
    At Oxford, we recently turned our attention to passenger 
railcar manufacturing, a sector where SOEs already established 
operations in the U.S., including final assembly facilities. 
Although railcars will be assembled here, a large number of the 
components are likely to be sourced from the SOE's home 
country, like China.
    We assessed two scenarios of potential disruption. In the 
first scenario the SOE does not need to adhere to Federal Buy 
America provisions, which is currently set at 65 percent U.S. 
content, but will jump to 70 percent next year.
    In this scenario, we assume the municipality purchasing 
railcars is not using Federal funds. So much of the railcar 
content will actually be made in the SOE's home country.
    In our second scenario, we assume a good faith adherence to 
Buy America provisions, which applies when Federal dollars are 
used. For context, local municipalities, including Boston, 
Philadelphia, Los Angeles and Chicago, have already awarded 
contracts to an SOE. Three of these city contracts are entirely 
funded by State and local governments. So the Buy America 
provisions do not apply.
    In the non-Buy America scenario, over half of the railcar's 
value is lost overseas. This means that for every $1 billion in 
railcar productions by an SOE, it costs the U.S. more than 
5,000 jobs and $500 million in GDP.
    Put another way, for every final assembly job created by an 
SOE here in the U.S., 5.4 jobs are lost elsewhere in the U.S. 
economy.
    In the Buy American scenario, more of the railcar's value 
is kept here in the U.S. However, we estimate that $1 billion 
in production awarded to an SOE still leads to a net loss of 
3,200 jobs and a reduction of almost $320 million in U.S. GDP.
    In this scenario, every SOE final assembly job created 
still eliminates 3.5 jobs here in the U.S. economy. So 
ultimately America loses in both scenarios. We just lose less 
in the Buy America.
    Our research, therefore, suggests that anticompetitive 
practices by SOEs could destabilize competitive private-sector 
railcar manufacturing, causing long-term consequences to 
productivity and efficiency. This creates cascading negative 
effects across the U.S. due to the loss of private-sector jobs.
    In sum, it is imperative that policymakers promptly 
acknowledge, assess, and respond to the SOEs making headway in 
the U.S. rail industry to prevent the loss of thousands of 
jobs, as well as hundreds of millions in wages, GDP, and taxes.
    Thank you again for this opportunity, and I look forward to 
answering any of the questions that you may have.
    [Mr. Galloway's prepared statement follows:]

                                 
 Prepared Statement of Hamilton Galloway, Head of Consultancy for the 
                       Americas, Oxford Economics
    Chairman DeFazio, Ranking Member Graves and members of the 
Committee on Transportation and Infrastructure Committee. First and 
most importantly I want to thank you for inviting me to testify today. 
My name is Hamilton Galloway and I am the Head of Consultancy for the 
Americas at Oxford Economics--a leader in global forecasting and 
quantitative analysis. Our worldwide client base comprises more than 
1,500 international corporations, financial institutions, government 
organizations, and universities. Headquartered in Oxford, England, with 
offices around the world, we employ 400 staff, including 250 advanced 
degreed economists and analysts. Our best-in-class global economic and 
industry models and analytical tools give us an unmatched ability to 
forecast external market trends and assess their economic, social and 
business impact. Over the past four years, my team and I have conducted 
a significant number of robust economic impact assessments that have 
been time tested, across a broad range of industrial manufacturing 
activities, including those within the rail industry, giving us unique 
insight into the domestic value that private companies provide the 
U.S.--specifically in terms of jobs, income, Gross Domestic Product 
(GDP) and taxes. Our work is regarded as best-in-class by some of the 
world's leading firms. It is within this context that I appear before 
you today.
                                overview
    In September 2018, Oxford Economics in collaboration with the Rail 
Supply Institute published a report that analyzed the economic 
contribution of the rail supply industry. That report is attached to my 
testimony. Our study included the manufacturing of railcars, 
locomotives, signaling and communication, rail ties and tracks, as well 
as the maintenance of way. Taking into consideration the extensive, 
integrated domestic supply chains of hundreds of producers of parts and 
components for the rail supply industry, we concluded that the 
activities of this sector support 650,000 mostly middle-income jobs, 
$74 billion in U.S. GDP and contributes nearly $17 billion to federal, 
state and local taxes. This value spreads coast to coast, covering 
every state in the Union. Simply stated, one job in the rail supply 
industry supports four additional jobs elsewhere in the U.S. economy, 
which means that significant value is retained in here in the U.S. In 
fact, data from the U.S. Bureau of Economic Analysis indicates that 
approximately 82% of the rolling stock manufacturing supply chain is 
U.S. based.\1\
---------------------------------------------------------------------------
    \1\ IMPLAN 2016 figures, based on U.S. Bureau of Economic Analysis 
data

              [GRAPHIC(S) NOT AVAILABLE IN TIFF FORMAT]


    Nested within the rail supply industry is the sector that 
manufactures public transit and freight railcars, and rolling stock--a 
sector that directly employs over 21,000 middle-class workers in the 
U.S. and supports nearly 190,000 U.S. jobs.\2\ In other words, every 
job in the public transit and freight rail car and rolling stock 
manufacturing sector supports nearly eight additional jobs in the U.S. 
economy. This is the context of value to the U.S. that is under threat 
from anti-competitive business practices demonstrated by state-owned 
enterprises.
---------------------------------------------------------------------------
    \2\ Freight railcar manufacturing supports approximately 65,000 
jobs--as evidenced from an Oxford Economics study conducted in 2017 
evaluating the industry with respect to the threat of state-owned 
enterprises. Passenger railcar and locomotive manufacturing represent 
the remaining balance of 125,000 total jobs supported.

              [GRAPHIC(S) NOT AVAILABLE IN TIFF FORMAT]


                        state-owned enterprises
    Foreign competition in the form of state-owned enterprises is an 
increasing factor for the U.S. economy. While competition in the 
private sector is generally regarded as positive, state-owned 
enterprises operate with a different business model than for-profit 
companies. At their core, state-owned enterprises have as their purpose 
to fill a social or economic need within their home country's economy. 
In recent decades, however, many state-owned enterprises have expanded 
outward, becoming multinational. Because state-owned enterprises enjoy 
certain advantages of government ownership--including direct state 
subsidies, concessionary financing from state-owned banks, state-backed 
guarantees, and exemptions from antitrust enforcement or bankruptcy 
rules--this expansion raises serious questions about the role that 
government owners of some of the world's top companies have on 
competition, particularly in the U.S. In fact, the advantages afforded 
state-owned enterprises threaten to undermine the benefits gained from 
fair competition in true private sector production--such as 
improvements to efficiency and technological advancement. Instead, 
anti-competitive practices displace private sector competitors, causing 
cascading effects through U.S. domestic supply chains and the business 
owners, workers and families who rely on them.
             implications on freight railcar manufacturing
    In 2017, Oxford Economics conducted original research into the 
potential disruption of state-owned enterprises in the freight railcar 
manufacturing sector.\3\ That report is attached to my testimony. Our 
findings illustrated a pattern of anti-competitive behavior with 
respect to pricing freight railcars, which ultimately led to the 
collapse of Australia's freight railcar manufacturing industry. If 
similar practices were to occur in the U.S., it would threaten the 
65,000 jobs supported by freight railcar manufacturing. This problem is 
further amplified because measures designed to preserve domestic 
production and content, such as Buy America, do not apply in the fright 
rail sector.
---------------------------------------------------------------------------
    \3\ Oxford Economics (May 2017). Will We Derail U.S. Freight 
Rolling Stock Production? An Assessment of the Impact of Foreign State-
Owned Enterprises on U.S. Freight Rolling Stock Production.
---------------------------------------------------------------------------
    In its 2017 research, Oxford Economics built two scenarios to 
better understand the implication of state-owned enterprise disruption 
in the U.S. freight railcar market. These scenarios were calculated in 
$1 billion sales/output increments--about one-fifth the size of the 
current freight railcar market. The first scenario evaluated a partial 
preservation of domestic supply chains--although the bulk of the 
railcar inputs would be produced in China. Under this scenario, if $1 
billion in freight railcar sales were to shift to a state-owned 
enterprise, approximately 5,100 U.S. jobs would be lost and U.S. GDP 
would decrease by approximately $540 million. The second scenario 
evaluated a full transfer of freight railcar production to China--
similar to what occurred in Australia.\4\ Under this scenario, a $1 
billion shift in freight railcar sales to a state-owned enterprise 
would result in a U.S. job loss of nearly 12,900, as well as a $1.3 
billion loss to U.S. GDP. The bulk of this loss would be felt across 
the supply chains of freight railcar manufacturing.
---------------------------------------------------------------------------
    \4\ Australia's freight rail market was nearly fully displaced by a 
state-owned enterprise in a span of less than one decade. In 2008, CRRC 
comprised about 40% of production output in Australia. By 2016, CRRC 
comprised more than 95% of output. Three key factors contributed to 
this outcome: 1) The Australian dollar during this time was very strong 
relative to foreign currencies, which reduced the effective price of 
Chinese freight railcars. 2) Australia's increasing economic reliance 
on China to buy Australian goods. 3) Australia's recognition of China 
as a market economy leading up to the bilateral Chinese-Australian Free 
Trade Agreement, which limits Australia's access to WTO remedies 
related to pricing and anti-dumping.

              [GRAPHIC(S) NOT AVAILABLE IN TIFF FORMAT]


   implications on public transit and passenger railcar manufacturing
    State-owned enterprises have already established operations here in 
the U.S.--including the establishment of final assembly facilities. 
While the activity of assembling components and parts will occur here 
in the U.S., a significant proportion of those components are likely to 
be sourced from the home country of the state-owned enterprise. There 
are two key reasons for this: 1) the mission of the state-owned 
enterprise is to drive value back to the home country, and 2) the 
state-owned enterprise has already made significant long-run capital 
investment in their home country's supply chain, which they rely on to 
produce railcars. As a result, the supply-chain jobs and value that 
have largely been a staple of the U.S. railcar economic landscape would 
be offshored.
    New research by Oxford Economics evaluating the potential 
disruption of these activities covers two scenarios. The first scenario 
evaluates the net impact of passenger railcar manufacturing wherein the 
state-owned enterprise does not need to abide by Buy America provisions 
(wherein, for FY2018-19, 65% of the parts used in railcar manufacturing 
must consist of content made in America. After FY2020, the U.S. content 
requirement moves up to 70%)--in other words, the municipality 
purchasing railcars in this scenario is not drawing on federal funds. 
Therefore, it is highly likely that much of the railcar content will be 
made in the state-owned enterprise's home country. The second scenario 
evaluates the impact of a good faith adherence to Buy 
Americaprovisions.
    For context, local municipalities, including MBTA in Boston, SEPTA 
in Pennsylvania, LACMTA in Los Angeles and CTA in Chicago have already 
awarded contracts to a state-owned enterprise. Three of these four 
contracts are entirely funded by state and local governments, meaning 
that Buy America provisions are not required.
                 scenario one--no buy america provision
    In the non-Buy America adherence scenario, we assume that 
approximately 52% of the parts used in the railcar are produced 
overseas, with final assembly completed in the U.S. The outcome from 
this scenario is a net loss of 5,100 jobs, $508 million in productivity 
and $113 million in taxes in the U.S. economy for every $1 billion in 
passenger railcar final output. Put another way, for every 1 US final 
assembly job created by a state-owned railcar manufacturer, a net 5.4 
jobs are lost in the US economy relative to traditional non-SOE 
producers, including direct, indirect, and induced impacts.

              [GRAPHIC(S) NOT AVAILABLE IN TIFF FORMAT]


            scenario two--adherence to buy america provision
    In the Buy America scenario, where more U.S. domestic content is 
incorporated into the production of railcars and final assembly 
completed, the effects are less severe, though the outcome still 
implies loss of jobs and value in the U.S. We estimate that there would 
be a net loss of 3,250 jobs, $318 million in productivity and $70 
million in taxes for every $1 billion in final output. In this 
scenario, every state-owned enterprise US final assembly job created 
results in a net loss of 3.5 jobs in the U.S. economy.\5\
---------------------------------------------------------------------------
    \5\ This scenario is designed to apply to situations similar to the 
SEPTA contract, wherein Buy America is a requirement.
---------------------------------------------------------------------------
                               conclusion
    The conclusions drawn from our research suggest that anti-
competitive business practices among state-owned enterprises could:
      Destabilize competitive, private sector railcar 
manufacturing, causing long-term consequences to productivity and 
efficiency
      Lead to significant losses of private-sector jobs and 
value in the U.S. economy, as supply chains for state-owned enterprises 
are offshored
      Create cascading negative effects across the U.S. due to 
the loss of private sector jobs in key manufacturing industries
    This disruption is further amplified when one factors in the 
passenger railcar manufacturing sector--an area where state-owned 
enterprises have already established operations here in the U.S. In 
sum, it is imperative that policy makers acknowledge, assess, and 
respond to state-owned enterprises that have and will likely continue 
to make headway into the U.S. rail industry in the near future to 
prevent, among other things, the loss of tens of thousands of jobs, as 
well as billions in wages, GDP and taxes.
    Thank you again for this opportunity and I look forward to 
answering any questions that you may have.

    Mr. DeFazio. Well, again, very, very good on the time. 
Thank you, Mr. Galloway.
    Mr. Cilluffo.
    Mr. Cilluffo. Thank you, Chairman DeFazio, Ranking Member 
Graves, and distinguished committee members. Thank you for the 
opportunity to testify before you today on an issue that is 
clearly of national importance.
    And I applaud your leadership in examining the impacts of 
foreign-owned and state-owned enterprises on the transportation 
sector and critical infrastructure more broadly.
    The subject is as timely as it is concerning, given the 
impact to U.S. economic power, national security, military 
strength, innovation, and of course, jobs.
    At a top level, and I might note, covering so much terrain 
in 5 minutes is a tall order, especially for me since I have 
never had an unspoken thought, but I will try.
    At the top level, from a cyber perspective, the threat 
comes in various shapes, sizes, and forms. Intentions vary, as 
do capabilities. Topping the list are Russia and China. They 
are both advanced, persistent threats, and both countries have 
turned to proxies to do their bidding.
    The primary concerns include computer network exploit where 
the theft of information to include intellectual property and 
other forms of espionage, as well as the mapping of critical 
infrastructure; computer network attack where the means to 
disrupt, destroy, or modify information and/or their systems; 
and of course, the insider threat.
    In relation to both Russian and state-owned enterprises, I 
wanted to underscore that companies may willingly or even 
unwittingly serve as conduits of sensitive information as legal 
provisions in their countries require that they share 
information with the security services, and they can even be 
compelled to do so.
    To give a sense of the scale and scope, I thought I would 
quickly tick off a very few examples, and I will focus on China 
since they account for over 90 percent of DOJ's economic 
espionage prosecutions and a vast majority of the cyber 
espionage cases.
    It is also worth noting, as General Adams brought up 
earlier, the Made in China 2025 plan. Most of the technologies 
targeted are directly in the Transportation and Infrastructure 
Committee's jurisdiction, and those that are not touch your 
jurisdiction in an integral kind of way.
    But to paraphrase Mark Twain, and I am not going to go over 
all of the espionage cases, whereas history may not repeat 
itself, it tends to rhyme, and there is a whole lot of rhyming 
going on right now.
    Taken individually, each of these cases, you can understand 
why people would brush them off. In the aggregate, however, it 
sends a very strong and compelling message to our national 
security interests.
    CRRC, we discussed briefly, or General Adams did, the 
significance of it having a foothold in our supply chain in 
some of the biggest cities in America. Obviously a 20- to 50-
percent procurement bids under the competition, this is an 
unlevel playing field, but it is, again, consistent of a 
broader pattern here, a broader strategy here.
    Drones, what most people do not realize is Chinese 
manufacturer DJI has largely captured the American UAS market, 
and in 2017, U.S. Customs authorities allege that drones 
produced by DJI provided China with access to U.S. critical 
infrastructure and law enforcement data.
    Major concerns abound where the data resides and whether it 
is corrupted and/or transmitting data back to third parties.
    Cameras, Hikvision, they are the biggest company in the 
world right now in terms of video surveillance equipment, and 
they have had access to U.S. infrastructures, including 
schools, prisons, and even sensitive military and Government 
installations.
    5G, Huawei, ZTE, the strategic significance of 5G as the 
bedrock upon which telecommunications and so much more will 
rely has direct relevance to the transportation sector. Not 
only does the attack surface grow exponentially, but smart 
highways and vehicles of tomorrow will be paved in silicon as 
much as they are in asphalt.
    This would be the tech equivalent of building on quicksand 
since 5G is going to be at the very core, at the operating 
systems of our smart infrastructures. This is the crux of the 
Executive order that the President promulgated last night.
    Financing, foreign proxy entities can step in and scoop up 
U.S. assets and entities on the verge of bankruptcy or seeking 
startup capital. These are two primary blind spots in CFIUS. 
Those are two issues that I think the committee can play a role 
in elevating since China was the largest single foreign venture 
capitalist in the United States cumulatively between 2015 and 
2017.
    The grid, more than 200 Chinese transformers have come into 
the U.S. energy sector during the past decade. Previously, 
there were none, and I can go on and on and on with the lists.
    But let me just close with there are certain things we need 
to be able to grapple with here, and what we cannot afford to 
do is grind the U.S. economy to a halt with blanket or overly 
blunt measures.
    Instead, we need to tailor and calibrate our responses to 
limit collateral damage to U.S. interests. National security 
and free markets are not either/or propositions. They are not 
mutually exclusive.
    We can and must do both.
    And I will touch on any recommendations during the Q&A.
    Thank you, Mr. Chairman. And sorry for blowing the good 
record of----
    [Mr. Cilluffo's prepared statement follows:]

                                 
 Prepared Statement of Frank J. Cilluffo, Director, McCrary Institute 
   for Cyber and Critical Infrastructure Security, Auburn University
                              introduction
    Chairman DeFazio, Ranking Member Graves, and distinguished 
Committee Members, thank you for the opportunity to testify before you 
today on a subject that is clearly of national importance. Your 
leadership in examining the impacts of foreign-owned enterprises on 
critical U.S. infrastructure and in the transportation sector in 
particular is commendable. The subject is as timely as it is 
concerning.
    In this testimony, my goal is threefold: First, to offer a snapshot 
of the threat. Second, to place that threat in context by elaborating 
upon why it matters. And, third, to suggest a handful of feasible, 
impact-oriented policy recommendations that fall within the Committee's 
jurisdiction. However, before proceeding, I offer one caveat. Whereas 
other witnesses will focus deeply on the specifics of particular 
modalities of transportation and the impacts in connection thereto, my 
contribution will reside more at the strategic level. I will speak to 
the broader challenges, primarily the threats to critical U.S. 
infrastructure posed by foreign-owned enterprises and the response. 
This approach is intended to add value by acknowledging and emphasizing 
that the transportation sector must not be examined in isolation.
    Pursuant to this approach, there are three chief concerns on the 
cyber side. One, the theft of information for the purpose of espionage 
or computer network exploitation, to include the mapping of critical 
U.S. infrastructure. Two, the theft of information to enable disruptive 
or destructive computer network attack, including hybrid cyber/physical 
attack. And, three, the insider threat, which cuts across all of these 
categories. In relation to foreign state-owned enterprises, it is also 
important to recognize that the potential threat is equally acute. It 
may arise deliberately with the foreign company acting as a willing 
conduit for its state of origin or inadvertently with the foreign 
company simply being subject in principle and/or by law of the state of 
origin to provide assistance upon request.
        the state of play: risks to national & economic security
    Foreign state-owned enterprises and China Railway Rolling Stock 
Corporation (CRRC) in particular is increasingly taking center-stage 
when it comes to building new rail cars for major American cities. 
Boston, Chicago, Los Angeles, and Philadelphia have each awarded 
contracts recently to CRRC, which placed markedly lower bids than the 
competition. The company is also expected to bid on upcoming rail-car 
contracts with the New York Metropolitan Transportation Authority, and 
the Washington (DC) Metropolitan Area Transit Authority.\1\
---------------------------------------------------------------------------
    \1\ Candice Norwood, ``As China Builds Transit Cars for U.S. 
Cities, Congress Seeks to Ban Them,'' Mass Transit (March 19, 2019), 
https://www.masstransitmag.com/rail/vehicles/news/21072662/as-china-
builds-transit-cars-for-us-cities-congress-seeks-to-ban-them
---------------------------------------------------------------------------
    These procurement decisions and processes raise multiple concerns. 
First, the playing field is tilted: CRRC is able to underbid others 
because it benefits from state support.\2\ Second, this support is just 
one element of a much broader strategy on China's part to challenge and 
undermine America economically.\3\ Third, these economic factors are 
inextricably intertwined with U.S. national security because to 
undercut America's competitiveness is to damage the engine that powers 
our national security. And, fourth, CRRC's foothold in the supply chain 
of public transit to some of the largest cities in America effectively 
provides China with a wealth of intelligence, accessible through cyber 
means and vulnerabilities, among others. In military terms, such 
gathering of information for future exploitation and potential attack 
is called Intelligence Preparation of the Battlefield (IPB)--an 
important concept here, as China conceives of cyber, economic, 
military, and other measures as interconnected tools to achieve the 
country's larger geopolitical aims and ambitions. Looking beyond public 
transit and beyond China alone, the unfortunate reality that we must 
take as our operating assumption, is that U.S. critical infrastructures 
have already been mapped by our adversaries.
---------------------------------------------------------------------------
    \2\ ``CRRC has been winning U.S. procurements by bidding anywhere 
from 20 to 50 percent below bids from its non-subsidized, private 
sector competitors.'' Annie I. Anton and Justin Hemmings, ``Recognizing 
Vendor Risks to National Security in the CFIUS Process,'' Lawfare 
(January 4, 2019), https://www.lawfareblog.com/recognizing-vendor-
risks-national-security-cfius-process
    \3\ As explained by a senior official at the U.S. Department of 
Justice just last month: ``The problem is not that China is working to 
master critical technologies, or even that it is competing with the 
United States, but rather the means by which it is doing so. `Made in 
China 2025' is as much a roadmap to theft as it is guidance to 
innovate. Since the plan was announced in 2015, the Justice Department 
has charged Chinese individuals and entities with trade secret theft 
implicating at least eight of the ten sectors [identified as `strategic 
manufacturing industries for promotion and development' by the Made in 
China 2025 strategy]. Over a longer time period, since 2011, more than 
90 percent of the Department's economic espionage prosecutions (i.e., 
cases alleging trade secret theft by or to benefit a foreign state) 
involve China, and more than two-thirds of all federal trade secret 
theft cases during that period have had at least a geographical nexus 
to China. Some of those cases demonstrate that China is using its 
intelligence services and their tradecraft to target our private 
sector's intellectual property. In the space of two months last year, 
the Department announced three cases alleging crimes by the same arm of 
the Chinese intelligence services, the Jiangsu Ministry of State 
Security, also known as the `JSSD'.'' ``Deputy Assistant Attorney 
General Adam S. Hickey of the National Security Division Delivers 
Remarks at the Fifth Annual Conference on CFIUS and Team Telecom,'' 
(April 24, 2019), https://www.justice.gov/opa/speech/deputy-assistant-
attorney-general-adam-s-hickey-national-security-division-delivers-0
---------------------------------------------------------------------------
    The situation is no less concerning in the air, where the use of 
unmanned aircraft systems (UAS) is becoming ever more common, for a 
range of purposes including surveying and securing large tracts of 
land. Notably, a Chinese manufacturer--DJI--has largely captured the 
American market for UAS. While UAS serve valuable functions, use of 
these Internet-connected systems entails risks. Most importantly, the 
using entity's sensitive data may be exposed and accessed.\4\ This type 
of breach is especially problematic if the using entity supports a 
critical U.S. sector or function, and the manufacturer of the UAS is a 
foreign state-owned enterprise. Chinese companies, for example, may be 
legally required to help advance the mission and goals of China's 
security and intelligence services. The use of UAS also raises the 
prospect of cyber/physical convergence, whereby cyber tools and 
operations may be invoked (particularly by an adversary with hostile 
intent) to generate kinetic or real-world consequences. Notwithstanding 
this background, the UAS issue has yet to receive in this country the 
attention and commensurate timely action that this concerning matter 
deserves.
---------------------------------------------------------------------------
    \4\ ``In 2017, U.S. customs authorities alleged that drones 
produced by Chinese company DJI, which has dominated the U.S. and 
Canadian drone markets, likely provided China with access to U.S. 
critical infrastructure and law enforcement data. DJI denied the 
allegation.'' Matthew Pennington, ``US panel warns against government 
purchase of Chinese tech,'' The Associated Press (November 14, 2018), 
https://www.fifthdomain.com/critical-infrastructure/2018/11/14/us-
panel-warns-against-government-purchase-of-chinese-tech/
---------------------------------------------------------------------------
    Within the transportation sector alone, the potential 
vulnerabilities are manifold. Public transit, freight rail, UAS, 
seaports, and so on--each presents a tempting target on its own.\5\ At 
the same time however, these transport hubs in surface, air and 
maritime also individually and collectively support and enable the U.S. 
military to achieve its ends and operations both at home and abroad. 
The ability of U.S. forces to complete these activities successfully 
and in service of the national interest is what the U.S. defense 
community refers to as Mission Assurance. Continuity of these 
operations, and resilience in the face of disruptive or destructive 
events, is of fundamental importance. National defense priorities thus 
intersect and, to a certain extent, depend upon the integrity of the 
transportation sector. If the latter is compromised that may put 
Mission Assurance at risk, since logistics are the lifeblood of the 
U.S. military; and to hamper that planning and execution is to 
jeopardize our ability to deploy forces and prosecute war. Put 
differently, the impacts of foreign state-owned enterprises on the 
transportation sector range well beyond the economic and stray deeply 
and directly into the realm of national security. Again, the potential 
for cyber/physical convergence, with resulting consequences on the 
battlefield, is concerning. Indeed, the Center for Cyber and Homeland 
Security will be releasing a report shortly entitled ``Strengthening 
Defense Mission Assurance Against Emerging Threats.'' We will make it 
available to the Committee.
---------------------------------------------------------------------------
    \5\ ``State and local government agencies have become increasingly 
vulnerable to cyberattacks--particularly when it comes to public 
transportation. In 2016, hackers hit the San Francisco transit system 
with a ransomware attack demanding $70,000. The following year, 
Sacramento Regional Transit faced a similar strike. In 2018, the 
Colorado Department of Transportation shut down 2,000 computers after 
falling victim to two ransomware attacks in two weeks.'' Norwood, 
https://www.governing.com/topics/transportation-infrastructure/gov-
china-crrc-congress-cities-transit-federal-funding-bill.html
---------------------------------------------------------------------------
    Foreign state-owned enterprises and the advanced technologies that 
they offer, often at highly competitive prices and frequently 
accompanied by additional concessionary financing, present a dilemma 
for other critical infrastructure sectors, too. 5G telecommunications 
technology proffered worldwide by Chinese companies Huawei and ZTE is a 
clear and prominent example. 5G will be the foundation upon which next-
generation networks, globally, will rest. Currently, countries are in 
the process of selecting the entities that will build and contribute to 
that foundation. This is a seminal decision that will affect not only 
the telecommunications sector in each country, but all of the other 
sectors that the telecommunications industry supports and services 
(such as transportation--including autonomous vehicles where the cyber 
domain meets and melds with the physical world).
    As such, 5G will be the hub powering many spokes that in turn may 
be critical sectors or functions. To be selected a preferred provider 
of the components for the hub is a tremendous economic opportunity. 
Huawei and ZTE are therefore competing aggressively to act as 
suppliers, including to the United States. Based on evidence of these 
companies' complicity with the Chinese government, and the national 
security concerns that this raises (e.g., espionage, IPB, intellectual 
property theft, etc.), the United States has rejected these overtures, 
and urged its allies and partners to do the same.\6\ While paths 
forward may ultimately diverge, the U.S. way ahead is clear, and it 
will not engage Huawei or ZTE. Significantly, the strategic 
significance of 5G, as the bedrock upon which telecommunications and so 
much more will rely, has also been recognized by more than 30 
countries, which met recently in Prague, and produced a series of 
principles regarding the ``cyber security of communications networks in 
a globally digitized world.'' \7\
---------------------------------------------------------------------------
    \6\ Frank J. Cilluffo and Sharon L. Cardash, ``What's wrong with 
Huawei, and why are countries banning the Chinese telecommunications 
firm?'' The Conversation (December 19, 2018), https://
theconversation.com/whats-wrong-with-huawei-and-why-are-countries-
banning-the-chinese-telecommunications-firm-109036. Note also, ``the 
potential impact of malicious cyberattacks . . . will intensify with 
the adoption of ultra-fast 5G networks that could quicken data speeds 
by up to 100 times.'' Pennington, https://www.fifthdomain.com/critical-
infrastructure/2018/11/14/us-panel-warns-against-government-purchase-
of-chinese-tech/
    \7\ Government of the Czech Republic, ``Prague 5G Security 
Conference announced series of recommendations: the Prague Proposals,'' 
(May 3, 2019), https://www.vlada.cz/en/media-centrum/aktualne/prague-
5g-security-conference-announced-series-of-recommendations-the-prague-
proposals-173422/
---------------------------------------------------------------------------
    Other products and technologies supplied by Chinese companies that 
have raised security concerns in the United States include cameras, 
such as video surveillance equipment, manufactured by Hangzhou 
Hikvision Digital Technology. The company, a global giant in its field, 
began as a Chinese government research institute. Today, three Chinese 
state-owned enterprises retain a large ownership stake of more than 40 
percent in the company. Nevertheless, Hikvision cameras have been used 
in U.S. prisons and schools, and ``sensitive sites such as the Fort 
Leonard Wood army base and the U.S. embassy in Kabul.'' Hikvision has 
also been the subject of allegations that the company maintains access 
to its devices ``even if you change the admin [passwords] and the 
firewall.'' \8\
---------------------------------------------------------------------------
    \8\ Sidney Leng, ``China's Hikvision hits out at US Congress over 
`baseless' ban on using surveillance equipment over national security 
concerns,'' South China Morning Post (May 27, 2018), https://
www.scmp.com/news/china/diplomacy-defence/article/2148010/chinas-
hikvision-hits-out-us-congress-over-baseless-ban
---------------------------------------------------------------------------
    Many other smaller but still important opportunities exist for 
foreign state-owned enterprises to make inroads into U.S. critical 
infrastructure either directly or indirectly. Flush with the financial 
backing of their state sponsors, these foreign proxy entities can step 
in and scoop up U.S. assets and entities that are on the verge of 
bankruptcy or in need of start-up capital.\9\ Such acquisitions may 
relate to a niche or component that may seem minor to the untrained 
eye, but may bear significant import. Consider switches, for instance. 
They play a crucial role in freight and passenger rail, and the ability 
to alter their activation or operation could cause substantial harm to 
both persons and property. Nor would such alteration be necessary to 
perform in person or onsite. Instead, tampering could take place from 
afar through silent and stealthy cyber means.
---------------------------------------------------------------------------
    \9\ The U.S.-China Economic and Security Review Commission notes 
that China was ``the largest single foreign VC [venture capital] 
investor ($24 billion) in the United States cumulatively between 2015 
and 2017, according to a recent U.S. government study.'' 2018 Report to 
Congress (November 2018), https://www.uscc.gov/sites/default/files/
annual_reports/2018%20Annual%
20Report%20to%20Congress.pdf at page 30. See also: Michael Brown and 
Pavneet Singh, China's Technology Transfer Strategy: How Chinese 
Investments in Emerging Technology Enable A Strategic Competitor to 
Access the Crown Jewels of U.S. Innovation (January 2018), Defense 
Innovation Unit Experimental (DIUx) Report.
---------------------------------------------------------------------------
    This scenario also highlights the criticality of time, as invoked 
by the phrase Positioning, Navigation, and Timing (PNT). Accuracy of 
time and the positioning and navigation functions that it enables is 
too often overlooked, underplayed, or taken as given. We do so at our 
peril. Here again, China is investing heavily with the dual goals of 
enhancing its ability to safeguard its own PNT and undermine others, 
such as through anti-satellite capabilities that could blind and bind 
the U.S. military. Modern militaries rely heavily on space-based assets 
for their transit and targeting requirements and other needs, thereby 
expanding the potential surface of attack. In addition, the continued 
expansion of the Internet of Things and the related number of connected 
devices worldwide that are giving us smart cities, smart cars, and 
sensors galore, likewise serves to increase exponentially both 
vulnerabilities and possibilities for attack. Heightened functionality 
comes at a price for soldiers and consumers alike.\10\ The ever-present 
criticality of PNT functions and the coming ubiquity of 5G technology 
each underscore the need to remain resilient, including by considering 
alternatives to our heavy reliance on the space-based Global 
Positioning System (GPS), as a precautionary measure.
---------------------------------------------------------------------------
    \10\ `` `The scale of Chinese state support for the IoT, the close 
supply chain integration between the United States and China, and 
China's role as an economic and military competitor to the United 
States creates enormous economic, security, supply chain, and data 
privacy risks for the United States . . . ' ''. Pennington, https://
www.fifthdomain.com/critical-infrastructure/2018/11/14/us-panel-warns-
against-government-purchase-of-chinese-tech/ [citing the 2018 Report of 
the U.S.-China Economic and Security Review Commission]
---------------------------------------------------------------------------
    Supply chain concerns are by no means limited to goods or services 
of Chinese origin.\11\ Software produced by the Russian anti-virus 
company Kaspersky Lab is the subject of a ban on use by U.S. federal 
agencies. Kaspersky Lab's leadership has close ties to Russia's 
leadership, and the Lab may be legally obligated to assist Russian 
security and intelligence officials with espionage efforts directed 
against the U.S. government.\12\ Indeed, even if the assist to foreign 
state officials in Moscow, Beijing, or elsewhere, were inadvertent or 
unwitting on the part of the foreign supplier, the possibility for that 
enterprise and its products, technologies and services to serve as 
conduit is simply unacceptable.
---------------------------------------------------------------------------
    \11\ But note: ``the U.S. government depends on commercial, off-
the-shelf products, many of them made in China, for more than 95 
percent of its electronics components and information technology 
systems.'' Pennington, https://www.fifthdomain.com/critical-
infrastructure/2018/11/14/us-panel-warns-against-government-purchase-
of-chinese-tech/. Moreover: ``An analysis of seven major U.S. based 
tech companies--HP, IBM, Dell, Cisco, Unisys, Microsoft and Intel--
found that more than half of the products they and their suppliers use 
are shipped from China.'' Derek B. Johnson, ``China's penetration of 
U.S. supply chain runs deep, says report,'' FCW (April 23, 2018), 
https://fcw.com/articles/2018/04/23/china-supply-chain-cyber.aspx?m=1
    \12\ Joseph Marks, ``Government's Kaspersky Ban Takes Effect,'' 
Nextgov (July 16, 2018), https://www.nextgov.com/cybersecurity/2018/07/
governments-kaspersky-ban-takes-effect/149758/
---------------------------------------------------------------------------
    Despite measures like the Kaspersky software ban that are intended 
to mitigate harm to U.S. national security, the imprint of foreign 
state-owned enterprises upon critical U.S. infrastructure today remains 
troubling. Consider the grid. According to the deputy director of 
counterintelligence at the Department of Energy, more than 200 Chinese 
transformers have come into the U.S. energy sector during the past 
decade. Previously there were none.\13\ The groundwork for future 
sabotage, actioned remotely by digital means, is now in place.
---------------------------------------------------------------------------
    \13\ Blake Sobczak and Peter Behr, ``China and America's 400-ton 
electric albatross,'' E&E News (April 25, 2019), https://
www.eenews.net/stories/1060216451
---------------------------------------------------------------------------
    In some instances, the problem is low-tech, at least on its face. A 
recent GAO report revealed that just six TSA employees were responsible 
for overseeing the security of 2.7 million miles of oil & gas 
pipeline.\14\ This is patently insufficient, regardless the degree of 
foreign state-owned enterprise involvement in this area. The problem 
appears to be compounded by shortfalls in cybersecurity expertise on 
the part of relevant personnel, and this further inhibits robust 
oversight at a time when pipeline operations are increasingly 
computerized.
---------------------------------------------------------------------------
    \14\ Catalin Cimpanu, ``Only six TSA staffers are overseeing US oil 
& gas pipeline security,'' ZDNet (May 2, 2019), https://www.zdnet.com/
article/only-six-tsa-staffers-are-overseeing-us-oil-gas-pipeline-
security/
---------------------------------------------------------------------------
    In short, we have failed to inoculate ourselves against the many 
and varied threats to U.S. critical infrastructure posed by nation-
state actors and their proxies. This, despite the fact that our 
adversaries have demonstrated their interest year after year in mapping 
our architectures and engaging in persistent computer network 
exploitation efforts that have no benign purpose and could ultimately 
be combined with kinetic measures. China and Russia are not alone in 
these pursuits. Iran and North Korea join them and possess a degree of 
hostile intent that more than makes up for any shortfalls in their 
respective capacities and capabilities. In this regard, we ought not to 
forget Iran's past cyber-targeting of U.S. banks (DDoS attacks) or its 
cyber-foray into the workings of a New York State dam.\15\ The 2018 
Foreign Economic Espionage in Cyberspace Report produced by the 
National Counterintelligence and Security Center notes also, ``Iranian 
hackers target U.S. aerospace and civil aviation firms.'' \16\ Nor 
should we forget North Korea's destructive cyber-attack on Sony 
Pictures Entertainment.\17\
---------------------------------------------------------------------------
    \15\ Dustin Volz, Nate Raymond, Jim Finkle, ``U.S. to charge Iran 
in cyber attacks against banks, New York dam-sources,'' Reuters (March 
23, 2016), https://www.reuters.com/article/us-usa-iran-cyber-
idUSKCN0WP2NM
    \16\ National Counterintelligence and Security Center, Foreign 
Economic Espionage in Cyberspace (2018), https://www.dni.gov/files/
NCSC/documents/news/20180724-economic-espionage-pub.pdf at page 9. In 
respect of Russia, the Report notes further (at page 8): ``Moscow has 
used cyber operations to collect intellectual property data from U.S. 
energy, healthcare, and technology companies. For example, Russian 
Government hackers last year compromised dozens of U.S. energy firms, 
including their operational networks. This activity could be driven by 
multiple objectives, including collecting intelligence, developing 
accesses for disruptive purposes, and providing sensitive U.S. 
intellectual property to Russian companies.''
    \17\ Peter Elkind, ``Inside the Hack of the Century,'' Fortune 
(June 25, 2015), http://fortune.com/sony-hack-part-1/
---------------------------------------------------------------------------
           proposed response: selected action recommendations
    The magnitude of the challenge is daunting, but there are steps 
that we can and should take in order to confront and counter the array 
of threats and problems that prevail, particularly those of highest 
potential consequence. What we cannot afford to do is grind the U.S. 
economy to a halt by introducing blanket and overly blunt security 
measures. Instead, we must tailor and calibrate our responses to limit 
any collateral damage to U.S. interests, separate and apart from 
national security concerns. In practice, this means working to elevate 
security concerns, monitor them, test our responses, and continually 
refine those regimes. Admittedly, this is a tall order. But, like any 
complex task, it can be broken down into a series of steps to be taken 
in a sequence that deals with first things first:
    Prioritize Lifeline Sectors and National Critical Functions. If 
everything is critical then nothing is, and since we cannot protect 
everything, everywhere, all the time, we must focus our limited human, 
capital and other resources on those assets and operations whose 
takedown or undermining would be most damaging to the nation. Put 
differently, we must manage risk since we cannot eliminate it. To this 
end, a good place to start would be to direct our attention to the so-
called ``Lifeline'' Sectors, which have already been identified as the 
most critical of the critical. These include the defense industrial 
base, energy, financial services, transportation, telecommunications, 
and water. In addition, the list of National Critical Functions (NCF) 
recently released by the National Risk Management Center, nested within 
the Department of Homeland Security (DHS)'s Cybersecurity and 
Infrastructure Security Agency (CISA), provides another series of 
guideposts for prioritization. The NCF list addresses cross-sector and 
system-wide risks, and thereby complements a focus on lifeline sectors, 
by taking the logical next step, which is aligning and calibrating the 
most critical of sectors and the most critical of functions.
    Know and Scrutinize Your Supply Chain. It should be patently clear 
from the above-described state of play that any entity is only as 
strong as the weakest link in its chain. In the context of business 
operations or government enterprise, this means that knowing and 
scrutinizing your supply chain is a prerequisite to public safety and 
security. However, while few would argue with this statement as a 
matter of principle, not enough businesses or government officials and 
contractors are paying this principle the heed that it deserves in 
practice. Instead of acting according to the old adage, ``trust but 
verify,'' too many of us are relying on trust alone \18\. In the 
context of critical infrastructure, this could have catastrophic 
consequences. Executive Order 13806 on Assessing and Strengthening the 
Manufacturing and Defense Industrial Base and Supply Chain Resiliency 
of the United States \19\ was assuredly a helpful initiative in this 
respect as was the Department of Defense-led Interagency Task Force 
Report \20\ and, the Information and Communications Technology (ICT) 
Supply Chain Risk Management Task Force launched recently by DHS 
CISA.\21\ However, it is incumbent upon all of us to widen and deepen 
the effort.\22\
---------------------------------------------------------------------------
    \18\ Phil Muncaster, ``Most Firms Rely on Trust Alone for Supply 
Chain Security,'' Infosecurity Magazine (May 1, 2019), https://
www.infosecurity-magazine.com/news/most-firms-rely-trust-alone-supply-
1/
    \19\ (July 21, 2017), https://www.federalregister.gov/documents/
2017/07/26/2017-15860/assessing-and-strengthening-the-manufacturing-
and-defense-industrial-base-and-supply-chain
    \20\ Report to President Donald J. Trump by the Interagency Task 
Force in Fulfillment of Executive Order 13806, Assessing and 
Strengthening the Manufacturing and Defense Industrial Base and Supply 
Chain Resiliency of the United States (September 2018), https://
media.defense.gov/2018/Oct/05/2002048904/-1/-1/1/ASSESSING-AND-
STRENGTHENING-THE-MANUFACTURING-AND%20DEFENSE-INDUSTRIAL-BASE-AND-
SUPPLY-CHAIN-RESILIENCY.PDF
    \21\ Robert Kolasky, Statement for the Record for a Hearing on 
``Securing U.S. Surface Transportation from Cyber Attacks,'' before the 
U.S. House of Representatives Committee on Homeland Security, 
Subcommittee on Transportation and Maritime Security, Subcommittee on 
Cybersecurity, Infrastructure Protection, and Innovation (February 26, 
2019), https://homeland.house.gov/sites/democrats.homeland.house.gov/
files/documents/Testimony-Kolasky.pdf at page 5
    \22\ Late last year, the Senate passed legislation to stand up an 
interagency council to ``develop rules of the road for federal supply 
chain security.'' Derek B. Johnson, ``Senate passes bill to establish 
governmentwide supply chain council,'' FCW (December 19, 2018), https:/
/fcw.com/articles/2018/12/19/senate-supply-chain-bill-johnson.aspx?m=1. 
The subsequently enacted SECURE Technology Act established the Federal 
Acquisition Security Council. See H.R. 7327 (January 3, 2018), at Title 
II, https://www.dni.gov/files/NCSC/documents/supplychain/20190327-Law-
BILLS-7327.pdf
---------------------------------------------------------------------------
    Empower CFIUS to better Protect Critical U.S. Infrastructure. The 
Committee on Foreign Investment in the United States (CFIUS) is an 
interagency body mandated to review the national security implications 
of certain transactions. Taken together with the 2018 Foreign 
Investment Risk Review and Modernization Act, and our export control 
regime, we have in place an architecture and mechanisms to assess and 
thwart significant, negative consequences for U.S. national security 
that might arise from foreign investment or technology transfer. The 
system in place entails evidence-based inquiry and analysis but 
contains some important gaps. These are identified and discussed in 
specific bilateral context in a staff research report of the U.S.-China 
Economic and Security Review Commission released earlier this month. 
The report includes the concern that ``investments in U.S. critical 
technologies based outside the United States'' fall beyond the 
detection ambit of CFIUS.\23\
---------------------------------------------------------------------------
    \23\ Sean O'Connor, How Chinese Companies Facilitate Technology 
Transfer from the United States, U.S.-China Economic and Security 
Review Commission Staff Research Report (May 6, 2019), https://
insidecybersecurity.com/sites/insidecybersecurity.com/files/documents/
2019/may/cs05072019_China_Tech_Transfer.pdf at page 10. Also, as noted 
in the 2018 Foreign Economic Espionage in Cyberspace Report: ``China 
uses front companies to obscure the hand of the Chinese government and 
acquire export controlled technology.'' https://www.dni.gov/files/NCSC/
documents/news/20180724-economic-espionage-pub.pdf at page 6.
---------------------------------------------------------------------------
    Develop Strategy, Not Just Tactics, and Integrate Cyber. American 
economic advantage, military strength, innovation, jobs and many other 
important national equities are at stake.\24\ There is a resultant 
compelling need to address the ecosystem of threats in a comprehensive 
and contextualized manner that balances and accommodates the tensions 
that may exist among the various equities at play. At the same time, 
cybersecurity factors, such as risk assessments and risk management 
strategies, should be woven into strategy at inception and across the 
board, rather than treated as a separate vertical, that must be 
retrofitted. To these ends, a domestic version of The Prague Proposals, 
which are principles regarding the ``cyber security of communication 
networks in a globally digitized world'' generated at the recent 5G 
Security Conference in which 32 countries participated, could prove 
useful for safeguarding U.S. Lifeline Sectors and National Critical 
Functions in connection with the widespread rollout and implementation 
of 5G technology.\25\
---------------------------------------------------------------------------
    \24\ The list is illustrative, not exhaustive, and elaborated by 
the National Counterintelligence and Security Center. https://
www.dni.gov/index.php/ncsc-what-we-do/ncsc-supply-chain-threats
    \25\ Government of the Czech Republic, https://www.vlada.cz/en/
media-centrum/aktualne/prague-5g-security-conference-announced-series-
of-recommendations-the-prague-proposals-173422/
---------------------------------------------------------------------------
    Make Building the Cyber Workforce and a Network of Critical 
Technologies Testbeds National Imperatives. Report after report has 
identified large shortfalls in the supply of skilled cyber 
professionals relative to U.S. demand for them in both the public and 
private sectors. Yet, cyber practitioners are crucial to identifying, 
assessing, and responding to the threat as manifested and previously 
described. For government, the under-supply problem is magnified 
because private industry can offer prospective and existing employees 
greater salary and benefits. Although psychic income derived from the 
government mission of serving the national interest is a significant 
pull and retention factor, the fact remains that the pool of qualified 
candidates is itself too small. It must be expanded, urgently, to 
address the deficit of knowledge and bandwidth that is needed in our 
public institutions and in our companies to counter and thwart cyber 
threats posed by state actors to U.S. critical infrastructure. The 
recent Executive Order on America's Cybersecurity Workforce recognizes 
this challenge,\26\ but continued and whole-of-society efforts will be 
required. In addition, on the technology side, we lack a strategic 
approach to integrating advancements into the broader ecosystem. An R&D 
effort, in the form of a nationwide network of technology testbeds that 
simulate a realistic pan-sectoral environment, is needed to remedy this 
shortfall. Taken in aggregate, such a platform would identify and 
explore the various national and economic security implications of new 
and critical technologies before they are in widespread use.
---------------------------------------------------------------------------
    \26\ (May 2, 2019), https://www.whitehouse.gov/presidential-
actions/executive-order-americas-cybersecurity-workforce/
---------------------------------------------------------------------------
                               conclusion
    National security and free markets need not be an either/or 
proposition--we need both. With leadership and sustained determination 
on the part of both government and industry, complemented and supported 
by robust partnership of the two, we can meet that goal. Thank you 
again for the opportunity to appear before you today. It is a privilege 
to contribute to this important conversation and analysis,\27\ and I 
look forward to trying to answer any questions that you may have.
---------------------------------------------------------------------------
    \27\ I would be remiss if I did not thank the deputy director of 
the Center for Cyber and Homeland Security, Sharon L. Cardash, for her 
skillful assistance in preparing this testimony.

    Mr. DeFazio. No, it's only 28 seconds. This is a good panel 
altogether. Thank you, and we are almost exactly on time.
    Mr. Kahn.
    Mr. Kahn. I will try to make up those seconds.
    Chairman DeFazio, Ranking Member Graves, distinguished 
members of the committee, thank you for the opportunity to 
speak here this morning.
    My name is Zach Kahn, and I lead public policy efforts and 
government relations for BYD Motors.
    I would like to acknowledge several of our employees here 
from our Lancaster, California, facility, as well as 
representatives from out union partners who are here as well.
    Thank you for the opportunity to speak with you today. 
These are exciting times for BYD in America. We recently 
delivered our 300th electric bus in the U.S., and one of our 
first customers logged its millionth mile on BYD buses.
    I do appreciate this opportunity to clarify that BYD is not 
a state-owned enterprise. As discussed in my written testimony, 
BYD is a privately held, publicly traded, global company with 
more than 200,000 employees, 900 of which are in the U.S.
    Berkshire Hathaway Energy, a subsidiary of Berkshire 
Hathaway, is BYD's long-term investment strategic partner and 
single largest outside shareholder.
    Our U.S. headquarters are in Los Angeles. We have multiple 
manufacturing facilities in Lancaster, California. BYD is a 
proud union company with a collective bargaining agreement with 
the International Association of Sheet Metal, Air, Rail and 
Transportation Workers, also known as SMART, Local 105.
    We have grown, as I said, to nearly 900 U.S. employees, 
including more than 775 SMART Union workers.
    We also have a community benefits agreement with Jobs to 
Move America and SMART, establishing training and 
apprenticeship programs for workers with traditionally high 
barriers to employment who have been historically 
underrepresented in the manufacturing industry.
    We are immensely proud of our diverse and talented 
workforce and invite any interested members of this committee 
to come out to Lancaster to meet our employees and see what we 
are building there together.
    BYD has invested more than $250 million on our U.S. 
operations. Last year alone, BYD spent more than $70 million on 
components made by American vendors located all across the 
country, which is twice what we spent in 2016. We source 
components from hundreds of U.S. vendor partners across the 
country.
    Our procurements allow our vendors to create and maintain 
hundreds, if not thousands, of American jobs. BYD is helping to 
create a truly competitive market for buses in America.
    The competition has led to rapid technological improvements 
in the electric bus sector for manufacturers across the 
industry, while also driving down costs and, most importantly, 
helping public transit agencies meet their Clean Air goals in a 
safe and economically viable way.
    Competition is the life blood of our country, and rather 
than hurt the market, this competition sparks innovation, 
reduces acquisition and life-cycle costs, and facilitates the 
growth and adoption of zero emission options for U.S. transit 
operators.
    The competition also creates new technology jobs outside of 
the vehicle manufacturer space. For example, BYD is the only 
manufacturer with numerous projects deploying en route, 
inductive, or wireless charging technology, which has the 
potential to transform transportation electrification by 
virtually eliminating operator concerns about vehicle range.
    BYD has worked directly with two companies, Momentum 
Dynamics from Malvern, Pennsylvania, and WAVE from Salt Lake 
City, Utah, investing millions of dollars in initial projects 
with each company.
    These companies are now deploying these technologies not 
only inside the U.S., but also outside the U.S. in Europe and 
abroad, as well as expanding their wireless charging 
applications to other industries besides transit buses.
    Were it not for this early support from BYD, these amazing 
and innovative U.S. startup companies would in all likelihood 
have stalled out.
    This is the kind of innovative technology that thrives in a 
competitive environment, driving local investment and creating 
new manufacturing, engineering, and design jobs in the process.
    We proudly note that we have had 14 different repeat 
customers who purchased zero emission buses after their first 
appointments with BYD.
    Just this week Anaheim Transportation Network ordered 40 
additional clean energy buses from BYD. As their executive 
director Diana Kotler noted, ``We have been operating four BYD 
buses on our routes over the past 2 years, and based on their 
performance, we are confident in BYD's quality, product, and 
their support of our effort to electrify our fleet.''
    Thank you, again, for this opportunity to tell you about 
BYD. I look forward to answering your questions.
    [Mr. Kahn's prepared statement follows:]

                                 
 Prepared Statement of Zachary Kahn, Director of Government Relations, 
                     North America, BYD Motors LLC
    Chairman DeFazio, Ranking Member Graves, distinguished members of 
the Committee, thank you for the opportunity to speak to you this 
morning on the important topic of ``The Impacts of State-Owned 
Enterprises on Public Transit and Freight Rail Sectors.'' My name is 
Zach Kahn and I lead policy efforts and government relations for BYD 
Motors. I have been with the company for more than 4 years and began as 
a regional sales manager. Prior to this, I worked on charging 
infrastructure for heavy duty electric vehicles, so I have not only 
seen the growth of BYD, but also the maturation of zero emission 
vehicles in the United States. There is a lot of positive news in this 
space and I hope to come back in the future and tell that story.
    I appreciate this opportunity to clarify that BYD is not a State-
Owned Enterprise. BYD is a privately held, publicly-traded global 
company. BYD US Holdings Inc., is a subsidiary of the global BYD 
Company and is incorporated in Delaware with headquarters in Los 
Angeles. BYD Coach & Bus LLC and BYD Energy LLC are subsidiaries of BYD 
US Holdings Inc. with manufacturing facilities in Lancaster, CA. Our 
U.S. operations are run out of these companies. That being said, we 
welcome this opportunity to tell you about BYD and what we have been 
doing in the United States to create good union jobs and to help 
transit agencies across the country electrify their bus fleets. We have 
been, and will continue to be, transparent and open.
    Since opening its Coach & Bus manufacturing facility in Lancaster 
in 2014, BYD has grown to nearly 900 total U.S. employees, including 
more than 775 union workers. To date, BYD has delivered more than 300 
electric buses in North America and has sold over 500 all-electric 
heavy-duty buses to more than 50 municipal, transit agency, university, 
airport, and other commercial and private sector clients across 13 
states including Massachusetts, Louisiana, Missouri, Oregon, 
Washington, and California, and four provinces in Canada. These buses 
are safe, economical, energy-efficient, quiet and environmentally 
friendly. Riders benefit from the smooth and quiet ride and the absence 
of tailpipe emissions, while we all benefit from the low environmental 
impact all-electric public transpiration provides.
    In Lancaster, we recently completed an expansion of our state-of-
the-art, ISO 9001, certified manufacturing facility to over 550,000 
square feet, and our American workers now have the capacity to 
domestically build 1,500 electric buses per year.
    In April of this year, BYD opened our first service center in San 
Carlos, CA. It is the first of several we plan to open around the 
country to better support customers with parts, training and technical 
support, ultimately creating more jobs and opportunity for American 
workers while providing better service to our customers. Additionally, 
BYD plans to expand its manufacturing presence in California and the 
U.S. by at least 2 million square feet in the coming years and expects 
to continue to significantly expand our employee base.
                     byd buses are made in america
    All BYD buses sold to U.S. transit agencies are made in America and 
meet the Federal Transit Administration's regulatory requirements. 
These buses exceed Buy America standards and have undergone numerous 
third party Buy America audits, each of which confirmed BYD's 
compliance with Buy America requirements. Each purchase of BYD buses 
includes both a pre-award Buy America Audit and a Post-Award Audit. 
These audits are conducted by a third party Buy America expert who is 
compensated by the customer, not BYD.\1\ In fact, during the Senate 
Banking Committee's work on the FAST Act in 2015, BYD encouraged 
committee staff to push the Buy America content requirements up to 70 
percent U.S. content.
---------------------------------------------------------------------------
    \1\ Buy America auditors who have worked on audits on BYD bus 
projects include: Steve Policar, LLC, Transit Resource Center, and 
Global Innovations, USA.
---------------------------------------------------------------------------
    BYD also surpasses the regulatory requirements related to safety 
and testing. For example, BYD has had three bus models approved for 
sale to U.S. transit agencies based on Altoona testing.\2\ In addition, 
we currently have two other electric bus models on the track in Altoona 
undergoing the certification and approval process--our five door, 60, 
all-electric K11 bus, and our 45, over the road all-electric coach bus.
---------------------------------------------------------------------------
    \2\ BYD's completed Altoona Testing Reports can be found here: 
http://apps.altoonabustest.psu.edu/buses/441, http://
apps.altoonabustest.psu.edu/buses/476
---------------------------------------------------------------------------
                    byd supports local u.s. vendors
    BYD has invested more than $250 million on U.S. operations since 
initiating domestic operations in 2014. Last year alone, BYD invested 
more than $70 million on components made by American vendors located 
all across the nation, which is a 3400% increase over what BYD spent on 
U.S. operations in the first year of U.S. operations and twice what the 
company spent in 2016. BYD sources components from more than 1,000 U.S. 
vendor partners across the country, including Trussville, Alabama; 
Windcrest, Texas; Murfreesboro, Tennessee; Elkhart, Indiana; Upper 
Sandusky, Ohio; Bronson, Michigan; and Neenah, Wisconsin. Our 
procurements allow our vendors to create and maintain thousands of 
American jobs across the country.
            byd ownership--privately-owned & publicly-traded
    BYD's founding and ownership are as transparent as every other 
multinational manufacturer and we strive to be as forthcoming as 
possible. Integrity and transparency are core values for BYD as a 
company. BYD was founded in February 1995, as a private company with 20 
employees making cell phone batteries. BYD has grown into a global 
publicly traded corporation with more than 200,000 employees globally. 
Throughout its 24 years of growth, BYD has established over 30 
industrial parks on six continents and has played a significant role in 
industries related to electronics, automobiles, clean energy and 
transit. From energy generation and storage to transportation, BYD is 
dedicated to providing zero-emission energy solutions for customers 
around the world. Two cornerstones of BYD's success is its dedication 
to innovation and transparency. The clean technologies it has developed 
benefit communities and transit agencies in the United States and all 
around the world, seeking to improve the environment with safe, quiet, 
efficient and affordable products.
    BYD has been publicly listed on the Hong Kong Stock Exchange since 
2002, and on the Shenzhen Stock Exchange since 2011. BYD has never been 
owned, operated, and controlled by any nation-state. The two founders 
of BYD together own 33.58 percent of the company.\3\ In September 2008, 
MidAmerican Energy Holdings Company (now renamed as Berkshire Hathaway 
Energy), a subsidiary of Berkshire Hathaway, based in Nebraska, entered 
into an agreement with BYD, pursuant to which it acquired approximately 
8.25 percent of the Company, to become BYD's long term investment 
strategic partner and single largest stockholder outside of the 
founders.
---------------------------------------------------------------------------
    \3\ BYD 2018 Annual Report, http://www.byd.com/en/
InvestorAnnals.html
---------------------------------------------------------------------------
                          proud union company
    BYD is a proud union company with a collective bargaining agreement 
with the International Association of Sheet Metal, Air, Rail and 
Transportation workers (SMART). As well as being the only electric bus 
manufacturer in the U.S. that employs union labor at every single one 
of its bus manufacturing facilities, we are also the only electric bus 
manufacturer in the country with a Community Benefits Agreement with 
Jobs to Move America and SMART. This legally binding agreement 
establishes training and apprenticeship programs for workers with 
traditionally high barriers to employment, and BYD has committed to 
work toward the goal of recruiting and hiring 40% of our workers from 
populations, such as veterans, who face significant barriers to 
employment. BYD has also initiated an effort to recruit workers from 
other populations that have been historically underrepresented in the 
manufacturing industry, including women and African Americans. We 
currently exceed the goals set out in our agreement and are immensely 
proud of our diverse and talented workforce. We are working with 
Antelope Valley College and our labor partners to create both a pre-
apprenticeship program at the college level and an ambitious 
apprenticeship program in 2019 that will include six months of 
classroom training and a year of on-the-job training. Our workers are 
diverse and reflect the communities in which we operate. We are proud 
of these workers and especially proud of the second chances we are 
providing to many of those working in our Lancaster facility. BYD 
stands by its products and its U.S. employees, which include over 775 
proud American union members. We are especially proud of the 
relationship we have developed with the cities of Lancaster and 
Palmdale in the Antelope Valley. We are active civic participants in 
the community and have been supportive of numerous local charities and 
institutions--from sponsoring the Advanced Zero Emission Transportation 
Endowment Fund Program at Antelope Valley College to supporting the Boy 
Scouts and the California Poppy Festival--and are honored to build 
buses here.
     byd has increased competition in the u.s. benefiting taxpayers
    BYD is a market leader and innovator responsible for many firsts in 
the bus industry--the first long range electric bus, the first electric 
bus to utilize in-wheel hub motors, the first manufacturer to offer a 
12 year battery warranty, the first manufacturer to build a 60-foot 
electric articulated bus, and the first to build a 45-foot electric 
coach bus, to name a few of many notable achievements. BYD is helping 
to create a truly competitive market for buses in the United States for 
the first time in decades. We believe, the competition BYD provides to 
the U.S. market has led to rapid technological improvements in the 
electric bus sector from manufacturers across the industry, while also 
driving down costs and, most importantly helping public transit 
agencies meet clean air goals in a safe and economically viable way. 
Competition is the life blood of our country and rather than hurt the 
market, the competition represented by BYD and other participants in 
the U.S. electric bus market sparks innovation, reduces acquisition and 
lifecycle costs, and facilitates the growth and adoption of zero 
emission options for U.S. transit operators.
    Competition in the transit market leads directly to innovation and 
job creation outside of the vehicle manufacturer space. For example, 
BYD is the only manufacturer with numerous projects deploying en route 
inductive charging technology. This technology has the potential to 
transform transportation electrification by virtually eliminating 
operator concerns regarding vehicle range. BYD has worked directly with 
two U.S. companies, Momentum Dynamics, from Malvern, Pennsylvania, and 
WAVE, from Salt Lake City, Utah, investing millions of dollars in 
initial projects including the first high powered 200 kW+ wireless 
chargers for each company. These two companies are now deploying their 
technology both inside and outside of the U.S., as well as expanding 
their wireless charging applications to other industries besides 
transit buses to include charging technologies for private vehicles and 
port equipment. Were it not for early support from BYD, these amazing 
and innovative U.S. startup companies would, in all likelihood, have 
stalled. Instead, they have been able to raise millions of dollars from 
investors and are now the international leaders in the wireless 
charging space. This is the kind of innovative technology that thrives 
in a competitive environment driving local investment and creating new 
manufacturing, engineering, and design jobs in the process.
    This competitive dynamic supported by BYD's presence in the U.S. 
has also driven down costs for transit agencies. Simply by having 
another viable alternative in the marketplace has forced traditional 
manufacturers to better respond to the needs of their customers by 
introducing zero emission options, investing in their own zero emission 
bus technology, and knowledge base. The entry of BYD, and others, into 
the electric bus market in the U.S. has created a vibrant and 
competitive market for transit agencies interested in procuring 
electric buses. Unlike in the traditional diesel or CNG bus market, 
where competition is minimal, each public Request for Proposals for 
electric buses is likely to garner at least four responses from 
legitimate bus manufacturers. Each proposer will have different 
technologies, different solutions to offer, and will each be competing 
on pricing. Without this market in place, it is unlikely that the price 
of an electric bus would have come down as quickly as it has in the 
last five years. By our calculations, the prices have stayed the same 
(or gone up). Competition is something to be encouraged in public 
transit as it benefits virtually all participants, with the possible 
exception of legacy manufacturers who have benefited from the lack of 
competition to date.
    Finally, the transit bus manufacturing industry appears to be 
thriving with the new competition. Proterra has quickly established 
itself as a leading electric bus manufacturer in the U.S. building a 
second manufacturing facility in the last few years and growing its 
customer base to over 85 agencies across North America. The Canadian-
based New Flyer wrote in a recent letter to the House Appropriations 
Committee that ``New Flyer continues to expand its operations across 
the U.S. Our Anniston, Alabama facility, with 750 employees, is 
dedicated to the advancement of bus and coach technology, including 
electric, autonomous and telematics technologies. We've also invested 
$28 million to establish a new part fabrication facility in 
Shepherdsville, Kentucky--and anticipate hiring over 550 employees.'' 
And the California-based Gillig recently announced the launch of its 
electric bus program as well.\4\ In short, competition is doing exactly 
what policymakers want it to do--forcing manufacturers to build better 
products at lower prices for the end user, while creating jobs across 
America.
---------------------------------------------------------------------------
    \4\ https://www.masstransitmag.com/bus/vehicles/hybrid-hydrogen-
electric-vehicles/press-release/21079183/gillig-llc-gillig-previews-
new-zeroemission-battery-electric-bus
---------------------------------------------------------------------------
    Before I close, I would also like to highlight just how important 
it is to have a robust electric bus market and why I choose to work for 
BYD. I believe we must do everything in our power to transition our 
nation to a cleaner, safer, more efficient, more economical, 
transportation system and meet our air quality and climate goals. This 
is why efforts in California and around the country to require all 
public transit buses be zero emission by 2040 are so important. And it 
is also why BYD is a proud California company that stands ready to help 
deliver on this promise. If we can improve the transit sector by 
lowering emissions through innovative technology, it opens the door for 
other sectors to adopt electric vehicles. As BYD has proven, we can 
make these vehicles in America.
    Thank you again for this opportunity to tell you about BYD. I 
welcome any questions you have and will answer them to the best of my 
ability.

    Mr. DeFazio. Thank you. You are within the time limits.
    And we now turn to Mr. Washington.
    Mr. Washington. Chairman DeFazio, Ranking Member Graves, 
Congresswoman Napolitano, and the honorable members of this 
committee, it is a genuine honor to join you here today. I am 
thrilled to be here and happy the committee has called this 
hearing.
    Today there is not a single American manufacturer of mass 
transit railcars, and that is certainly an issue worthy of 
congressional consideration, deliberation, and action.
    I am pleased to submit my formal testimony for the record 
and want to summarize my testimony by sharing the following 
four points.
    Point one, America's proud mass transit history in my own 
backyard of Illinois, having grown up as a child in the Midwest 
and specifically in public housing on the South Side of 
Chicago, I have great respect for America's tremendous 
manufacturing history and the path to the middle class of the 
history provided to millions of hard-working Americans.
    While growing up as a child in Chicago in the 1970s, I was 
not aware that about 130 miles south of my home over a century 
before, America was designing and producing mass transit 
railcars in the town of Bloomington, Illinois.
    In this American town, workers began building the iconic 
Pullman coaches. Years later, the company would set up a shop 
closer to Chicago, within 5 miles of my public housing project 
in the town aptly called Pullman, where thousands of American, 
would spend decades building mobility for our Nation.
    I would like to add that at one time, that Pullman company 
was the largest employer of African Americans in the United 
States, where members of my family were Pullman porters and 
worked primarily for tips, and they organized themselves as the 
Brotherhood of Sleeping Car Porters under the leadership of A. 
Phillip Randolph.
    Point two, today for reasons that are both very complex and 
very simple, there are no American manufacturers of mass 
transit railcars. So as was clearly explained in a very smartly 
worded Eno Center for Transportation report, the companies that 
build transit railcars and sell them to public transit agencies 
are all foreign-owned companies.
    As members of this committee are well aware, there is a 
large delta between the benefits of simply assembling rolling 
stock in the United States as opposed to manufacturing rolling 
stock in our Nation.
    To be clear, when we lost that manufacturing base, we also 
lost our leadership in the design and innovation realms to 
foreign manufacturers.
    I say it is complex because I am convinced that the absence 
of the domestic transit railcar manufacturer is directly tied 
to both the intense competition of the global marketplace and 
government actions that have created an uneven playing field 
for rolling stock firms.
    That said, I also believe that the lack of any domestic 
manufacturer has taken place because of an absence of Federal, 
State and local rules and regulations that prioritize a dynamic 
and competitive environment for the emergence of the American 
transit railcar.
    For Los Angeles, a most recent rail rolling stock 
procurement that was held in line with all current Federal 
rules and resulted in a contract being awarded to CRRC, we 
entered into a contract on March 10th, 2017, to purchase 64 new 
heavy rail vehicles for our growing subway system, with five 
additional options for another 218 subway cars.
    The shell for these railcars will be made in China, and its 
assembly will be done in Springfield, Massachusetts.
    The third point is that as a U.S. military veteran who 
enlisted in the United States Army as an 18-year-old and 
retired as a command sergeant major, a disabled veteran with 25 
years of service, I would like to share the following 
observation that has to do with manufacturing facilities of the 
Apache helicopter, which was synonymous with our branch of 
service.
    If we look at where this attack helicopter is manufactured, 
it is not abroad. It is in Mesa, Arizona. Four thousand 
Americans are building the Apache.
    Point four, like the Boeing plant and the base of suppliers 
surrounding it in and around Mesa, I have outlined a vision for 
a one-of-a-kind center of manufacturing of rolling stock in the 
United States in Los Angeles County, where rolling stock would 
be not simply assembled, but manufactured.
    So with support of the county of Los Angeles and the city 
of Los Angeles, we are taking that initiative as we move 
forward.
    Chairman DeFazio, Ranking Member Graves and honorable 
members of the committee, on behalf of L.A. County, I look to 
return to the committee in the coming year to share some 
positive news on our effort to stand up this country's only 
railcar manufacturing facility.
    Thank you.
    [Mr. Washington's prepared statement follows:]

                                 
 Prepared Statement of Phillip A. Washington, CEO, Los Angeles County 
                 Metropolitan Transportation Authority
                             introduction:
    Chairman DeFazio, Ranking member Graves and honorable members of 
this committee--it is a genuine honor to join you today at this 
important hearing.
    Having grown up as a child in the Mid-West and specifically in 
public housing on the South Side of Chicago--I have great respect for 
America's tremendous manufacturing history and the path--the ticket--to 
the middle class that history provided to millions of hard working 
Americans. We are thrilled to be here and happy the committee has 
called this hearing. Today there is not a single American manufacturer 
of mass transit railcars and that is certainly an issue worthy of 
congressional consideration, deliberation and action.
    While growing up as a kid in Chicago in the 1970s--I wasn't aware 
that about 130 miles south of my home--over a century before--America 
was designing and producing mass transit rail cars in the town of 
Bloomington, Illinois. In this American town, workers began building--
in 1859--the iconic Pullman coaches, which were made at the Chicago and 
Alton shops by workers who literally built our growing nation. Years 
later, the company would set up shop closer to Chicago within 5 miles 
of my public housing project--in a town aptly called Pullman--where 
thousands of Americans would spend decades building mobility for our 
nation. I should also add that at one time--the Pullman Company was the 
largest employer of African Americans in the United States--where--as 
porters (my grandfather and late pastor were Pullman porters and worked 
primarily for tips)--they organized themselves as the Brotherhood of 
Sleeping Car Porters under the leadership of A. Phillip Randolph.
               transit railcars--no domestic manufacturer
    Today, for reasons that are both very complex and very simple--
there are no American manufacturers of mass transit railcars. So as was 
clearly explained in a smartly worded Eno Center for Transportation 
report entitled, The Implications of the Federal Ban on Chinese 
Railcars,--``the companies that build transit railcars and sell them to 
public transit agencies are all foreign-owned companies with assembly 
facilities in the United States.'' And as members of this committee are 
well aware--there is a large delta between the benefits of simply 
assembling rolling stock in the United States as opposed to 
manufacturing rolling stock in our nation. To be clear, when we lost 
our manufacturing base we also lost our leadership in the design and 
innovation realms to foreign manufacturers.
    I say the reason is complex because I am convinced that the absence 
of a domestic transit railcar manufacturer is directly tied to both the 
intense competition of the global marketplace and government actions 
that have created an uneven playing field for rolling stock firms--
leaving some at a clear disadvantage.
    That said, I also believe that the lack of any domestic 
manufacturer has taken place because of an absence of federal, state 
and local rules and regulations that prioritize a dynamic and 
competitive environment for the emergence of an American transit 
railcar manufacturer. In effect--we have no American-owned Pullman's 
today because we have failed--in my opinion--to create the economic 
environment in which a new Pullman-like firm--American owned--would 
prosper in a truly free, fair and open marketplace.
    For Los Angeles Metro, our most recent rail rolling stock 
procurement was held in line with all current federal rules and 
resulted in a contract being awarded to the China Railway Rolling Stock 
Corporation (CRRC). We entered into a contract on March 10, 2017 to 
purchase sixty four new heavy rail vehicles for our growing subway 
system--with five additional options for another 218 subway cars. The 
shell for these railcars will be made at the CRRC's facility in 
Changchun, China and its assembly would be done in Springfield, 
Massachusetts. Work on the assembly of propulsion systems, HVAC and 
lighting components will be performed at a facility in the City of 
Industry--which is situated in Los Angeles County. In total, our agency 
is spending a combination of federal and local funds in the amount of 
$647 million for this procurement.
              military procurement--the apache helicopter
    As a U.S. military veteran--who enlisted in the U.S. Army as an 
eighteen year old and retired as a Command Sergeant Major after twenty 
five years of service--I would like to share the following observation. 
Wherever I was based--either at military facilities across America or 
abroad--the Apache helicopter was synonymous with our branch of 
service. And, if we look at where this attack helicopter is 
manufactured--it is not abroad--it is in Mesa, Arizona.
    There in Mesa--over 4,000 Americans are building the Apache--and 
perhaps just as importantly--there are over 500 suppliers to Boeing's 
plant in Mesa--parts suppliers who employ thousands of Americans. And 
just over two years ago--in March of 2017--the U.S. Government entered 
into a five year $3.4 billion agreement with Boeing to construct many 
more Apaches--ensuring continued employment for hard working Americans.
      los angeles metro--rolling stock industrial park initiative:
    Like the Boeing plant and the base of suppliers surrounding it--in 
and around Mesa, Arizona--I have outlined a vision to my Board of 
Directors to create in Los Angeles County a one of a kind center for 
the manufacturing of rolling stock in the United States--as opposed to 
many facilities in the United States--where rolling stock is simply 
assembled--not manufactured.
    With support from the County of Los Angeles, the City of Los 
Angeles and other municipalities, our agency has taken the initiative 
to host several roundtables--including one last year with Chief 
Executive Officers of major rail manufacturing companies around the 
world and a second gathering held at our agency on April 2, 2019 with 
major bus and rail suppliers.
    The goal of these two gatherings was to collect the information 
necessary for our agency to smartly move forward--with dispatch--to 
identify a location in Los Angeles County that could serve as the home 
to a future rail/bus manufacturing center. And related to the 
manufacturing part of this effort--I also want to emphasize and make 
clear that my goal is to see the associated design and innovation 
related to rolling stock occur in the United States--much like in the 
automotive realm, where southern California is the center for the 
design of automobiles produced here in the United States and around the 
world.
    This future manufacturing center in Los Angeles County could also 
serve the growing mass transit rolling stock needs for agencies across 
the Western United States.
    The motivation for my initiative is clear. With LA Metro slated to 
spend over $400 billion over the next four decades on mobility in our 
region--we must make sure that the benefits of our spending--which in 
our case is 82%--or $350 billion--from Los Angeles County residents--
stays local.
    So for those on this panel who believe in states' rights and local 
control--my initiative for this future rail/bus manufacturing center is 
to make sure our local funds have a local benefit--without rules that--
for example--prohibit us from hiring locally and giving preference to 
local manufacturers when we procure rolling stock--especially when a 
majority of the funds being spent come from the residents of Los 
Angeles County's 88 cities.
    And for others on this panel--who are squarely focused on bringing 
good paying manufacturing jobs back to America--my initiative aims to 
do just that--offering a welcome ticket to the middle class that I 
touched on earlier in my testimony.
                              conclusion:
    Chairman DeFazio, Ranking member Graves and honorable members of 
this committee--on behalf of the Los Angeles County Metropolitan 
Transportation Authority--I want to thank you for giving us this 
opportunity to discuss our views on the critical subject raised by this 
hearing.
    I look forward to returning to this committee in the coming year to 
share some very positive news on LA Metro's effort to bring back the 
manufacturing of mass transit rolling stock to America. With 
leadership, focus and a little help from Congress--I am convinced that 
the golden era of manufacturing mass transit rolling stock in America 
is ahead of us.

    Mr. DeFazio. I thank the gentleman.
    With that I would now turn to the first round of questions, 
as soon as I get back to my questions. I will look for my piece 
of paper here. Here we go.
    So I was particularly alarmed at General Adams' and Mr. 
Cilluffo's testimony regarding the potential for cybersecurity 
breaches.
    I mean, could you just get a little bit more into that 
issue?
    In a major deployment, especially if we have to move our 
tanks, I assume we are tremendously dependent upon the freight 
rail network. I am not sure how much it applies to the 
logistics chain.
    Could you address that at all, General?
    General Adams. Yes, sir.
    Mr. DeFazio. Turn your mic on please.
    General Adams. Let's look at it from the strategic 
perspective, which I appreciate is a good place to start. First 
of all, intermodal transportation is the key here, and we think 
we need to focus on that.
    As you know, and as I said in the testimony, freight rail 
runs through every military base, runs through every American 
city, runs through every depot, every port, and the transfer of 
goods and services and commodities from freight rail to 
shipping is really something that we should focus on from a 
strategic perspective.
    That is where a potential adversary will focus as well. 
First of all, it is a real strength of our freight rail system 
that we have this kind of network that smoothly transports 
military goods, hazardous waste, and all sorts of other 
commodities from the place where they are produced or stored, 
in the case of the military, to ports so that they can deploy 
overseas.
    A strategic adversary will look closely at this as an I&W, 
and it is an indications and warnings problem for them, and 
they are looking closely at our rail network. We should be 
concerned about that from a strategic perspective.
    Mr. DeFazio. Let me. I assume we do not limit the freight 
that goes through the bases. I mean, we may have people 
transporting chlorine through a military base to another 
destination. Is that possible?
    General Adams. Yes, sir, absolutely.
    Mr. DeFazio. Right. And----
    General Adams. And that is one of the reasons--I am sorry. 
Go ahead.
    Mr. DeFazio. Right, and derailment of a chlorine vehicle, 
railcar, is potentially absolutely catastrophic.
    General Adams. Potentially catastrophic, and if I may, 
since our railcars are continually technology improved, one of 
the things the telematics on our railcars do is provide 
positive indication that hatch covers are closed, for example.
    Mr. DeFazio. Sure.
    General Adams. A cybersecurity intrusion into that 
particular technology could give false assurance that the hatch 
cover is closed.
    Mr. DeFazio. OK. All right. Mr. Cilluffo, briefly because I 
have another question for another member of the panel.
    Mr. Cilluffo. I will try to be brief. Two quick points 
here. So we discussed some of the cases where you have seen 
theft of intellectual property and economic secrets, as well as 
political and military secrets.
    On the espionage sets of issues, there is a litany and a 
long list of examples we can turn to in other sectors as well, 
but I think what gets lost is disruptive and/or destructive 
types of attacks, and from a cyber perspective, if you can 
exploit, you can also attack. It all hinges around the intent 
of the perpetrator.
    So if they are in these systems, they can use it for more 
malicious aim than just stealing secrets as bad as that is. So 
basically when you think about the transportation sector, your 
dependence on PNT, on positioning, navigation and timing, 
clocks is 100 percent.
    So GPS and other issues that are maybe outside of what you 
would think of as transportation and disruptive attacks, such 
as jamming or spoofing of some of these systems could really 
take a major toll economically as well as from a national 
security standpoint.
    And I just want to bring one point on the defense side. I 
mean the mission assurance. There is an old adage. Amateurs 
talk strategy. Professionals talk logistics. I think it was the 
Marine Corps that came up with it, but I am not 100 percent 
sure.
    Logistics here is everything, and if you impede the ability 
to project power, you are basically impeding the ability to 
fight and win wars. So this is more than just a homeland 
security set of issues. It is a national security set of 
issues.
    Mr. DeFazio. OK. Thank you.
    Mr. Kahn, I am just a little confused here. We invited you 
to testify, and you were going to, we thought, testify on 
behalf of BYD as a whole, and we have a truth in testimony 
statement, but it indicates you are testifying on behalf of BYD 
Motors.
    BYD Motors is the sales team subsidiary of BYD U.S. 
Holdings. Another subsidiary, BYD Coach and Bus, makes the 
buses.
    So, you know, basically, I am a little confused here. Are 
you here on behalf of the company as a whole or just on the 
sales team?
    Mr. Kahn. Sure. I work for BYD Motors. I am happy to talk 
about BYD Motors. I work hand in hand with BYD Coach and Bus. I 
can answer questions about BYD Coach and Bus.
    Mr. DeFazio. OK. I just wanted to get that clear.
    So BYD recognized in 2017 $338 million in Chinese 
Government grants on its income statement; is that correct?
    Mr. Kahn. Which year was that? I missed that.
    Mr. DeFazio. Pardon?
    Mr. Kahn. What year did you say?
    Mr. DeFazio. 2017.
    Mr. Kahn. I believe that is correct. I do not have----
    Mr. DeFazio. OK. All right. And then the batteries, which 
are assembled here, those are made in China, correct?
    Mr. Kahn. The battery cells are made in China, yes.
    Mr. DeFazio. Yes. So and somehow we assemble battery cells 
here, and we say that is a made-in-America product when it is 
assembled.
    Mr. Kahn. So BYD since we have come here has followed the 
rules of the road when it comes to Buy America.
    Mr. DeFazio. Right. I know, and it is very complicated 
rules, and we will act to clarify the components, subcomponents 
and all of that. It has been gamed before, and you know, it is 
being gamed here.
    Yes, you are following the rules. The rules are defective. 
So if BYD were required to actually source the required amount 
of the vehicle in the United States, you know, by law, would 
they do that or would they just close up shop even with the 
$250 million investment?
    Mr. Kahn. Just for clarity, are you talking specifically 
about the batteries?
    Mr. DeFazio. Well, once we reduce that down to a very minor 
component, you are going to have to source other things here in 
the United States.
    Mr. Kahn. So thank you for the question.
    I think what BYD would say to that would be we would 
evaluate. You know, once those rules were promulgated for 
everyone, we would evaluate it and see the opportunity.
    We certainly, as the demand for battery electric vehicles 
has grown around the world, we have, I believe, plants. I do 
not know if we have actually built them yet, battery cell 
plants elsewhere.
    So if there was a demand in the U.S. for battery electric 
vehicles of the scale necessary to justify building our own 
plant, that is certainly something we would explore.
    Mr. DeFazio. OK. Thank you.
    I turn now to Mr. Graves.
    Mr. Graves of Missouri. I want to go back to Mr. Cilluffo.
    Just drill straight down in, you know, just to be 
straightforward on what this committee can do to better 
integrate cybersecurity and our transportation policy.
    I mean, it is very concerning to me what you said, but just 
shoot it straight out there.
    Mr. Cilluffo. Well, thank you, Congressman Graves, and 
thank you for that question, because I think cyber is treated 
still as a black magic and an art, isolated or independent of 
other critical infrastructure. I think it is actually part and 
parcel with everything your committee is grappling with and 
looking at.
    It is pervasive. It is ubiquitous. So what I would suggest, 
and I am so happy you brought up the national critical 
functions in your opening statement. So marry up the national 
critical functions.
    If you see issues to the national critical functions to all 
of our various lifeline sectors or critical infrastructure 
issues, you need to start getting to a risk-based approach and 
assessing and evaluating risk across modalities of 
transportation.
    So I would be looking at a series of hearings across all 
the different modalities, looking at national critical 
functions, and then racking and stacking and seeing where you 
have some common vulnerabilities that cut across all of those, 
and that is where I think you would put your most muscle and 
weight behind trying to ameliorate the risk.
    The reality is, if everything is critical, nothing is 
critical, but heck, transportation is at the very top of that 
list. If you are not moving, we have got big problems on our 
hands.
    So I would actually make this a broader set of issues that 
your committee can start weighing in, and then there are 
sectoral issues outside of your jurisdiction that you are going 
to have to be able to work with your colleagues in other 
committees just as the executive branch is struggling with some 
of these issues.
    So I think you have a major role to play here. I think I 
would start by matching up the national critical functions with 
the different modes of transportation, racking and stacking 
there.
    And the other concept that might be worth looking at is how 
all of these entities come together. So I had proposed in my 
prepared remarks a testbed because we want to be testing these 
technologies before they are adopted in the market or used in 
the market.
    But we look at the technology through a soda straw. We look 
at it through a very narrow lens. What we really need to be 
able to do is see how it impacts other infrastructures.
    So I think you have got an important role to play. If we 
can help in any way we want to, but I think when you look at 
China, in particular, 2025, almost all of the issues they are 
interested in are in your bailiwick.
    So I think cyber should be not a sidebar issue, not a 
footnote. I think it should be a principal issue your committee 
grapples with.
    Mr. DeFazio. OK. Mr. Graves.
    Mr. Graves of Missouri. I will yield my time to Mr. 
Crawford.
    Mr. DeFazio. OK. With that I turn to Mr. Crawford.
    Mr. Crawford. Thank you, Mr. Chairman. I thank the ranking 
member.
    Earlier today, in fact, concurrently as we speak, the House 
Permanent Select Committee on Intelligence is holding a hearing 
on China's emerging digital authoritarianism and global 
influence operations targeting the United States and its 
partners.
    I am a member of that committee, and I got to stay for the 
oral testimony of four very highly credentialed individuals 
that presented testimony on that topic.
    I would ask the chairman for unanimous consent to enter 
that into the record.
    Mr. DeFazio. Without objection.
    Mr. Crawford. Thank you.
    I think that informs our committee here as well and, as you 
mentioned, on the cyber side in particular. So global influence 
operations.
    Shortly before delivering its first products to Jamaica 
last year, the CRRC corporate Twitter account showed the 
following. I believe we have that on the screen. I will direct 
your attention to the screen. If not, I have the tweet in hand.
    And that tweet reads, ``Following CRRC's entry to Jamaica, 
our products now are offered to 104 countries and regions. So 
far, 83 percent of all rail products in the world are operated 
by CRRC or are CRRC ones. How long will it take for us 
conquering the remaining 17 percent?''
    There is the tweet on the monitor for your review.
    [The information follows:]

                                 
                                 
CRRC Tweet Submitted for the Record by Hon. Eric A. ``Rick'' Crawford, 
 a Representative in Congress from the State of Arkansas, and Ranking 
 Member, Subcommittee on Railroads, Pipelines, and Hazardous Materials

              [GRAPHIC(S) NOT AVAILABLE IN TIFF FORMAT]


    Mr. Crawford. One of those 104 countries that they 
referenced is Iran, by the way, an interesting footnote.
    Mr. Washington, I have a question for you. When you used 
Federal grant funds to purchase CRRC rolling stock for the Los 
Angeles Metro, did you know that it was an SOE hell-bent on, 
quote, ``conquering the global rail market''?
    Mr. Washington. Thank you for the question.
    I cannot say I personally did, but this was the best value 
procurement where two proposers bid on this. We had evaluation 
criteria where CRRC came in number one.
    The evaluation criteria consisted of past performance, 
delivery, experience, technical price, all of those things. But 
I cannot say that I personally knew the SOE.
    Mr. Crawford. Given what we know and what has been shared 
with us in testimony, Mr. Cilluffo has referenced this. It has 
been referenced by the chairman and the ranking member.
    Given what we know and what I just highlighted with regard 
to China's emerging digital authoritarianism and global 
influence operations and how that is extending into the United 
States, and I understand you are bottom line oriented, and you 
have to be. I know that particularly mass transit is an 
expensive enterprise, and you are looking for the best value.
    But given what we know about China's influence operations 
and how they are trying to project that into the United States, 
would it not behoove you to look for other sources that are not 
state-owned enterprises of a country who has really a malign 
influence campaign targeting the United States?
    Mr. Washington. Is that question for me?
    Mr. Crawford. Yes, sir, and anybody else that wants to 
answer that.
    Mr. Washington. Well, sure. No, I stand by our procurement. 
I stand by the process that we used. I stand by the evaluation 
criteria that we used to evaluate. I stand by that.
    Mr. Crawford. OK. Well, given the fact that other taxpayers 
outside of those in the area that you serve, outside the State 
of California, contribute to funding operations like yours, I 
think that we probably in the future ought to take a closer 
look because I think it is incumbent on us to be good stewards 
of taxpayer dollars.
    And I do not really want to go back home to my constituents 
in Arkansas and say that their Federal tax dollars went to help 
a state-owned enterprise of China to access mass transit 
projects in places like Los Angeles.
    So I just think that we should probably endeavor to be 
better stewards, and anybody that wants to comment on that. Mr. 
Kahn, certainly you are welcome to chime in on this as well 
because I think there is probably some explaining that you 
might want to offer on that subject as well.
    Mr. Washington. Mr. Crawford, can I add one other thing----
    Mr. Crawford. Sure.
    Mr. Washington [continuing]. To my response. Standing by 
the procurement does not mean that we will not do our due 
diligence as it relates to cybersecurity. We are looking to 
perform penetration testing on the various systems, the vehicle 
networks, the wireless data communications, all of those 
things.
    So while standing by our procurement and our processes, we 
still stand ready to do our due diligence as it relates to 
cybersecurity.
    Mr. Crawford. That is comforting. I appreciate that.
    Mr. Kahn. Thank you, Mr. Crawford.
    Just to respond to your point, I think Huawei is in a 
different ball because we are not a state-owned entity. We have 
never had state control. We have always been privately funded 
and publicly traded.
    Mr. Crawford. I am having a hard time believing that, but 
that is a conversation for another time.
    General Adams, you made some pretty important observations 
with our freight rail moving through military installations. 
How we move materiel and personnel and things like that are 
certainly of strategic interest to countries like China. 
Wouldn't you agree?
    General Adams. Yes, sir, and in fact, it is one of the most 
important assets we have, is that we can, in fact, move our 
military supplies or military equipment from bases to ports 
effectively because we have a good freight rail system.
    But, on the other hand, that also could be a crippling 
vulnerability if China were, for example, to build our freight 
railcars. They would be able to track them. They would be able 
to know what is on them, and we would lose the ability to move 
our military equipment without observation.
    Mr. Crawford. So I think I am understanding you here. 
Basically, the entry of Chinese state-owned enterprises into 
our freight rail, which is essentially what they are 
endeavoring to tee up, presents a strategic vulnerability to 
us, correct?
    General Adams. Yes, sir. That is absolutely correct.
    And if I may enlarge on that point just a moment?
    Mr. Crawford. Please do.
    General Adams. We also lose the ability to conduct. If we 
only have the assembly operations here for freight rail or for 
transit rail, we lose the rest of the supply chain. We lose the 
R&D.
    Mr. Crawford. An important note. Thank you for that.
    General Adams. And that is important from a standpoint of 
for the future we need to preserve that supply chain here in 
the United States.
    Mr. Crawford. Thank you.
    Mr. Cilluffo, would you like to comment on it as well?
    Mr. Cilluffo. Yes. I think that the point you raised is 
really important in terms of global perception management or 
influence operations, and obviously, this is part and parcel of 
Russia's strategic plan, which they look at cyber.
    We mirror image. We tend to think others look at it the way 
they do, but perception management, psychological operations, 
camouflage concealment and deception, this is all part and 
parcel of some of our adversaries' cyber toolkits.
    And you see that with respect to China as well, and you 
have got two other countries that are starting to ramp up their 
activity, Iran and North Korea. They are by no means at the 
same level in integrating computer network attack and exploit 
into their warfighting strategy and doctrine as the Russians 
and the Chinese are, but what they lack in capability they more 
than make up for with intent, and they are more likely to turn 
to disruptive and destructive attacks.
    At least some of the bigger countries, they have to weigh 
the consequences of some of their bad behavior, which they have 
gotten away with murder, if you ask me, but that is a different 
question.
    But I am glad you brought up the influence operations 
because that is very much part of the cyber discussion we have 
to have. It is more than just hacking into systems.
    If you can actually create the outcome you want without 
doing any harm, you are 10 steps ahead. And if you can induce 
changes in behavior on the good guys' side, meaning we make 
decisions or we lose trust and confidence in our systems or we 
lose trust and confidence in our democracy or our 
transportation, those are big issues to think about, and that 
has to be part of the cyber discussion.
    Mr. Crawford. Thank you.
    General Adams, a final question here. In your opinion, do 
you think TRANSCOM is doing enough to secure freight rail 
movement?
    General Adams. Sir, could you repeat the question?
    Mr. Crawford. Do you think our TRANSCOM is doing enough to 
help secure freight rail movement with regard to military 
operations?
    General Adams. I do not think we can do enough. I know that 
TRANSCOM is diligently working on it and resolutely working on 
it, but I do not think we can do enough.
    I think we should be very concerned about the threat. I 
like the idea of the TIVSA bill that has been dropped in the 
House yesterday. I like it being in the Senate.
    We need to stop their incursion into freight rail 
especially, and I think we have. We are fortunate to have the 
opportunity to do that.
    We will help TRANSCOM if they work hard, but they need as 
much support as they can get.
    Mr. Crawford. Thank you.
    And I thank the panel for their testimony, and I yield 
back.
    Mr. DeFazio. I thank the gentlemen.
    I just want to explain to Members. I went over on my time. 
So we yielded the same amount of time on the Republican side to 
be fair, and now we will go to 5-minute questioning.
    And who is next? Representative Napolitano.
    Mrs. Napolitano. Thank you, Mr. Chairman.
    Mr. Washington, I would like to know what steps you think 
Congress could take in the next surface transportation 
authorization bill to realize your vision of bringing the 
manufacture of mass transit railcars to America, and in your 
case, L.A. County.
    And to follow up, are there challenges with research, 
development and deployment of electric bus technology?
    And what can Congress do to help?
    Mr. Washington. Thank you for the question.
    And thank you for your advocacy as well in the district and 
also for the transportation industry.
    I think the best step that Congress can take is to, one, 
give preferential treatment to mass transit manufacturers to 
base their facilities in America. And, again, I am not talking 
about just assembly plants. I am talking about from soup to 
nuts, to forge steel, to do the things that real manufacturing 
outfits for passenger railcar vehicles do all over Europe, in 
China. We need to do that here.
    So I think that a strong message from this committee to 
say, and Congress to say, that in the next transportation 
reauthorization bill that there will be a priority given for 
those regions that are looking to stand up in our case an 
industrial park that includes the manufacturing facility, that 
includes electric bus manufacturers as well, I think is very, 
very key.
    Also and lastly, enabling local hire and allowing local 
hire to be at least piloted again I think is very, very key to 
making sure that if a manufacturing facility is stood up, that 
local entities that in our case are putting in 82 percent of 
the funding for infrastructure in L.A. County would benefit.
    Mrs. Napolitano. Well, that is very good.
    What incentives do you think Congress might provide to help 
transportation quarters make up the difference for the low bid 
for the foreign company?
    Mr. Washington. I think going through the process, in our 
case I think the difference was maybe $30 million or so, I 
believe, and that is in my testimony. It was not that big of a 
difference.
    We had two bidders, and so if Congress were to consider 
making up the difference, I think that there are other things 
that are in the evaluation criteria that is not just price, 
things like experience in project management and things like 
that.
    So I think that has to be considered as well.
    Mrs. Napolitano. Very good. Thank you, Mr. Washington.
    I yield to Mr. Lipinski.
    Mr. DeFazio. Or actually he has 5 minutes next if you want.
    Mrs. Napolitano. That is fine.
    Mr. DeFazio. Because we did two in a row on the Republican 
side.
    So do you want to do for 1 minute or you can use your 5?
    Mr. Lipinski. I will use my 5.
    Mr. DeFazio. OK. There you go. All right.
    Mr. Lipinski. Thank you.
    Mr. DeFazio. I recognize the gentleman.
    Mr. Lipinski. And so I will not make this too much more 
confusing.
    I want to thank you, Mr. Chairman, for holding this 
hearing. I have been working on this issue, especially Buy 
America, now not as long as the chairman has, but I think the 
fact that the Chinese Government has made very clear in their 
plan for their Made in China 2025 initiative that they want the 
rail manufacturing sector to target.
    I think that should concern us on top of the what the 
ranking member of the Railroads, Pipelines, and Hazardous 
Materials Subcommittee, Mr. Crawford, pointed out, that tweet 
by CRRC.
    You know, conquering the remaining 17 percent of all rail 
in the world, we really need to wake up. We need to understand 
what a threat this is and do something about it.
    We cannot just sit here and talk about it and then years 
from now when it happens say, ``Well, I remember talking about 
that, but, well, it happened.''
    My first question, Mr. Galloway, in Australia, you talked 
about how the freight railcar manufacturing industry was 
eliminated. How quickly could that happen here in the U.S.?
    And I know we have a much more robust domestic market than 
Australia had, but you know, how quickly could you see this 
happening?
    Mr. Galloway. I think a lot of that would depend on the 
level of investment that CRRC or other state-owned enterprises 
would be making here in the U.S. in terms of either 
establishing final assembly facilities, specifically in freight 
rail, which is where.
    [Disturbance in the hearing room.]
    Mr. Galloway. I think a lot of that actually depends on the 
level of focus and investment that CRRC would be looking to 
make to disrupt specifically freight rail, which was the 
example that I was pointing to in Australia.
    I think it could occur in less than 10 years if the 
conditions are right. In Australia the conditions were right. 
Australia recognized China as a market economy, granted market 
economy status that opened a lot of doors of a company like 
CRRC to enter into that market and utilize their tactics to 
displace the market within freight rail.
    There were a lot of other kind of global macroeconomic 
conditions that were taking place. The Australia dollar was 
very, very strong during that period, and so that made the 
purchase of foreign railcars much cheaper, and so they were 
able to acquire CRRC cars at a much lower price.
    And on top of that, Australia was engaged in a trade deal, 
the Chinese-Australian free trade agreement, during that 
period, which also opened up a lot of those doors for a lot of 
disruption within the marketplace.
    I think there are some corollaries that are here in the 
U.S., and some of those specific instances that could 
ultimately open up those doors for that type of disruption here 
in the U.S., and it could span in that same period of time in 
terms of our own disruption.
    Mr. Lipinski. What leverage do you suggest that we use in 
order to prevent that from happening here in the U.S.?
    Mr. Galloway. Well, I think right now there is one lever 
that is being utilized through the section 232, steel and 
aluminum tariffs that help to mitigate some of those price 
advantages.
    However, you know, we are looking at a short-term solution 
to a long-term problem, and the long-term problem is you have a 
company that is owned by a foreign government that is 
supporting that company, and ultimately the levers that need to 
get pulled is a long-term solution to move state-owned 
enterprises, wean them off of government subsidies and 
concessionary financing or tactics that they are using to 
disrupt the U.S. economy and manufacturing.
    Mr. Lipinski. Mr. Paul, do you have any suggestions on what 
levers we can use?
    Mr. Paul. I do. First, a robust spend. As the chairman 
indicated, the Federal Government has not always been a good 
partner. So if there is a stable, long-term market, there will 
be more entrants into it.
    The second is that CRRC is predatory, and we have to 
understand that they now dominate the world rail market after 
being a bit player 20 years ago, and the same thing that is 
happening globally will happen in the United States as they 
drive competition out.
    An incumbent rail maker left Philadelphia after it lost its 
contract there, and we can assume that is going to happen down 
the road.
    So the TIVSA legislation is a start. We should also insist 
on reciprocity. There is no American company that has the same 
opportunities that CRRC or BYD have in the United States.
    We do not have those opportunities in China. China is not a 
signatory to the Government procurement agreement. It can 
discriminate, and it does, against our products, and so we 
should ensure that we have that reciprocity as well.
    Mr. Lipinski. Thank you.
    I yield back.
    Mr. DeFazio. I thank the gentleman.
    Representative Gibbs, 5 minutes.
    [No response.]
    Mr. DeFazio. Mr. Davis. I think he is here.
    Mr. Davis. Can I take Gibbs' time, too?
    [Laughter.]
    Mr. DeFazio. That applies later on.
    Mr. Davis. Actually to make it a little more confusing, I 
am going to yield my time to the gentleman from Michigan, Mr. 
Mitchell.
    Mr. Mitchell. Thank you, Mr. Davis.
    And, Mr. Chair, if I could have Mr. Gibbs' time, too, it 
would be interesting.
    Mr. Kahn, it is a long morning for you, and it is going to 
get a little bit longer. The $338 million in Chinese grants, 
what are the terms of those grants?
    Mr. Kahn. I cannot speak to the terms of those grants. I 
just do not know the answer. I could look into it and get back 
to you.
    Mr. Mitchell. Were the loans from the Chinese Government?
    Mr. Kahn. China set up a number of incentive programs. So I 
know some of them are voucher type programs that are similar to 
vouchers that we can receive in California. Some are, you 
know----
    Mr. Mitchell. With all due respect, Mr. Kahn, I think the 
voucher type programs to support that you get in California and 
from the Chinese Government are a little different. So we would 
like detail in writing to the committee----
    Mr. Kahn. Sure.
    Mr. Mitchell [continuing]. Of what those grants were, the 
terms of those grants, whether they were loans, whether they 
had to be paid back.
    BYD's board of directors, how many members are there?
    Mr. Kahn. I would have to review the annual report. I 
believe it is five, but I would have to confirm.
    Mr. Mitchell. Let's assume you are right. It is five. Two 
of them, let's see, the chairman, Mr. Chuan-fu; then there is 
Zuo. The two founders, as they are worded, own 33.58 percent of 
the company.
    I did a variety of private equity deals, and almost 34 
percent is controlling interest in the company.
    There is one other interesting guy who is on the board of 
directors, making it three, someone from Norinco group, which 
is a state-owned defense company. That is three. Three of five 
means you have control. Math is pretty simple, right?
    Mr. Kahn. Three of five, yes, that would be control, but I 
do not know the gentleman that you just mentioned with Norinco. 
I do not know about that.
    Mr. Mitchell. Well, it is cited here with a footnote. 
Footnote 14 is the BYD 2013 Interim Report. So I am assuming 
the Alliance for American Manufacturing did their homework on 
it. I suggest you may want to confirm that.
    Mr. Kahn. If that is a 2013 report, I do not believe that 
is the 2018 report. So I do not----
    Mr. Mitchell. Well, why do you not detail for the committee 
the ownership, the board of directors--excuse me--of BYD as 
well as the overall organizational structure?
    Because, as the chair noted, you have multiple companies 
and groups, and sometimes that happens in companies, but to be 
absolutely honest with you, we need to make a distinction, in 
my opinion, as we look at this, Mr. Chair, between state owned 
and state influenced.
    Can you share with us the 33.58 percent of the company, 
what the equity value of that when the company was founded? How 
much was that?
    Mr. Kahn. I cannot share, but I can look into that and get 
back to you with that.
    Mr. Mitchell. I have a list of questions.
    Mr. Kahn. OK.
    Mr. Mitchell. The followup question to that is: on what 
terms, what general sources did that money come from?
    Because, you know, to be honest with you, economic 
transactions in China are pretty opaque at best, and I still 
have doubts whether or not the money that founded this company 
came from individual earnings or came through them from the 
Chinese Government.
    And you can paper this all you want in terms of you have a 
union agreement, you have employees. That is great. We want 
employment in America, but if, in fact, whether this is 
technically state owned or state influenced, we have a problem 
here.
    I also serve on the House Armed Services Committee, and 
what is very abundantly clear by the Chinese Government is they 
plan to assume a dominant position in the world by 2025 in all 
aspects, including economic. This is a threat to the security 
of this Nation.
    So let's not dress this up and say that BYD is not state 
owned when, in fact, I want documentation of how this company 
is funded, where the money came from, who the board of 
directors are, this $338 million grant.
    And while the chair and I may have a different perspective 
in terms of how we address this problem, we need to in this 
country address predatory, state-owned entities or state-
influenced entities that are taking jobs away from Americans 
and threatening our national security.
    And unless you prove otherwise in terms of BYD, Mr. Kahn, 
you are going to be on that list of people we have serious 
questions why they are in the United States taking our 
Government money and sending it to China.
    So we have serious questions that I would like to have 
addressed by your company.
    And with that, Mr. Chair, I yield back. Thank you.
    Mr. DeFazio. I thank the gentleman.
    Next would be Representative Sires.
    Mr. Sires. Thank you, Mr. Chairman, and thank you for 
having this hearing, and it is a very informative hearing.
    Brigadier General, I could not agree with you more on the 
concerns that this country should have about foreign entities 
being so involved in our rail system. I really do believe that 
while we sleep, these countries plot, Russia, China, and I am a 
believer of that just about all my life.
    So with that, as we get into these companies, how do we 
track what they are doing? Or we do not.
    Does any entity in the Government keep an eye on these 
people that you know of on what they are doing, whatever their 
involvement is with us?
    General Adams. Sir, thank you for the question.
    I know that our intelligence agencies are busily and 
resolutely working on that very problem, and I am encouraged to 
know that the Congress is also working on that problem.
    This today represents a great moment. I look at the glass 
half full for just a moment. We know and we have awareness of 
the problem, and I think that is the beginning of resolving it.
    I have referred to the TIVSA bill before. I think that is a 
very good step forward, and I appreciate those that have both 
sponsored it and signed onto the bill.
    We cannot solve this problem overnight, but we can 
certainly wake up, as you suggest, and begin to address it 
effectively. We still, even if we stop Chinese incursion into 
transit rail and we prevent Chinese incursion into freight 
rail, we are still going to have some mitigation that we are 
going to need to do because we have got Chinese-made vehicles 
in our country, and we need to do the proper mitigation, 
primarily cybersecurity, to make sure that they do not take 
advantage of us already.
    Allow me to suggest that the other thing we really need to 
do is look at this, and I know this is how you are looking at 
it. This is just one front in a broad campaign.
    China is directed from the top. The Chinese Communist Party 
by the bylaws of the China Railway Rolling Stock Corporation, 
CRRC has to ask the Chinese Communist Party for guidance on any 
of the major operations.
    The number of people on its board of directors who are also 
People's Liberation Army, former People's Liberation Army 
personnel, is large. There is a real overlap between the 
direction of the company and the direction of the Chinese 
Communist Party.
    They do not do anything independently. Fortunately, we live 
in a country where our businesses are independent. We have a 
market economy, and thank God for that.
    But China does not work like that, and I think the first 
realization that we have to have is this is one front in a 
broad campaign.
    Mr. Sires. I also think that we have to make the American 
people aware, more aware so that they become knowledgeable 
about what is going on actually. I just think the American 
people sometimes, it is too late sometimes when they become 
aware of some of these things, and as I look at Australia, you 
know, what happened to them.
    I just want to ask Mr. Washington a question.
    Mr. Washington, what are the problems that you as an 
administrator have dealing with these foreign countries that 
are subsidized; that when you go for a bid, they come in very 
low?
    Now, you are appointed. You have to answer to the people. 
How do you say to the people, ``Well, this guy is 20 percent 
cheaper. We should go to him''?
    I mean, that is a nightmare. You know, having been a former 
elected official myself, and when you take the bids, you know, 
if you take the higher bid, they say, ``Oh, this guy has got to 
have something going with this guy.''
    Mr. Washington. Yes.
    Mr. Sires. You know, so how do you deal with the public and 
say, ``Look. This may be 20 percent cheaper, but the final 
product may cost us a lot more at the end''?
    Mr. Washington. Yes, sir. This particular solicitation was 
a best value, and so we were not just looking at the lowest 
cost or the lowest price, I should say. And so most of these 
that have to do with rolling stock are usually best value.
    So as I mentioned earlier, the evaluation criteria in this 
case looking at past performance, looking at past experience, 
technical compliance, project management expertise, voluntary 
local employment programs, as well, and price, all of these 
things with price being one of six have to be looked at.
    And I would also add that in our case, with this 
solicitation, we had two bidders, CRRC and a South Korean firm, 
Hyundai Rotem. Coincidentally, as the CEO in Denver when I was 
there, I actually selected Hyundai Rotem, and I cannot remember 
if CRRC bid on that.
    But that is reflective of the various evaluation criteria 
on any solicitation.
    So it is tough to look at these kinds of things. You are 
criticized if you take something too high.
    Mr. Sires. If you do not----
    Mr. DeFazio. You are over.
    Mr. Sires. I am sorry. That is my time?
    Mr. DeFazio. Yes.
    Mr. Sires. OK.
    Mr. DeFazio. All right. Sorry. Thank you. Thank you both.
    Representative Bost.
    Mr. Bost. Thank you, Mr. Chairman.
    You know, when we are looking at this, I can see a similar 
situation that occurred in our steel industry. Both industries 
must compete against China state-owned enterprises.
    Now, you can magically say it is not, but the reality is, 
from what the questions Mr. Mitchell brought forward, I think 
it is.
    Now, the solution might be a little different, but the 
outcome is the same. China unfairly undercuts the competition 
and then comes in and dominates the market. We can see that 
with the email that was sent out.
    You know, here in Congress, I worked on a law that would 
improve our anti-dumping and countervailing trade remedy laws. 
In this case, we can request by the industry or we can start 
the Commerce Commission to look into this.
    I am just curious if the industry has started looking at 
this for potential trade by using this law. Mr. Paul, do you 
know that?
    Mr. Paul. I am not aware of any specific efforts with 
respect to transit equipment or railcars, but the component 
parts thereof, absolutely, steel being one of the key values by 
ingredient in railcars.
    And I was just in Granite City the other week, and I have 
seen both the challenges with dumping and then also what can 
happen when you have taken some action and restored some jobs 
there.
    And what I will say, and I think it is worth noting this, 
that both BYD and CRRC made substantial requests for tariff 
relief from both the 232 and the 301 tariffs for equipment that 
they were bringing into the United States.
    And so this is already an issue.
    Mr. Bost. Were they granted the request?
    Mr. Paul. Pardon me?
    Mr. Bost. Were they granted those?
    Mr. Paul. They were not precisely because in the case of 
BYD's request, virtually all of them were products that were 
part of the Made in China 2025 plan, where there is a very well 
laid out set of objectives that the Chinese Government has for 
industry domination. It is there for everybody to read.
    But this is an emerging threat, and as you indicated, in 
the steel market now, the global steel market is so distorted 
by China that it is almost unrecoverable. China makes half the 
world's steel. It does not consume that much, and 5 out of the 
top 10 companies in the world are state-owned enterprises.
    They do not play in market conditions. It has completely 
wrecked the steel market around the world, and you see CRRC 
doing the same thing now in the rail space where, again, they 
were a bit player 20 years ago.
    They are by far the most dominant rail company in the 
world. Bombardier and others are small players now compared to 
China and BYD.
    Again, the ambitions of BYD are to become the world's 
largest automobile maker, and we have the luxury right now of 
not seeing a lot of imported cars from China. That may soon 
change.
    Mr. Bost. Have you thought about bringing those anti-
dumping challenges to the WTO?
    Mr. Paul. To the WTO? No. I find the WTO to be slow and 
incredibly inefficient.
    Mr. Bost. So do I.
    Mr. Paul. From a domestic perspective, I think we would 
want to look at the market conditions to see if there is, in 
fact, a case because, as you know, the criteria are sometimes 
lagging and complicated.
    But, again, the component parts, some of the component 
parts are already subject to specific dumping orders or tariffs 
because of that unfair competition.
    Mr. Bost. Is there a way that you have been able to see 
where we can enhance those through law or does existing 
antidumping language we have suffice?
    Mr. Paul. No. Those laws need to be improved. They need to 
be improved dramatically, and there needs to be, first, the 
opportunity for the Commerce Department to initiate more cases. 
As you know, they are expensive for the private industry.
    There needs to be a much more early warning activation 
system, and you have seen with this administration a lot more 
executive action that is being taken as well.
    And so I do not think that that authority should be 
restricted in any way. In fact, I think the Federal Government 
should be much more assertive about standing up for the 
interests and rights of its domestic industry.
    Mr. Bost. OK. One real quick question because I have got 
just a few seconds left. The Buy America, would it apply to the 
transit projects that receive Federal dollars?
    Do you feel that this is being manipulated to make it look 
like they are not receiving Federal dollars?
    Mr. Paul. Absolutely. The Buy America laws need to be 
reformed. The chairman briefly mentioned this with respect to 
advanced batteries.
    There is a new kind of standard that has been proposed in 
the USMCA that is worth looking at to get more of that battery 
content into the North American, specifically to the U.S., 
market.
    And also, the CRRC and BYD claims with respect to Buy 
America, they should be audited. The inspector general's report 
in Albuquerque indicates that there is very clearly the 
possibility that BYD is not fully meeting its Buy America 
obligations.
    Mr. Bost. Thank you, Mr. Paul.
    Mr. Chairman, I yield back.
    Mr. DeFazio. Representative Espaillat.
    Mr. Espaillat. Thank you, Mr. Chairman.
    And thank you to all the witnesses for your testimony 
today.
    This is a very important conversation that we are having 
today. I also sit on the Foreign Affairs Committee, and just 
last week we held hearings about China's influence in the 
world, particularly developing nations and in Latin America, 
and there they are building ports. They are building rail. They 
are building all kinds of transportation and infrastructure 
projects.
    Of course, when you have control of the ports, there is no 
telling what will go through them.
    They are also looking to control facial imaging and data, 
and so I think they are very crafty and they are out-foxing us.
    So here in the U.S., we have to be mindful of ways in which 
China is undermining not only our competitiveness, but also our 
national security. Chinese state-owned enterprises have made it 
their goal to corner the market in terms of infrastructure, 
whether it is ports or rail, and their involvement in 
constructing rolling stock is of particular concern to me, 
coming from New York City where we have the largest transit 
system in the country.
    FTA regulations require competitive solicitation of rolling 
stock contracts to the maximum extent feasible, but in many 
cases because of Chinese SOE's dominance, transit and commuter 
rail agencies end up having few options to choose from.
    I would like to ask Mr. Washington whether he has 
experienced similar problems in Los Angeles.
    And I would like to ask the other panelists what they think 
Congress can do to promote competitiveness in this area.
    This is a real issue. As much as we can talk about it, I 
think we need to develop a strategy to derail them, no pun 
intended.
    Mr. Washington.
    Mr. Washington. Well, thank you for the question. I hate to 
hear the word ``derailment'' in my business.
    [Laughter.]
    Mr. Washington. But, yes, as I mentioned, we had two 
bidders on this particular contract for heavy rail vehicles. We 
also have contracts with other rolling stock providers, namely, 
Kinki Sharyo, Alstom, Talgo.
    And so there are some, not many, that we have to choose 
from. In our case, we have proven in Los Angeles that these 
are, again, best value solicitations. So we are going to look 
at them very, very closely to determine not just price, but a 
number of other things.
    But there are not many players.
    Mr. Espaillat. What kind of other factors will you be 
looking at besides pricing?
    Mr. Washington. The program management, the past 
performance, delivery of the rolling stock vehicles. In our 
case, the local employment plan; what do they plan to do 
locally in terms of training local folks in the community, 
those kinds of things.
    Mr. Espaillat. Has anybody else had any other experiences 
across the country?
    Mr. Kahn. I would just add, sir, just on the electric bus 
phase, which is different than the rail side, I think right now 
the electric bus space is actually the most competitive. The 
bus market right now compared to diesel or CNG, there are four 
legitimate OEMs that are submitting competitive bids, leading 
to technology getting better and better.
    For example, in New York City, they have got 10 buses up 
and running. Five of them are with New Flyer, five of them with 
Proterra. BYD submitted a bid, was not selected, but there is 
an open and robust competitive process going on now on the 
electric bus space, which is leading to cleaner buses getting 
out on the roads around the U.S.
    Mr. Espaillat. Thank you.
    Mr. Chairman, I yield back.
    Mr. DeFazio. I thank the gentleman.
    Representative Gallagher.
    Mr. Gallagher. Thank you, Mr. Chairman.
    Mr. Cilluffo, could you explain in simple terms to the 
committee the connection between transportation and 
telecommunications?
    In other words, why is 5G and the internet playing such a 
crucial part of this conversation on rail and public transit 
security?
    Mr. Cilluffo. Well, thank you, Congressman Gallagher.
    And I mentioned briefly in my oral that the highways and 
vehicles of tomorrow are going to be paved in silicon as much 
as they are in asphalt, and that is the reality.
    Ultimately, when you think of 5G, it is going to be the hub 
that you have so many other spokes that will connect not only 
transportation; basically all of our lifeline sectors and 
critical infrastructure.
    So if we get that wrong, we are really building some of the 
most sophisticated networks in infrastructure on very weak 
foundations. So I think that the President was right in 
promulgating the Executive order last night to prohibit, in 
essence, Huawei and ZTE from engaging in the market in the 
United States.
    And I might note Australia has already done so. So I think 
from learning some of the hard lessons they learned on the rail 
side, that could have factored into their decisionmaking on 5G.
    Mr. Gallagher. I think part of our challenge is these 
threats, while real, sometimes we talk about them in abstract 
ways. Could you give us perhaps some real-world examples of how 
a smart train or public transit could be compromised or 
weaponized?
    Mr. Cilluffo. Yes. So I mean, I think it was General Adams 
who brought up some of the examples in terms of Wi-Fi, and we 
talked a lot about security, but there are legitimate privacy 
issues here, too, given the use of technologies to monitor 
individuals.
    So I mean, if you can get into the system, it really does 
hinge around what the perpetrator's intent is. So if you are 
exploiting Wi-Fi, which is just one of many avenues to be able 
to get into a system, you can cause some significant harm.
    I am more worried from a national security standpoint. If 
you talk about switching, and if you are talking about rails 
and that is where it goes from a security concern to a genuine 
national security concern.
    You know, I know an amazing and incredibly thoughtful 
chairman of an important commission that I hope can take some 
of this on in the Solarium Commission.
    Mr. Gallagher. I will not ask you to elaborate on that 
further.
    [Laughter.]
    Mr. Gallagher. General, I will get to you in one second, 
but, Mr. Kahn, first--if I have time--if your company was asked 
to conduct espionage in any form under the 2017 National 
Intelligence Law on American citizens using your products, 
would BYD comply?
    Mr. Kahn. BYD Motors would not comply. BYD, to my 
knowledge, BYD would not comply with that.
    Mr. Gallagher. What recourse would BYD have if the Chinese 
Communist Party seized their assets under the 2017 National 
Intelligence Law?
    Mr. Kahn. I do not know the answer to that. I am sorry. I 
can ask and get back to you on that.
    Mr. Gallagher. Thank you.
    Is your understanding that the judicial system in China is 
independent of the Chinese Community Party or subordinate to 
it?
    Mr. Kahn. I am not an expert on the judicial system in 
China.
    Mr. Gallagher. OK. And, General Adams, just to circle back 
to with the time remaining what I asked Mr. Cilluffo about, 
could you sort of add to what you have already laid out in your 
testimony, real-world examples of smart trains, public transit 
threats, any drone threats that you see in transportation going 
forward?
    Help us really tease out that connection between the future 
of the internet and the future of transportation.
    General Adams. One of the things that we want to do with 
our industry and its vulnerability to cyber intrusion, for 
example, is reduce the attack surface.
    Specifically, we know the Chinese have technology, such as 
facial recognition technology and intercept technology. If we 
want to let them make our railcars, transit or freight, we are 
going to expose ourselves to their intrusion using facial 
recognition technology.
    Now, I have commuted to the Pentagon a lot over the past 40 
years. I do not want my face recognized getting on and off or 
any others who serve the country every day, whether they are in 
uniform or civilian clothes. We do not need to have Chinese 
facial recognition technology on a transit railcar going to the 
Pentagon or anyplace else in Washington, DC, or I would enlarge 
that to Boston or L.A. or Chicago or Atlanta.
    But we have got to be reducing our attack surface all the 
time because they will exploit it.
    Mr. Gallagher. Thank you.
    And I am going to run out of time, and I apologize. We have 
a very vast number of witnesses here. So I cannot get to every 
one of them, but I yield back.
    Thank you, Mr. Chairman.
    Mr. DeFazio. I thank the gentleman for his questions.
    With that, Representative Allred.
    Mr. Allred. Well, thank you, Mr. Chairman. I want to thank 
you and the ranking member for holding this important hearing.
    I am also a member of the Foreign Affairs Committee, and as 
has been mentioned, we have taken a close look at Chinese 
actions around the world recently, and I am happy to see us 
taking a close look at Chinese economic expansion into our own 
industries seriously now.
    And I want to say that I welcome the legislation introduced 
by my colleague Harley Rouda and my fellow Texan, John Cornyn, 
in the Senate, the Transit Infrastructure Vehicle Security Act 
to prevent Federal funds from being used to buy transit 
railcars or buses manufactured by Chinese-owned companies.
    I welcome that and look forward to supporting that.
    And I want to recognize Trinity Industries, which is here 
today, which is headquartered in my hometown of Dallas and has 
provided good-paying American jobs for 85 years as a leading 
manufacturer of railcar products and services in North America.
    And I want to begin with Mr. Kahn here. The United States 
is a top exporter of technology products and services, an 
industry powered by innovative, forward-thinking entrepreneurs 
and a robust network of some of the world's top research 
institutions.
    In your written testimony, you mention some of the 
partnerships that BYD has made with community colleges in 
localities to diversify and bolster its manufacturing 
workforce.
    Has BYD also partnered within the U.S. research 
institutions to develop products sold within the U.S.?
    Mr. Kahn. Thank you for that question.
    I think that is a really important thing that a lot of OEMs 
are looking at.
    I do not believe we have worked with a specific research 
institution, but we have worked with startup companies, as I 
mentioned earlier, on the inductive and wireless charging 
space. We are the only OEM that has got a number of projects 
where we use wireless charging as a way to increase the range 
of our electric buses so that customers do not have as much 
range concerns as they might otherwise.
    So those are two companies that came out of the U.S., one 
out of Pennsylvania, one out of the State of Utah where I 
actually used to work, but these are companies that are now 
being able to take the technology that they worked on with BYD 
and sell it to other agencies, but also abroad and bring it to 
other areas, such as the port environment and other areas where 
they operate.
    That is technology that if there was not an OEM partner, 
those companies would have had a lot of trouble raising funding 
and developing that technology.
    So it has been a great partnership that creating that 
competitive, innovative space that we have right now in the 
electric bus space in the U.S. has been vital for that.
    Mr. Allred. OK. I want to turn to General Adams very 
quickly.
    In your testimony you describe the deep ties between CRRC 
and the Chinese Government, and my question is: would CRRC be 
able to resist an order from the Chinese Government to take a 
malevolent action against the United States rail system?
    General Adams. Sir, if I understand the question correctly, 
would the CRRC take orders from the Chinese Government?
    Mr. Allred. That is right.
    General Adams. No question about it. They are already doing 
that, and it is because not only is the directorship 
interlinked, but they are required by bylaw to solicit the 
opinion of the Chinese Communist Party for any decisions 
regarding company operations.
    Mr. Allred. Well, I would like you to elaborate a bit. My 
colleague was just asking you about this as well, the 
statements you made in your testimony about the Chinese 
dominance of the U.S. rail system would turn the system from a 
bedrock strategic asset into a potentially crippling 
vulnerability for us.
    If you could, elaborate on your thoughts there just a 
little bit.
    General Adams. Yes, sir. Rail, especially freight rail, is 
the major way we move military supplies within the country. It 
is also the way we deploy military supplies from the bases in 
the country to the ports for deployment overseas.
    We could not do without it. We move tanks. We move trucks. 
We move everything that is of military significance that 
requires transportation because rail is, one, it is effective 
and, two, it is the least expensive way to move things in the 
country.
    That is a great asset for us, but if China were to make our 
railcars, if China were in control of not only the railcars, 
but the system itself, that would turn it into a strategic 
vulnerability because they would be able to monitor our 
movements. They would be able to receive advanced indication 
and warning of our movements. They would know what our plans 
were by knowing in detail what is on the cars.
    So instead of something that would be to our benefit, it 
would be something that we would be giving the enemy, potential 
adversary, I should say, a warning about what we are doing, and 
they would be able to monitor our movements.
    Mr. Allred. Well, in the foreign affairs space, I think we 
are seeing a change to great power competition, and I want to 
commend this committee and the bipartisan approach that we are 
having to this to try and counter what I do see as, you know, a 
new competition for us, something we will be keeping our eye 
on.
    I do not want to stifle innovation. I still want to have 
trade and bring in new ideas, but I think this is something we 
need to keep an eye on.
    I want to thank you for your testimony and for helping 
share this with the American people today.
    Mr. DeFazio. I thank the gentleman.
    Representative Balderson.
    Mr. Balderson. Thank you, Mr. Chairman.
    Thank you all for being here this morning.
    My first question is for Mr. Paul and Mr. Galloway. As 
noted in your testimonies, the manufacturing of public transit 
freight railcars and rolling stock employs over 21,000 American 
middle-class workers and supports nearly 190,000 jobs here in 
the United States.
    Right now CRRC is consistently bidding 20 to 50 percent 
lower than nonsubsidized private-sector companies. Do you 
believe that once CRRC undercuts all other competition, that 
their current assembly jobs will be kept in the United States?
    Mr. Paul. Perhaps in name only, and that is the situation 
that we are operating under now, Mr. Balderson, is that there 
is final assembly occurring in the United States, turning the 
screw, adding very little value, adding some value, but a lot 
of that content is coming from Chinese imports.
    In the process by CRRC underbidding all these other firms, 
and again, many of them have foreign investment, but they have 
to operate under market conditions. They are driving out 
competition.
    And any economic textbook will tell you once a firm 
achieves a monopoly and/or a monopsony, the price is going to 
rise. The quality is not necessarily going to improve, and 
ultimately the victims of that are going to be transit riders 
and transit systems when there is not that robust competitive 
system in the United States.
    The Australian example is a good one because Australia had 
a domestic rail industry. It now has virtually none. Ninety-
five percent of the market is controlled outside of Australia.
    In fact, the one Australian firm went to China to make its 
products and bring them back in.
    So we are not Australia, but I think there is a lot of 
lessons to be learned there, and it is important to remember 
that most of the jobs in railcar assembly are outside of those 
assembly facilities. They are in the steel, the wheels, 
everything else that goes into making that vehicle.
    That is where the preponderance of jobs is, and so if you 
have a company like CRRC that is not necessarily committed to 
that domestic manufacturing footprint and to expanding it, you 
are going to cost jobs in the supply chain.
    Mr. Balderson. Thank you.
    Mr. Galloway, would you like to add?
    Mr. Galloway. Yes, I will just add a couple of notes.
    I think it is important, and I agree with everything Mr. 
Paul has said. I think the key to understanding some of the 
potential disruption here is the fact that the U.S. domestic 
railcar and rolling stock manufacturing sector has very, very 
deep supply chains within the U.S.
    And it covers every State, and it covers hundreds of 
congressional districts, and so there is a lot of value that is 
being retained here in the U.S., and that even includes the 
private-sector foreign owners of rail rolling stock 
manufacturing. They have made significant investments here in 
the U.S. in our domestic supply chains. So that value is being 
retained.
    The problem you are running into now is when you have a 
foreign SOE that is coming in here, and they are disrupting 
that by pulling that value-added supply chain out of the U.S. 
and moving it back to their home country because they are not 
making those investments into the U.S. manufacturing process. 
That is where you are going to find a lot of that huge amount 
of disruption.
    But going back to my earlier comments, even under the 
existing Buy America provisions, you are still finding a net 
loss under SOE type of market activities and conditions.
    Mr. Balderson. Thank you.
    And, Mr. Paul, my last question to both of you also, but 
you kind of touched on it with the Australia issue.
    If Chinese state-owned enterprises are ultimately 
successful in driving out and undercutting our competition just 
like they did in Australia, how long do you think it would take 
for America's railcar manufacturing and industry to bounce 
back?
    Mr. Paul. Obviously, there are a lot of factors that go 
into that, you know, public investment and many other issues. 
But the roadmap is pretty dire.
    And we have seen what has happened in other industries of 
the United States that have been targeted through the 5-year 
industrial plans or the Made in China 2025.
    And as I mentioned in my testimony, this is the tip of the 
iceberg. The procurement market is not insignificant, but the 
more significant market, I think, for these companies is the 
U.S. automotive market, and that is of serious concern because 
that is the very heart of American manufacturing.
    One out of about every eight or nine jobs is connected to 
auto manufacturing in the United States, and so I look at the 
playbook, and I am very concerned unless the committee and the 
Congress take some action.
    Mr. Balderson. Thank you.
    Mr. Galloway, do you want to follow up or you are fine?
    Mr. Galloway. I am good.
    Mr. Balderson. Thank you very much.
    Mr. Chairman, I yield back my remaining time.
    Mr. DeFazio. The 2 seconds.
    Representative Rouda. Is he here? No. OK. Oh, there he is. 
Sorry. God, Harley, you are way down there. I forgot we had so 
many rows.
    Mr. Rouda. Thank you, Mr. Chairman.
    And thank you, Chairman and Ranking Member, for holding 
today's hearing on such an important topic and for the guidance 
and protecting American manufacturing jobs.
    I recently introduced the House companion of S. 846, the 
Transit Infrastructure Vehicle Security Act, TIVSA, that would 
prevent Federal transit dollars from being used to procure 
Chinese transportation assets.
    The free market principles of capitalism are how the United 
States of America became the most powerful country in the 
history of the world. Yet we know nonfree market economies and 
their state-owned enterprises, SOEs, are a direct threat, a 
national security threat to our country's commitment to fair 
and open competition.
    Why? Because SOEs undermine free markets by benefitting 
from government funding and preferential treatment to undercut 
the competition.
    As part of the Made in China 2025 initiative, China has 
dramatically underwritten its rail and bus industries to the 
tune of billions of dollars through direct funding and other 
subsidies.
    As this committee considers aggressive investments in our 
infrastructure, we must ensure we are not investing in rail and 
bus stock that could jeopardize our national security or 
disadvantage companies based in the United States who operate 
without the benefit of billions of dollars of direct government 
funding.
    I support fair trade, as do all the Members in this room 
and on this committee, but there is nothing fair about forcing 
American rail and bus stock manufacturers to compete with 
companies who receive billions of dollars from their government 
in order to win contracts in the United States. And American 
tax dollars should not be used in that means.
    I am proud to work with a bipartisan, bicameral group to 
introduce legislation to hold China accountable because we need 
to do all we can to support American workers and American-made 
products.
    I would like to thank Representatives Ryan, Holmes Norton, 
Garamendi, Crawford, Perry, Granger, and Weber for joining me 
as original cosponsors of the House version of TIVSA, and I 
also want to thank Senators Cornyn, Baldwin, Brown, Crapo, and 
Shelby for their work in the Senate.
    I have a few questions. I will start with you, Mr. 
Galloway.
    Australia's freight railcar manufacturing has all been 
decimated, but decimated by what has taken place there with the 
Chinese SOEs; is that correct?
    Mr. Galloway. That is correct.
    Mr. Rouda. And I think I read somewhere that we are looking 
at 65,000 American jobs could be at risk if we continue down 
this process, if you want to take that question or the general 
as well.
    Mr. Galloway. Our research at Oxford Economics confirms 
that the freight rail sector, just as a sector in itself----
    Mr. Rouda. Just that sector alone?
    Mr. Galloway [continuing]. Is freight railcar 
manufacturing, that is correct.
    Mr. Rouda. Is that direct and indirect jobs?
    Mr. Galloway. That would be direct and indirect and induced 
effects. That is correct.
    Mr. Rouda. What is the cost, GDP?
    Mr. Galloway. The cost to GDP, it is in my notes. I believe 
it is about $7 or $16 billion. I do not have on hand, but it is 
significant.
    Mr. Rouda. Can you talk about what the ripple effects are 
through our economy if we use American tax dollars to fund 
SOEs? The impact of losing those jobs, losing the $7 billion of 
GDP, and what the ripple effects would be through our economy?
    Mr. Galloway. Yes, so the ripple effects would be 
substantial because you are dealing with supply chains that are 
domestic. So you have the suppliers of all sorts of parts and 
components, systems and subsystems that are manufactured here 
in the United States.
    It is those jobs are strong middle-class, middle-income 
jobs in the U.S. that would be displaced as a result of foreign 
competition that would be coming in and underpricing and taking 
that market share away from good corporate citizens and 
producers of products here in the United States.
    Mr. Rouda. And, Mr. Paul, what is the total level of direct 
investment by the Chinese Government into these SOEs?
    Mr. Paul. The value of the 51,000 Chinese state-owned 
enterprises is $29 trillion. The amount of money they receive 
is almost incalculable because it is through every policy 
aspect that you can imagine, from preferential tax treatment, 
low-interest loans, a protected home market, labor and 
environmental regulations that are not complied with 
domestically, a misaligned currency from time to time, and the 
well-established technology transfer and intellectual property 
theft.
    And so attracting the R&D and development is well below the 
cost of doing that in the United States, and so it is the 
world's largest racket.
    And if China chooses to do that, I guess that is the 
Chinese Government's prerogative, but there is no reason 
whatsoever why American taxpayers should have to subsidize 
that. So I am glad that you introduced the legislation. We are 
proud to endorse it.
    Mr. Rouda. So American companies and any companies that 
follow fair and free trade in a capitalistic process, you 
invest money, you have revenue, you have expenses, and you have 
a return to shareholders.
    Yet these SOEs do not work under those rules, right? There 
is no obligation for return to shareholders. In fact, by making 
these massive investments in these companies, they can 
underprice any other company out there in ways that it is 
absolutely impossible for us here in the U.S. and elsewhere----
    Mr. DeFazio. I know the gentleman feels very passionately 
about the issue, but he is over time.
    Mr. Rouda. Thank you, Chairman.
    I yield back.
    Mr. DeFazio. I thank you.
    And I would turn to Representative Palmer.
    Mr. Palmer. Thank you, Mr. Chairman. Thank you for holding 
this hearing.
    Mr. Washington, how much lower in dollars was the CRRC bid 
versus Hyundai?
    Mr. Washington. I believe it was about $35 million, sir.
    Mr. Palmer. What would that be as a percentage of the 
difference? Put that in percentage terms. What percent lower 
than Hyundai?
    Mr. Washington. I would say probably about between 5 and 10 
percent or so.
    Mr. Palmer. Given what we have heard today, I am amazed 
that we are even having the discussion about doing business 
with China.
    General Adams, the Commander of the U.S. Southern Command 
says Beijing is using this information and debt diplomacy to 
help Maduro hold on in power. We know that Xi has pledged $250 
billion in investment and infrastructure and energy, 
infrastructure in Latin America.
    There was this scandal involving a company called Otabek 
that they have taken over their projects in Colombia, Peru, 
Brazil, the Dominican Republic.
    Does it make sense to you that we would allow China to come 
in?
    You have already made the case. I am just going to ask you 
to repeat it, for how problematic this could be and how 
strategic it could be for China to get into our freight system.
    General Adams. Sure. Thank you for bringing up the foreign 
element of this and the influence element of this because one 
of the ways that China does make its influence known in the 
world is they work in areas that need their technology, that 
need their financial support, and then they use that as 
leverage for all sorts of things.
    Now, part of my service was in Africa, and this was 15 
years ago.
    Mr. Palmer. There are 10,000 Chinese-owned companies doing 
business in Africa today, and they are in every sphere you can 
think of, infrastructure, energy, small and medium-size 
businesses, telecom.
    General Adams. They are assiduous about developing 
influence in the developing world. They know that the 
developing world wants their help, and they can provide it at 
cheap cost and develop as much money as they want.
    It is a very important point of leverage for them to have 
these friends and these influences in the developing world.
    Sir, if I may the other part of that is what they do when 
they buy this influence is they develop the supply chain 
entirely in China.
    Mr. Palmer. Right.
    General Adams. The Chinese are masters of vertical 
integration. They want not just to sell their goods. They want 
to make the goods in China, and if they can sell to the 
developing world, they are not going to put the supply chain 
there. They are going to keep it back in China, which means 
that they grow their industry with R&D, intellectual capital, 
basic research.
    And once they have got the industry, they use that, again, 
for global domination.
    Mr. Palmer. But they have got partners that are playing in 
this game with them as well where they might not manufacture 
the steel pipe or whatever it is they are selling. They will 
provide the material to do that in, say, Thailand or someplace 
like that and not have to pay any duties on it.
    So they have these agreements that are undermining not only 
our interest, but the interest of other countries.
    I want to move. You brought up the technology, and, Mr. 
Cilluffo, my concern, too, is when we are talking about China's 
expertise in building these electric vehicles and others, how 
much of the technology that they are using is pirated from the 
United States?
    Mr. Cilluffo. A great question because, I mean, if you look 
in totality, and I think it was Mr. Bost who brought up the 
question earlier about steel. The first big indictments were 
about 5 years ago where you had five PLA military officers 
indicted by the U.S. Government, and they were using state-
owned enterprises to achieve industrial and economic espionage.
    When we start looking at autonomous vehicles, that is so 
critical to our society, to our country and the great State of 
Alabama and elsewhere. So we need to get that right. I would be 
willing to bet you if you were to look in context that it is 
not all originally made in China.
    Mr. Palmer. Oh, I go back to my opening comment about why 
we are even having a discussion about allowing China to play in 
our freight space, considering how we, I think, have been 
asleep at the wheel to a certain extent with them having 
control of the Panama Canal and other strategic footholds that 
they have established in Central and South America.
    Thank you for your indulgence, Mr. Chairman. I yield back.
    Mr. DeFazio. I thank the gentleman for his questions.
    Representative Fletcher.
    Mrs. Fletcher. Thank you, Mr. Chairman, and thank you, 
Ranking Member Graves, for holding this important hearing 
today.
    Thank you to all the witnesses for taking time to testify.
    It has been clear here from the testimony today that these 
state-owned enterprises, Chinese state-owned enterprises have 
an unfair advantage in the bidding process for public rail 
projects and that we have a real situation on our hands of 
addressing a number of potential impacts as they continue to be 
engaged in this market.
    Certainly if they can corner the market and drive domestic 
companies out of the business, we may not see these savings in 
the long term that we are seeing now in some of this bidding.
    And beyond that, I think that there are a lot of national 
security and other concerns that your testimony has raised.
    General Adams, I wanted to ask you specifically. In your 
written testimony, you explain that the contracts that the CRRC 
won for the U.S. metropolitan transit projects include the 
delivery of trains that contain Wi-Fi systems, automatic train 
controls, passenger counters, surveillance cameras, and other 
technologies that will be thoroughly integrated.
    In an era where Americans are increasingly concerned about 
privacy and data privacy and artificial intelligence, can you 
talk a little bit about how the Chinese Government could use 
some of the advances in artificial intelligence and facial 
recognition to extract even more value out of its investment in 
the U.S. transit systems?
    General Adams. Thank you very much.
    The point of having technology on our trains is ultimately 
efficiency and safety, which means that we welcome the 
inclusion of technology in our transit system trains, in our 
freight rail trains. We want more of it, not less.
    We are not Luddites. We like technology. China knows that, 
too, and in fact, their technology is advanced. They are not as 
good as we are, but they are very good, and they know that they 
can answer our requests for proposal for building transit 
railcars, in particular, like WMATA is soliciting. They know 
they can satisfy that, and we want those requirements to be 
satisfied.
    But we do not want to, as I go back to, we do not want to 
enlarge our attack surface, and if we allow them to build the 
cars that have this advanced technology, we are exposing 
ourselves to the maximum amount of intrusion, and they will do 
whatever they can.
    They are very interested in tracking the movement of the 
cars. They are very interested in tracking the people that are 
on the cars. When it comes to transit rail, it is a clear 
problem for Washington, DC, because we all ride the Metro.
    But when you talk about the freight rail system, I think 
the problem gets even more intense because we are talking about 
tracking the movement of sensitive goods, hazardous waste, 
toxic chemicals and so forth. We do not want to let China know 
where those cars are.
    If they go into a high-threat urban area, for example, the 
last thing we want is for China to manipulate the controls on 
the hatches, either give a false read or give a spoofing read 
so that we think the hatches are open or closed. They can do 
whatever they want, if they have the control of the telematics 
on the railcars.
    So to sum up, the exposure that we have to technology is 
something that we actually welcome. However, at the same time, 
we want to make sure that we do not want to have an attack 
surface that a potential adversary could exploit.
    Mrs. Fletcher. And just as a followup, what kind of 
safeguards, if any, do we have now to prevent that information 
from being utilized or what do we have in place?
    General Adams. We do have standards for cybersecurity. I 
think we need to strengthen them, and because so much of 
especially the transit cars are property or bought by the local 
and the State governments, we need to help the State and local 
governments develop greater, tighter cybersecurity standards.
    So there is a lot of work to do on that. Certainly, the 
TIVSA bill is important because the best way to manage risk is 
to avoid it. We do not want to use Federal dollars to purchase 
Chinese railcars. Let's avoid the risk. Let's not let them do 
it.
    Mrs. Fletcher. Thank you very much.
    I yield back my time.
    Mr. DeFazio. I thank the gentlelady.
    We now turn to Representative Katko.
    Mr. Katko. Thank you, Mr. Chairman.
    And thank you all for being here.
    Unfortunately, this is a concern that is compounded by the 
cyber threat, and I am well aware of that through my role as 
ranking member on the Committee on Homeland Security's 
Subcommittee on Cybersecurity, Infrastructure Protection, and 
Innovation, and it really is stunning to me that, number one, 
we are not good stewards of our cyber systems in the United 
States, and we do not always anticipate the vulnerabilities.
    And then we compound that by taking one of the worst actors 
in China and giving basically free access to the movement of 
millions of people and all of the implications that has.
    So I am very concerned about that. In my previous life, way 
back when I was starting out as a lawyer, I was an antitrust 
lawyer, and that sure sounds like predatory pricing to me to 
price everybody out of the market, and that sure sounds like 
they are dumping in our market, too, basically, products 
because of state-support and government-owned entities.
    But I want to focus on a cyber threat and all the threats, 
and I want to use a case example from something that is going 
on right now, and that is what they are doing in New York City.
    Governor Cuomo announced in May of 2017 that the MTA would 
launch the Genius Transit Challenge, a grant program to 
challenge companies and individuals to develop innovative 
solutions to improve the New York City subway system.
    On March 9th of last year, they announced that the winners 
of the grant program would include--you guessed it--CRRC, which 
invested $50 million of its own funds to develop a new subway 
car for the MTA transit system, despite the absence of any 
ongoing procurements.
    The railcar would include modern train control technology, 
Wi-Fi, and other systems that could be susceptible to 
cyberattack.
    So, Mr. Cilluffo, if you could start and if we have time, 
General, could you tell me based on that fact scenario, which 
is happening, what your concerns are?
    Mr. Cilluffo. Big, big concern. I mean, firstly, we 
discussed this threat that China poses from a cyber 
perspective, and quite honestly, we have not levied 
consequences or incurred costs for bad behavior. It seems like 
we are doing quite the opposite if we are rewarding bad 
behavior with winning potential contracts in the United States.
    So CRRC has to be looked at in the broader context of what 
we have seen in other sectors, in other environments, and I 
think that that is important.
    The bottom line in all this is we have let the bad guys 
have run of the field, and I think we need to change that. You 
have done some amazing work historically as a prosecutor, and I 
do think we need to start prosecuting some of these bad actors.
    But we need to bring other instruments to bear as well, be 
those economic and in some cases maybe even military, but at 
the end of the day, we have yet to articulate a deterrence 
strategy to dissuade, deter, and if need be, compel bad 
behavior.
    And amidst all of this, you have got economic levers that 
we are just not minding the store. So as a former New Yorker, I 
really hope that we do not continue.
    Mr. Katko. I appreciate your comments.
    And, General, can you focus a little bit more?
    I understand the problem, but focus more on this particular 
situation. What could go wrong with the Chinese railcars in New 
York City in the current fact pattern?
    General Adams. The most effective cyberattack is one we 
never know about, and the sooner we know about it, the least 
effective it is.
    They have succeeded in flying under the radar, to use 
another military term, for a long time. We do not even know the 
extent of their intrusion. In fact, the minute that we find out 
about it is going to be too late.
    Mr. Katko. Too late.
    General Adams. That is the problem that really concerns me. 
We have already seen how they conduct business. They conduct 
business under the radar, surreptitiously, without raising any 
concerns.
    And again, look at the glass half full. This hearing is a 
wonderful way to shine some light on the situation, and I 
appreciate the questions.
    But I think we need to be much more resolute and diligent 
even than we are today. I think I know our intelligence 
agencies are working on the problem, and I presume that you 
have heard some of their concerns. I am happy that they are and 
have great confidence that they are doing resolute work on this 
issue.
    But we in the public also need to know that we are taking 
this issue seriously. State and local governments do not have 
access to that information. They are making decisions, I am 
sure, in good faith, but in the blind, and I think the more we 
can tell about the incipient and insidious threats that we have 
from China and the way they exploit our technology for their 
own purposes the better off we are going to be.
    Mr. Katko. I thank you.
    I yield back my 7 seconds, Mr. Chairman.
    Mr. DeFazio. I thank the gentleman. We will use it wisely.
    I would now turn to Representative Brownley.
    Ms. Brownley. Thank you, Mr. Chairman, and thank you for 
holding this hearing on the impacts of state-owned enterprises 
in the transit and rail industry.
    Throughout my career in public service, I have supported 
Buy America and Buy America laws. In fact, I consistently 
cosponsored legislation to improve these laws, and I continue 
to believe we must strive to do everything possible to promote 
jobs in manufacturing in our country and in California, which 
is my home State.
    Lancaster, California, is home to one of BYD's 
manufacturing facilities. It employs 900 individuals. Lancaster 
is very close to my congressional district and probably employs 
many of my constituents. I have heard from the sheet metal, 
air, rail, and transportation workers' unions that represent 
most of these employees, and they have raised real concerns 
about the loss of jobs should BYD be prohibited from doing 
business with our local transit agencies.
    I am also concerned about how this issue relates to 
addressing climate change. In California, we have passed a new 
law requiring transit agencies to transition to zero emission 
buses by 2029. I believe we should pass similar legislation at 
the Federal level, and I have introduced the Green Bus Act to 
accomplish that purpose.
    I hope, Mr. Chairman, that we can look to calibrate a 
solution as it relates to transit and to transit only, and to 
improve Buy America, and I hope we can distinguish between bad 
actions of state-owned companies and investments that create 
good jobs and help us address climate change.
    And, Mr. Chairman, I hope we can work together to ensure 
all these issues are fully debated and considered before moving 
forward.
    And finally, I would just like to say to my colleagues on 
the other side of the aisle China is investing in clean 
energies in the United States because China's leadership knows 
our cities and counties want to move to a clean economy, and 
they want to move to a clean economy as quickly as they 
possibly can.
    So let's be clear. China's strategy fits very neatly into 
their Made in China by 2025 plan to become the world 
manufacturing power in 10 years. So we need to take the lead on 
clean energy.
    So I have gotten that off my chest, and I would like to ask 
Mr. Paul, and this question is directed at transit and not 
rail.
    Is there a solution, a calibrated solution, that does not 
simply just require creating a new U.S. manufacturing here in 
the United States?
    Mr. Paul. It is a good question, and I will say I come at 
this from the perspective of my background. I was a CWA member, 
a shop steward. I represented workers at the AFL-CIO. I have 
deep concern about the dignity of work and about the future of 
work in the United States.
    I think there does need to be a level playing field, and I 
think that BYD as a corporate entity owes some answers about 
some of its subsidies and what have you.
    I do think, and I agree with you that electrification is 
the future and that we ought to be a big part of it and 
investing in it as well. I think one way to achieve that goal 
is to have a robust infrastructure investment so that there are 
more companies that know that there is a sustainable, large 
enough market for them to make long-term investments in their 
workers and capital in the United States, and so I will say 
that.
    I do not think it is a question of pitting the workers in 
Lancaster against everybody else. We are all in this together, 
and I do believe that there is a solution.
    I also believe that every company needs to play by the 
rules, and those rules need to be strictly enforced.
    Ms. Brownley. And do you believe in this notion of 
electrification being the future, and that we are at a climate 
crisis, and the quicker we can get there the better off we are 
going to be and the world is going to be?
    Mr. Paul. I drive a union-made, Chevy-made Chevrolet Volt. 
I am part of that. I totally agree with you that 
electrification and other sorts of advanced energy forms, and 
there may be some transitions as well, but we have to get there 
as well. I completely agree with you.
    Ms. Brownley. Thank you very much.
    And I see my time is up. So I will yield back, Mr. 
Chairman. Thank you for the time.
    Mr. DeFazio. I thank the gentlelady.
    Now Representative Babin.
    Dr. Babin. Sir, thank you so much, Mr. Chairman.
    This is a very, very valuable and revealing hearing. It 
shows just how serious the threat is not only in the 
transportation issue, but many, many other issues that our 
country is facing. Thank you for having this.
    Mr. Cilluffo, I would like to ask you a question. I want to 
say thank you to all of you witnesses. It is valuable 
testimony.
    Mr. Cilluffo, I appreciate what you said in your testimony. 
Quote, ``to undercut America's competitiveness is to damage the 
engine that powers our national security.'' Well said.
    To allow the Chinese to undermine our otherwise well-
functioning, free markets, undercut American competition, and 
jeopardize our national security is a travesty. And I have 
become aware recently of foreign state-owned enterprises 
attempting to enter into the U.S. market of passenger boarding 
bridges, and I personally have a number of cyber and data 
privacy concerns in response to some technologies that they are 
proposing, like facial recognition and others.
    So in light of that, should the same concerns that are 
being raised about Chinese-owned or subsidized freight and 
passenger rail companies also be raised in the context of other 
critical transportation infrastructure, including aviation 
infrastructure?
    Mr. Cilluffo. Thank you, Mr. Congressman.
    Without a doubt, I think it is important to look at it 
across all modes of transportation and even beyond because 
different modes of transportation are dependent upon critical 
infrastructures outside of that particular domain.
    Take PNT, GPS, some of the timing signaling, I think it is 
very important that you look at it beyond that.
    And one thing on the facial recognition piece that you 
raise, I mean what did not come up yet today was also they were 
the perpetrators behind one of the biggest hacks of all time, 
of OPM. Everyone with security clearances, match that up with 
fingerprints and then facial recognition, and you have got a 
pretty big privacy nightmare on our hands.
    Dr. Babin. Absolutely. All right. Well, thank you so much.
    And, Mr. Galloway, as you know, China's Made in China 2025 
initiative targets 10 major industries for global domination, 
covering a range of critical industries such as rail equipment, 
aerospace, maritime equipment, and many others. China's plan 
involves far-reaching state support for these industries, 
offering government subsidies, below-market financing, and a 
range of other tools to advance China's state-owned entities at 
the expense of domestic companies right here in the United 
States.
    In your opinion, what long-term solutions should the United 
States implement to respond to China's anticompetitive 
behavior?
    Mr. Galloway. I think the challenge is long-term solutions 
really reside in getting the state-owned enterprises to conform 
to good corporate behavior and level the playing field here in 
the U.S.
    I think from a policy perspective it presents a unique 
challenge because convincing a government to stop funding and 
supporting their entities is something that goes against what 
their objectives are here in the U.S. and globally.
    There are certain tools I think that you have as a 
congressional body in terms of helping to mitigate some of that 
either through certain protectionist measurements, shoring up 
things like Buy America or using other types of tactics to 
target specific areas that are specifically susceptible to 
anticompetitive and disruptive behavior here in the U.S.
    But I think a lot of encouragement for direct investment in 
building out supply chains and curbing the types of subsidies 
and other concessionary financing and activities that the 
state-owned enterprises are actually doing here and globally is 
really the next step.
    Dr. Babin. I think that is well said. And do you agree with 
some of the initiatives that the administration is currently 
doing in their negotiations with China to try to mitigate some 
of these problems that you just said?
    Mr. Galloway. I do agree with some of them. I think the 
issue is holding firm and keeping a close eye and focus on 
ensuring that the provisions that are attached to those types 
of engagements and those types of policies are enforced, and 
they are well designed in order to protect and preserve the 
sanctity of the supply chain systems and the competitiveness 
within our domestic economy.
    Dr. Babin. Absolutely, and I am running out of time. I 
could ask a lot more questions, but I will yield back. What is 
it, 11 seconds?
    Mr. DeFazio. I thank the gentleman. Again, we will spend it 
wisely.
    Representative Payne.
    Mr. Payne. Thank you, Mr. Chairman, and I thank the ranking 
member for having this hearing today.
    Mr. Cilluffo, as you may be aware, New Jersey and my 
district has been described as the two most dangerous miles in 
America because of the chemical installations, seaport, 
airport, rail, and interstate all coming together in a 2-mile 
radius.
    What do you see as potential cyber threats to the area 
because of railcars manufactured by state-owned enterprises?
    And what can be done to ensure safety?
    Mr. Cilluffo. Thank you, Congressman. That is an excellent 
question.
    And when I highlighted the national critical functions 
earlier, these are 55 designated issues that, if denigrated, 
could have a debilitating effect on our national security 
economy and the like.
    And industrial control systems, whether from the chemical 
side or from other sectors, share common vulnerabilities, and 
that is something we would call a single point failure.
    So I do think that what we need to start doing is racking 
and stacking because we cannot get our arms around everything 
all the time, and the last thing we want is the ``spread the 
peanut butter'' approach where everything is even. We have got 
to get the most important issues addressed first, and I would 
put chemical and I would put, obviously, transportation on that 
list, along with a handful of others, financial services, 
defense, industrial base, telecommunications, water, and the 
like.
    So I do think that that is an important set of issues, and 
from a rail, from a movement, absolutely that is something that 
we should be concerned about.
    Mr. Payne. Thank you.
    Mr. Galloway, the U.S. is in a dire need, obviously, of 
robust investment in our aging transportation infrastructure. 
If this investment goes to railcars manufactured by state-owned 
enterprises, would that impact the effectiveness of the 
investment?
    And how so?
    Mr. Galloway. If I am hearing your question correctly, if 
it is going into freight railcar manufacturing that would be 
completed by state-owned enterprises, the disruption would be 
significant.
    And earlier in my testimony and what we have actually, 
research at Oxford Economics, even $1 billion in freight 
railcar manufacturing that would go to a state-owned 
enterprise, and keep in mind $1 billion is only a fraction of 
the size of the industry, you are looking at a potential loss 
of 5,000 U.S. jobs, good-paying U.S. jobs, as well as $1.3 
billion in U.S. GDP.
    Because that value ripples through the economy, because the 
supply chains are here, and you are keeping a lot of that 
economic value retained here in the U.S., that is going to dry 
up. That is going to go overseas.
    Mr. Payne. And would those figures and statistics and jobs 
continue at that level?
    Mr. Galloway. If the investment would continue at that 
level, yes, it would, and you can look at this as an additive 
effect. It would double if it goes from $1 billion to $2 
billion. It would triple going from $1 billion to $3 billion.
    And these are annualized figures. So as that investment 
would continue, that same disruption and that loss would 
continue.
    Mr. Payne. Thank you.
    And, Mr. Chairman, I am going to yield back 1 minute and 15 
seconds.
    Mr. DeFazio. Thank you. I appreciate that.
    Representative LaMalfa.
    Mr. LaMalfa. I appreciate it, Mr. Chairman.
    Thank you, witnesses. It has been a full-length hearing 
here with many Members. I will just narrow my questions down a 
little bit here to issues of security.
    Mr. Cilluffo, the bottom line on the amount of data that a 
Chinese company can be collecting on our transit systems, that 
is fully expected to be sent back to mainland China and used in 
their intel systems, right?
    I mean, we fully expect that that is going to be.
    Mr. Cilluffo. That is a major concern, yes. As General 
Keith Alexander, then-Director of the National Security Agency, 
referred to it as the greatest transfer of wealth in our 
history. So intellectual property theft.
    Mr. LaMalfa. There is no reason to believe that that will 
not happen?
    Mr. Cilluffo. No reason. I mean, obviously you want to 
agnostic to everyone. You want to put in all the right security 
controls you can and standards and most importantly, here is 
the reality. The threat moves so fast, technology changes, that 
you have got to be testing your systems all the time, red 
teaming and looking for vulnerabilities.
    I mean, if you legislate a law right now that tries to 
handle security itself, not the importance of security, it is 
going to be out of date by the time the ink dries. So you want 
to consistently probe and test our systems, and that is maybe 
where the mandate should be.
    Mr. LaMalfa. To hack-proof them, et cetera?
    Mr. Cilluffo. As much as you can hack-proof them, yes, or 
at least minimize the impact and consequences when the 
inevitable occurs. They are hacked.
    Mr. LaMalfa. But if we are bringing them in to be the 
manufacturers and installers of these----
    Mr. Cilluffo. A big problem, yes.
    Mr. LaMalfa [continuing]. Then they have free access. They 
do not have to hack.
    Mr. Cilluffo. That is the concern.
    Mr. LaMalfa. There is no way we can ensure that.
    Mr. Cilluffo. Yes.
    Mr. LaMalfa. OK. Thank you.
    Mr. Paul, when we are talking about, you know, railcars, 
for example, any product built in China or ostensibly starts to 
be built in China and only assembled here, let's talk about 
railcars, and I will also throw this to Mr. Washington, as 
well.
    You know, bottom line, if the bidders are looking for 
savings involved by using Chinese-made products over American 
made, what kind of savings percentage-wise or dollar-wise are 
you looking at for a transit railcar?
    What are you really saving at the end of the day?
    And I come from northern California where only a couple of 
hours from me is the Bay Bridge, which, you know, the cost 
overruns on that were something else.
    Mr. Paul. Right.
    Mr. LaMalfa. But also immediately as they are building it 
or immediately after it was deemed ready, they are talking 
about quality issues with bolts and type of metal and the way 
the metal was initially manufactured.
    So, you know, compare all of those things please.
    Mr. Paul. Yes. And I specifically remember the Bay Bridge 
example because California taxpayers essentially subsidized an 
enterprise in China in Shenjian to begin a bridge building 
exercise that resulted in cost overruns and delays and 
ultimately did not deliver what it promised.
    With respect to CRRC----
    Mr. LaMalfa. I know people that will not drive across the 
bridge.
    Mr. Paul. Yes.
    Mr. LaMalfa. I mean, I am not scared, but you know.
    Mr. Paul. In addition to the traffic, the safety.
    Mr. LaMalfa. Yes.
    Mr. Paul. So CRRC entered the U.S. market a few years ago 
first in Massachusetts, and it won a contract after combining 
with another company, another Chinese-owned company that was 
disqualified from the bidding process, and it undercut every 
bidder.
    It then quickly secured contracts in Philadelphia and 
Chicago, in Los Angeles, and I think the representative from 
Los Angeles said that the bid could have been 10 percent under. 
In some cases, it was tens of millions or even hundreds of 
millions of dollars less than the next lowest bidder.
    And CRRC was able to do this because it is a loss leader. 
This is not a profit-making enterprise. This is a tool of 
Chinese state power designed to build an industrial capacity 
and dominate a market.
    Mr. LaMalfa. I am going to run out of time here real 
quickly. So bottom line, and then Mr. Washington, what initial 
savings for those that are tempted by that bid would they see? 
Just a few seconds, please.
    Mr. Paul. Well, on paper----
    Mr. LaMalfa. Just a rough number here.
    Mr. Paul [continuing]. It could be up to 30 or 40 percent.
    Mr. LaMalfa. Yes, yes.
    Mr. Paul. That may not be the case down the road, as you 
mentioned, but it can be quite sizable.
    Mr. LaMalfa. OK. Mr. Washington, please.
    Mr. Washington. Yes, I would just say that, first of all, 
current Federal procurement rules do not allow public agencies 
to disqualify a CRRC or an SOE or an SOE-influenced agency.
    I would also say, and I mentioned earlier that the delta 
between the CRRC and the second bidder was between 5 and 10 
percent. It was actually 3.5 percent.
    But I think in our case that savings or that delta was not 
very big.
    Mr. LaMalfa. Was not what?
    Mr. Washington. Not very large, 3.5 percent.
    Mr. LaMalfa. Very, very little. OK.
    Mr. Chairman, thank you.
    Mr. DeFazio. I thank the gentleman.
    I just again do a little editorial comment at this point 
since you raised the new Oakland Bay Bridge. When I chaired the 
Highways and Transit Subcommittee back in probably 2008 or 
2009, I held a hearing on that procurement, and we had the 
successful bidder sitting right there, and he had bid the U.S. 
side and the China side.
    And I said to him, ``Well, how is it that, you know, do 
they have the capability of building this bridge in China?'' I 
said, ``I am not aware, you know, because of the innovative 
design.''
    He said, ``Oh, no. No,'' he said, ``I am going to build a 
factory over there.''
    And I said to him, ``Well, what if I tightened up the Buy 
America?''
    He said, ``Oh, I would build a factory here.''
    That is on the record. I mean, just pathetic what we have 
done.
    With that, Representative Malinowski.
    Mr. Malinowski. Thank you, Mr. Chairman.
    As a predicate to my question, let me make a couple of 
comments. First of all, China is setting up the most 
sophisticated surveillance state in human history. If you live 
in China, particularly in a sensitive area, we are at a point 
where the government is essentially tracking your movements 24/
7 through apps installed on your phone and, of course, 
surveillance cameras that are everywhere with facial 
recognition that is getting better and better.
    Number two, we are seeing that China, among other 
countries, is increasingly brazen in extending the tentacles of 
its repressive apparatus to other countries. Just last week we 
saw Amnesty International could not rent office space in New 
York City because a Chinese state-owned enterprise owned the 
building and told them no.
    In New York City, we had a Canadian Member of Parliament 
using a WeChat page to communicate with her Chinese-Canadian 
constituents, and her messages, her posts were being taken down 
by the Chinese Government in Canada.
    More to the point we have thousands and thousands and 
thousands of Chinese-Americans living in the United States, 
many of whom have taken refuge in this country, many of whom 
are dissidents. They are critics of the Chinese Government, and 
in the last couple of years more and more reports of Chinese 
agents in the United States directly confronting them, 
threatening them, of course, threatening their family members 
still back home in China.
    So these are people, not hypothetical. These are people in 
the United States that are persons of great interest to the 
Chinese Government today.
    Now, General, I wanted to ask you. Describe how China could 
use the fact that it is manufacturing train railcars, investing 
in mass transit in the United States, to follow these people 
and enable harassment of these people.
    General Adams. I am sure that it is the case that one of 
the most interesting demographics for the United States for 
Chinese intelligence is Chinese ex-pats, American citizens 
whose families come from China, Americans who have emigrated 
from China and are now contributing to our economy, 
contributing to our society. Welcome American citizens.
    I am sure that that is one of their targets.
    Mr. Malinowski. And they would have an interest in tracking 
them increasingly in real time to the extent that they can, and 
of course, Wi-Fi signals intercepting communications and so 
forth.
    General Adams. It is like putting an antenna for their 
intelligence collection systems in every major city in the 
country, assuming that this dynamic continues.
    But they have already got those antennae in some of the 
largest cities in our country, and I am sure they will use it 
for that.
    If I may, strategically, one of the hardest things to do, 
you have to know the capabilities of the adversary. The hardest 
thing to do is to find the intentions of the adversary for us 
as well as our adversaries.
    We look at each other all the time. China is developing the 
capability in bounds to collect against us, to collect against 
whatever targets they want. Giving them attack surfaces of our 
transit railcars is a gift to them.
    The same thing with freight rail, much more strategic, much 
more logistically challenging for us because, again, it is our 
strategic asset, but we need to understand that what they 
really want to know is our intent, and the more detailed, the 
more fidelity they have, let's say, on the Chinese-American 
demographic, let's say on our demographic right here in this 
room; the more detail they have on who we are and what our 
intents are, the more full their intel picture of the United 
States is going to be.
    Mr. Malinowski. Well, that is the national security risk, 
and what I am suggesting is that there is a very real personal 
danger to people living in the United States who are American 
citizens who have ties to China.
    And this, of course, could perhaps extend to other 
dictatorships. China is the head of a club of autocrats and 
could share this intelligence with the Egyptians, the 
Pakistanis, others who may have similar interests.
    The ultimate question for me then is: what are the 
safeguards, if any?
    Are there technical safeguards short of simply not allowing 
Chinese investment in these sectors that would enable us, 
setting aside the economic questions that you all raise, but 
looking strictly at the national security and privacy concerns; 
are there technical safeguards that could be applied to the 
importation of railcars, buses, automobiles, which we have not 
mentioned, but of course could pose similar concerns, or is the 
only safeguard simply not accepting the investment?
    General Adams. If we want to avoid the risk, then we need 
to not accept the investment. If we want to manage the risk, 
then there are some things we can do short of prohibiting it.
    We have techniques that we can use to mitigate 
cybersecurity vulnerabilities, but we are going to have to 
manage it no matter what, whether it is completely cutting it 
off or using the technical measures that we have to detect 
transmission of signals, for example.
    But, again, the best way to manage risk is to avoid it.
    Mr. Cilluffo. Congressman, can I add one very quick point 
to this, very, very quick? And I have got a flight to catch so 
I do so at my own peril here.
    But the reality is agnostic to the perpetrator. We have a 
responsibility to do more from a cybersecurity standpoint 
because that attack surface is growing exponentially whether it 
is China-driven or anything else.
    So I would argue that there are a lot of steps that can and 
should be taken. I just do not want that heavy regulatory 
hammer alone to be driving all that. We need to test our 
vulnerabilities and test systems within systems.
    Mr. DeFazio. Mr. Garamendi.
    Mr. Garamendi. Thank you, Mr. Chairman.
    As you know and those who have followed my time here in 
Congress, make it in America has been my theme, multiple pieces 
of legislation over the years and more than enough talking, 
well, maybe not enough talking.
    We have been somewhat successful. We have increased the Buy 
American percentage for the highway transit to I think it will 
be 70 percent. I tried to cut back on some of the loopholes 
that are there.
    We have a piece of legislation before us today, Mr. Rouda's 
legislation, that goes directly to the heart of unfair 
competition.
    The Chinese state enterprises as been discussed repeatedly 
by Members as well as our witnesses, make it very, very clear 
that competing with the state-owned enterprises in China is not 
a market-based system. It has nothing to do with that.
    And as long as that system of state-owned enterprises 
exists, we need laws here in the United States to say, no, you 
cannot enter the American market.
    Now, much of the discussion that the President is engaged 
in with tariffs misses this key point and, frankly, he would be 
better off dealing with it directly as Mr. Rouda's legislation 
does.
    I do have a couple of things that I want to bring out. We 
do have laws. We have the Clayton and the Sherman Antitrust 
Act. There is a right of private lawsuits that could and should 
be brought by those that have been harmed by the unfair 
predatory pricing.
    I would suggest that there is a triple penalty. So if you 
find that it has cost you $1, the penalty can be $3. You ought 
to take a look at that.
    Secondly, this is a question for Mr. Washington. I think 
you dealt with this at least in part, and I want to come back 
to it.
    Do the Federal transit procurement rules allow an agency, 
such as yours, to reject a bid due to cybersecurity concerns, 
say, by the Chinese state-controlled company like CRRC?
    Mr. Washington. They do not. Currently, the Federal 
procurement rules do not allow public agencies to disqualify a, 
in this case, a CRRC or a BYD. To my knowledge, only Congress 
can do that, and I would----
    Mr. Garamendi. Well--excuse me. Please complete.
    Mr. Washington. And I would just also add one thing. 
Transit agencies need guidance in this area because the 
increased need for railcars and many of the areas around the 
country as referendums are being approved is upon us.
    Mr. Garamendi. I appreciate that, and it sounds like there 
ought to be law.
    And, in fact, there is a law that at least goes partway 
towards dealing with this, and that is Mr. Rouda's law that 
says that if the cybersecurity concerns cannot be addressed, 
then that particular company or that particular bid must be 
rejected.
    And so it does go directly to that, and I draw that to the 
attention of those of us who will be voting on this eventually. 
And I am proud to be an original cosponsor of that legislation.
    My final point really deals with another piece of 
legislation that we are dealing with, and that is to extend the 
Buy America requirements to the entire infrastructure package 
that may eventually emerge from this committee. And so it is 
everything from pipes to pumps and broadband and other 
activities that hopefully will be part of a very rich and 
successful piece of legislation.
    Apparently, the President is going to suggest how we might 
pay for it. That would be helpful, but along the way, that bill 
has been introduced by, will be introduced by Senator Baldwin 
over in the Senate side, and I will be introducing it here on 
this side in the next few days. I draw the attention of the 
committee and anybody that is interested in extending the Buy 
America to all money that the Federal Government would be 
spending on infrastructure writ large.
    A most unusual event, I am yielding back time.
    Mr. DeFazio. I thank the gentleman.
    I just take the opportunity on his time to say, you know, I 
am determined. I got us to move to 70 percent American content, 
but I was not successful in getting amendments to how you 
classify components, subcomponent, systems, et cetera, et 
cetera.
    It is very complicated, but clearly, the loophole that BYD 
is using in this case to get to the value that theoretically 
they are eligible.
    So I really thank the gentleman for his initiative, and 
there are some very specific places where we need to apply 
that.
    So with that, I would turn to the gentleman, Mr. Johnson.
    Mr. Johnson of Georgia. Thank you, Mr. Chairman.
    Mr. Paul, your testimony and several others who have 
submitted testimony today express clear concern that the CRRC 
is intentionally seeking to dominate our Nation's transit rail 
sector. With the completion of several U.S. public transit 
projects already, CRRC has postured itself to be a dominant 
competitor in our transit and railcar manufacturing industry.
    Do you anticipate that CRRC will make a gradual impact on 
our rail sector or can we expect a more dramatic and swifter 
impact?
    Mr. Paul. Mr. Johnson, it is a terrific question.
    It has already altered the landscape. There is no question 
about that, and it is winning approximately three out of every 
four transit awards.
    Atlanta is actually an exception to that, but they are 
making substantial progress, again, by offering prices that are 
essentially loss leading.
    The ultimate result of all of this is going to be reduced 
competition. That is, its competitors, the incumbent firms like 
Hyundai, Kawasaki, Alstom, the others, will exit the market if 
they are not winning awards.
    And so there is a combination of tools that are available, 
I think, to both make the experience better for local transit 
agencies and for taxpayers as well.
    One of those is obviously to create a level playing field 
for the bidding. The incumbent companies are simply not 
competing against another company in CRRC. They are competing 
against a country. That is the issue that the TIVSA would 
alleviate.
    The other issue----
    Mr. Johnson of Georgia. So how do you level that playing 
field?
    Mr. Paul. How do you level that playing field? Well, that 
would exclude state-owned enterprises from competing for the 
contracts, and so CRRC would need to divest itself of its 
interest in the Chinese Government or find another buyer for 
its assets.
    The other issue, and I think this is an important one, is 
the size of the transit spend, and that has been an impediment 
for many firms to stay engaged in the U.S. market.
    And so I am hoping as part of this infrastructure 
conversation that the Congress is having with the White House 
that there will be a robust, sustained commitment to building 
out transit rail infrastructure in the United States that is 
going to send a signal to these firms that it can stay in these 
markets, invest in these workers, invest in capital.
    And I think that is the ultimate outcome that we would like 
to see.
    Mr. Johnson of Georgia. Thank you.
    Mr. Cilluffo, the integration of Chinese technology into 
our transit network is intertwined with national security. With 
the implementation of GPS, safety features, Wi-Fi systems, and 
numerous other nuanced technologies, China gains considerable 
access to gather intelligence.
    Do you believe that this requires hyper vigilance from our 
intelligence community?
    And I would like for you to answer also, General Adams.
    Mr. Cilluffo. Congressman Johnson, without a doubt, and the 
good news is if you look at the number of industrial and 
economic espionage cases and if you look at the cyber espionage 
cases in particular, they are heavily focused on the People's 
Republic of China and their intentions because that is where a 
lot of the activity is.
    They are by no means the only player we have to worry about 
or actor we have to worry about, but the good news is that 
awareness is high. The bad news is that awareness is high 
because there is a whole lot of activity going on.
    Mr. Johnson of Georgia. General Adams.
    General Adams. Yes, sir, we do need to be hyper vigilant, 
and as I said before, by the time we detect a threat from 
cybersecurity, it is already too late.
    The Chinese are not interested in telegraphing their 
intent. Good for us, they actually have. We know they want to 
conquer the global freight rail market, and it is good to see 
this level of interest from Congress because it supports our 
intelligence community's hyper interest in this dynamic as 
well.
    So thank you.
    Mr. Johnson of Georgia. Thank you.
    I want to thank all of the witnesses for their testimony, 
and I also want to thank Chairman DeFazio for holding this very 
important hearing today on how we can protect our Nation's rail 
infrastructure.
    With that I yield back.
    Mr. DeFazio. I thank the gentleman.
    Representative Miller.
    Mrs. Miller. Thank you, Chairman DeFazio and Ranking Member 
Graves, and thank all of you all for being here today.
    Mr. DeFazio. Mr. Cilluffo, if you need to get a plane, go. 
They do not hold planes for me and they are not going to hold 
it for you.
    [Laughter.]
    Mr. Cilluffo. I apologize. Thank you.
    Mrs. Miller. Be safe.
    It is of the utmost importance that we continue to focus on 
stabilizing our domestic industries by preventing unfair 
business practices. We know that anticompetitive business 
practices among the SOEs could damage private-sector railcars 
manufacturing and create an imbalance, leading to the loss of 
jobs in the United States.
    The railcar manufacturing industry is one that we must 
protect.
    Mr. Galloway, I enjoyed your quote on the internal 
structure of how a competitive market is supposed to work. The 
advantages given to state-owned enterprises threaten to 
undermine the benefits gained from fair competition in true 
private-sector productions, such as improving efficiency and 
technological advancement.
    You state that the anticompetitive practices displace 
private-sector competitors causing a domino effect throughout 
the United States supply chains and the business owners, 
workers, and families who rely on them.
    What are some ways in which Congress can improve oversight 
to ensure that state-owned enterprises do not upset our rail 
economy?
    Mr. Galloway. I think from a policy perspective and an 
action perspective, ensuring that state-owned enterprises are 
behaving as good corporate citizens, they are making the 
investments necessary in the U.S. to produce goods here in the 
U.S. rather than offshoring their supply chains and their goods 
production back to the Chinese economy or elsewhere is critical 
to maintaining that level playing field.
    Unfortunately, under the current structure of SOEs, that is 
very unlikely to occur.
    And not being a policymaker, I am uncertain on what the 
best path forward would be to ensure that if CRRC is going to 
operate here in the U.S. and is going to provide railcars, that 
they are doing it above board and they are doing it as a good 
corporate citizen, short of preventing them from actually 
operating here in the U.S. to begin with.
    Mrs. Miller. What is the future of the world market if this 
behavior continues?
    Mr. Galloway. Oh, I think we are already seeing what the 
future of the world market is, which is heavy displacement of 
domestic railcar manufacturing in many different countries.
    I cited earlier the Australian example where the freight 
railcar manufacturing sector has been completely decimated, and 
then the last remaining producer moved their operations to 
China in order to compete with Chinese firms, with CRRC.
    So and you are seeing this type of cascading effect across 
a lot of other markets, both developed and developing, where 
there were railcar sectors that existed that are no longer the 
case.
    Mrs. Miller. Thank you.
    Mr. Washington, what are the top issues that you are 
dealing with as a transit agency with foreign companies that 
bid and operate here?
    Mr. Washington. Well, I think one of the top issues is 
making sure that they invest in the local area, which is why we 
included in the evaluation criteria local employment plans and 
local employment requirements.
    I think the other big thing is suppliers, as well. Having 
suppliers near or in close proximity in this case to final 
assembly plants is very, very important as well. I see those as 
some of the top challenges.
    Mrs. Miller. Would those suppliers be locally owned as 
well?
    Mr. Washington. Pardon me?
    Mrs. Miller. Would the suppliers be locally owned?
    Mr. Washington. The suppliers can be locally owned, yes. We 
prefer that. We definitely prefer that, which is why I said in 
my statement the idea that we need to stand up our own 
passenger railcar manufacturing facility in this country, 
slash, an industrial yard with suppliers located there as well.
    Mrs. Miller. OK. Thank you.
    I yield back my time.
    Mr. DeFazio. I thank the gentlelady.
    Seeing no other Members prepared to ask questions, I would 
thank all of the members of the panel for their interesting and 
instructive testimony and the amount of time you devoted to us 
today.
    This is a critical issue, and thank you for being here.
    With that the committee stands adjourned.
    [Whereupon, at 12:51 p.m., the committee was adjourned.]



                       Submissions for the Record

                              ----------                              


    Prepared Statement of Hon. Daniel Lipinski, a Representative in 
    Congress from the State of Illinois, and Chair, Subcommittee on 
             Railroads, Pipelines, and Hazardous Materials
    Thank you Chairman DeFazio and Ranking Member Graves for holding 
this important hearing about the ``The Impact of Foreign State-Owned 
Enterprises on the U.S. Public Transit and Freight Rail Sectors.''
    As we will hear today from our witnesses and from many of our 
members including myself, the entry of Chinese State Owned Enterprises 
has made a lot of companies and public policy makers concerned. Since 
2015, the China Railroad Rolling Stock Corporation also known as CRRC 
has won four large transit rail rolling stock contracts with public 
transit agencies in the United States, including in my home region of 
Chicago. Furthermore, recent media reports indicate they may bid on 
several more contracts, including WMATA, the New York City Subway and 
possible my home commuter railroad, Metra.
    Let me be clear about my own views on the issue. The entry of 
Chinese State Owned Enterprises into this country is a huge threat to 
America's economic livelihood and national security.
    Chinese State Owned Enterprises are a very different entity than a 
typical foreign corporation. In my mind, there absolutely is a huge 
difference between CRRC and Stadler for example. CRRC is controlled by 
a government that is competing with us economically, in many cases 
unfairly, and poses a potential substantial military threat. Last time 
I checked Mr. Chairman, Stadler was not controlled by the Swiss 
Government nor are we worried about the Swiss Government threatening 
the United States economically or militarily.
    I want to note I am cognizant of the workers at CRRC's factories in 
Chicago and elsewhere. These factories do provide well-paying jobs to 
hundreds of workers and I understand from the local unions that CRRC 
has treated these workers and their unions well. So in this process, we 
should not forget that these workers are our constituents or that our 
actions could affect their livelihoods and families.
    However, we can't turn a blind eye to this threat and assume that 
CRRC or China will continue to play by the rules. The Chinese 
government has a terrible record when it comes to respecting workers 
rights or competing fairly economically. As General Adams notes in his 
testimony, the Chinese Government has a ``Made in China 2025'' 
initiative, a key component of China's 13th Five-Year plan, and 
identifies the rail manufacturing sector as a top target for Chinese 
expansion. We should absolutely assume that the ultimate goal of CRRC 
or the Chinese government is to move into the US freight market and 
that should scare us all. One only has to look at our domestic steel 
market and the closing of steel plants in communities all across this 
country and the tremendous hardship that has resulted to see what 
happens when China decides they want to enter a market and compete 
unfairly.
    According to testimony we will hear today from Hamilton Galloway, 
the rail supply industry supports 650,000 mostly middle-income jobs, 
$74 billion in U.S. GDP and contributes nearly $17 billion to federal, 
state and local taxes. Highlighting the importance of the railway 
supply industry in this country, my home region of Chicago has lot of 
railway suppliers that keep our American manufacturing strong and 
employ thousands of Chicagoans. I have heard strong concerns from these 
companies about their ability to compete with unfairly subsidized state 
owned entities, and we absolutely need to be forward thinking and 
address this potential threat.
    As Mr. Galloway's testimony indicates, even if a state-owned rail 
manufacturer adds some jobs, the likely overall effect in the future is 
a significant decrease in jobs as the domestic supply chain is wiped 
out and most production is outsourced to where the state owned 
enterprise is located, say China. The potential future degradation of 
our domestic supply chain is something we are facing right now.
    It is true that there are no American based manufacturers of 
transit rolling stock. However, that does not mean we should just give 
up and start accepting corporations controlled by foreign governments 
that may be adversaries to us both militarily and economically. I 
appreciate Mr. Washington's testimony that he would like to see to see 
the associated design and innovation related to rolling stock occur in 
the United States. I share that same goal. However, I fail to see how 
our transit agencies selecting Chinese state enterprises with a history 
of undercutting bids from other companies using Chinese state subsidies 
takes us closer to that goal. If anything, it drastically reduces the 
chances that we will create a thriving domestic market for rolling 
stock.
    So above all, we need to be focused on protecting our domestic 
freight supplier industry and also figuring out how to create a 
thriving domestic transit and bus rolling stock industry right here in 
the United States.
    I look forward to hearing from our witnesses and other members on 
how we can accomplish these two critical goals.
    Thank you again Mr. Chairman for holding this important hearing and 
I yield back the balance of my time.

                                 
            E-mail Submitted for the Record by Hon. Crawford
    Information provided by the Federal Transit Administration re: 
Federal funds used in CRRC contracts.
    On 5/16/19, 3:47 PM, ``Webb, Kate (FTA)'' <                        
@dot.gov> wrote:
    Hi Jay,
    My apologies for the delayed response. I don't have a formal table 
but I can tell you that .the following transit agencies have used 
federal funding to purchase CRCC [sic] subway cars:
       Chicago Transit Authority (CTA)
       Southeastern Pennsylvania Transportation Authority (SEPTA)
       Los Angeles County Metropolitan Transportation Authority 
(LACMTA)
    None of the ordered cars have yet entered into service.
    Please let us know if you have any questions.
        Kate
                                         Kate Webb,
Office of Communications and Congressional Affairs, Federal Transit 
                               Administration, Washington, DC 20590

                                 
      Letter from Scott N. Paul, President, Alliance for American 
        Manufacturing, Submitted for the Record by Hon. DeFazio
                                                      May 29, 2019.

   Support H.R. 2739, the Transit Infrastructure Vehicle Security Act

  aam supports rouda-crawford-perry-granger-ryan-holmes norton-weber-
  garamendi bipartisan legislation to prohibit federal funds going to 
 chinese-owned, controlled or subsidized rail car or bus manufacturers
    Dear Representatives:
    On behalf of the Alliance for American Manufacturing (AAM), a 
partnership between the United Steelworkers (USW) and leading U.S. 
manufacturing companies, I am writing to express our support for H.R. 
2739, the Transit Infrastructure Vehicle Security Act (TIVSA). This 
bicameral, bipartisan legislation would ban Federal Transit 
Administration (FTA) funds from being used to award a contract or 
subcontract to a Chinese state-owned, controlled, or subsidized 
enterprise.
    Backed by deep government support and Beijing's ``Made in China 
2025'' initiative, China's electric bus and rail state-owned 
enterprises (SOEs) are rapidly altering the U.S. competitive landscape 
for rolling stock manufacturing. This is having a profoundly negative 
impact on established, private-sector U.S. firms and jeopardizing 
supply chains that employ tens of thousands of American workers.
    China Railroad Rolling Stock Corporation (CRRC)--a Chinese SOE--has 
drastically altered the competitive landscape for domestic railcar 
manufacturing. Since 2014, CRRC has secured major metro transit car 
contracts in Boston, Philadelphia, Los Angeles, and Chicago with 
impossibly low bids. In Boston, CRRC's bid was hundreds of millions of 
dollars below the next lowest bidder. In Philadelphia, another bidder 
was quoted as saying, ``I cannot grasp how they are able to do it at 
that cost.'' There should be no doubting CRRC's strategy to establish 
itself in the U.S. market and to eliminate legitimate competition 
through any means necessary, even if it means losing substantial sums 
of money along the way. With potential deals in Washington, DC and New 
York City in CRRC's sights, it is vital for U.S. national security, 
innovation, and jobs that we stop subsidizing the destruction of our 
domestic rolling stock manufacturing base with federal dollars.
    The electric bus industry is also in Beijing's sights. BYD, or 
Build Your Dreams, assembles electric buses in the United States and is 
both influenced and subsidized by the Chinese government. BYD has been 
plagued by quality issues and a recent OIG investigation by the City of 
Albuquerque suggests that ``the majority, if not all, parts were 
manufactured in China and shipped to the United States''--including the 
bus frame, chassis, walls, drive train, axels, motor, lights, seating 
and seat belts, and more. BYD not only aggressively undermines healthy 
market competition in the electric bus procurement market, it threatens 
to displace supply chains here in the United States with imported parts 
and components shipped in from China.
    It is vital that the United States act to prevent the destruction 
of the U.S. competitive landscape for rolling stock manufacturing 
before it is too late. America's tax dollars should not be used to 
support Chinese state-owned firms seeking to undermine market 
competition. Please support the bipartisan, bicameral Transit 
Infrastructure Vehicle Security Act.
        Sincerely,
                                              Scott N. Paul
                                                          President

                                 
      Letter from Lonnie R. Stephenson, International President, 
  International Brotherhood of Electrical Workers, Submitted for the 
                         Record by Hon. DeFazio
                                                      May 15, 2019.
Hon. Peter A. DeFazio
Chairman
Committee on Transportation and Infrastructure, U.S. House of 
        Representatives, Washington, DC 20515
Hon. Sam Graves
Ranking Member
Committee on Transportation and Infrastructure, U.S. House of 
        Representatives, Washington, DC 20515
    Dear Chairman DeFazio and Ranking Member Graves:
    On behalf of the 775,000 active and retired members of the 
International Brotherhood of Electrical Workers (IBEW), I am writing 
regarding your committee's May 16, 2019, hearing on ``The Impacts of 
State-Owned Enterprises on Public Transit and Freight Rail Sectors.`` 
The IBEW is concerned that Congress may pursue legislation that will 
deny federal funds and will directly result in the loss of hundreds of 
jobs for our members who are employed by CRRC Sifang America in 
Chicago, Illinois and CRRC MA in Springfield, Massachusetts.
    Several years ago, the IBEW and the International Association of 
Sheet Metal, Air, Rail and Transportation Workers (SMART) began a 
working relationship with CRRC, a China-based rolling stock 
manufacturer to build railcars in the United States. I had the 
opportunity to visit CRRC's work firsthand as a part of an IBEW 
delegation trip to China. CRRC made a commitment to manufacture transit 
cars in the United States and hire American workers at competitive 
salaries and benefits.
    This investment has been further shown by the opening of CRRC's 
facility near the site of the historic Pullman Company factory in 
Chicago's South Side. In Chicago, part of the negotiated package 
resulted in historic community benefits agreements that not only 
targeted local workers but committed the company to hiring military 
veterans, women, the formerly incarcerated and communities of color. As 
a result, $4 million in federal funds were awarded to community 
colleges, junior colleges and technical training programs, all to build 
training for the transportation manufacturing sector where none had 
previously existed.
    In recent years, dozens of IBEW members have traveled to China to 
be trained in CRRC's leading manufacturing practices and bring these 
skills back to the United States. Today, our partnership manufactures 
world class railcars for several of our nation's largest public transit 
systems, including the Chicago Transit Authority (CTA), Los Angeles 
County Metropolitan Transportation Authority (LA Metro), Massachusetts 
Bay Transportation Authority (MBTA), and Southeastern Pennsylvania 
Transportation Authority (SEPTA).
    The decline of American manufacturing over the past four decades 
has been a major blow to the IBEW and its membership. Forty years ago, 
the IBEW had over 400,000 members in the manufacturing sector, proudly 
building goods for American consumers and the global market. These 
manufacturing jobs provided wages and benefits that would support a 
family and sustain communities through the United States. Today, the 
IBEW only has 30,000 members in manufacturing, a 93 percent decline. 
When CRRC approached IBEW about a partnership to build railcars in the 
United States, we saw this as an opportunity to bring manufacturing 
jobs back to communities in Chicago and Springfield that have suffered 
from years of deindustrialization.
    The IBEW hopes to strengthen its relationship with CRRC moving 
forward and increase domestic railcar manufacturing made by union 
labor. However, we are aware of the criticism by CRRC's competitors and 
the increasing attention of CRRC's growing footprint within the halls 
of Congress. I want to be clear that the IBEW is sensitive to the 
cybersecurity concerns raised by some regarding CRRC transit cars and 
has no issue with Congress passing legislation that would ensure the 
security of hardware and software components of railcars and other 
rolling stock. Adoption of the Transit Infrastructure Vehicle Security 
Act (S. 846) or similar legislation, however, would result in the 
closure of CRRC's two manufacturing facilities, leading to the loss of 
400 family-supporting union jobs at the Chicago and Springfield sites, 
without any assurance that future railcar manufacturing will be done 
domestically or through a U.S.-owned company.
    The IBEW asks that the House Committee on Transportation and 
Infrastructure take a comprehensive view of the current state of 
domestic manufacturing in the United States and to consider 
alternatives before adopting legislation like the Transit 
Infrastructure Vehicle Security Act. Furthermore, before the Committee 
on Transportation and Infrastructure takes legislative action, we ask 
committee members to consider two important questions:
    First, if Congress takes action to close CRRC's railcar facilities, 
how will the workers at these factories be made whole?
    Second, if legislation is enacted to close the CRRC facilities, 
what will Congress do to ensure that future railcar manufacturing is 
done in the United States by American workers earning family-supporting 
wages and benefits? Otherwise, future transit cars will most likely be 
made by a different foreign-owned company with no assurance of creating 
more or higher quality jobs than what CRRC is already providing.
    The IBEW looks forward to working with the House Committee on 
Transportation and Infrastructure on this important matter.
        Sincerely yours,
                                       Lonnie R. Stephenson
                                            International President
Copy to all Members of the U.S. House Committee on Transportation & 
Infrastructure

                                 
Statement of the Railway Supply Institute, Submitted for the Record by 
                              Hon. DeFazio
    The Railway Supply Institute (RSI) is an international trade 
association representing more than 200 companies involved in the 
manufacture of goods and services in the locomotive, freight car, 
maintenance of way, communications and signaling and passenger rail 
industries. RSI members provide critical products to Class I and short 
line railroads, shippers, Amtrak, and transit authorities nationwide 
and work with these customers to create new products or services that 
drive enhancements in safety and efficiency across their networks.
    While our members have a strong presence across the United States, 
they market their products around the world and have complex global 
supply chains that support these manufacturing operations. Our members 
are seeing increased government intervention in the global rail 
marketplace. Foreign governments sometimes impose technology transfer 
requirements--directly or indirectly--as a prerequisite to granting 
investment approvals or market access. A Chinese-owned State-Owned 
Enterprise (SOE) called CRRC has also identified rail manufacturing as 
a strategic market sector and made clear their intention to dominate 
the global railway supply and rolling stock market. Here in the United 
States, CRRC and its affiliates have leveraged state-backed financing 
and below-market loan rates to secure $2.6 billion in railcar contracts 
for commuter agencies in Boston, Chicago, Los Angeles and Philadelphia, 
with other contracts pending including one in Washington, D.C. The 
company has won these contracts by as much as thirty percent below the 
next lowest bid, raising significant questions about whether these are 
market-based offerings.
    Allowing a SOE to continue these activities creates both economic 
and national security concerns. These actions are already undermining a 
$74 billion dollar \1\ a year industry with current American rail 
supply manufacturers concerned that more SOE involvement will lead to a 
loss of domestic manufacturing and a reduction in American jobs. This 
also has long term national security impacts as demonstrated in 
Australia with the complete takeover by an SOE of the Australian 
domestic market and its capability to build both passenger and freight 
rail cars. America's rail system covers more than 140,000 miles and 
carries forty percent of America's intercity freight, including 111 
million tons per year of hazardous materials. Allowing a foreign, 
state-backed entity to increase direct investment in our nation's 
critical infrastructure, particularly projects utilizing federal 
funding, creates significant economic and national security concerns. 
Therefore, RSI supports H.R. 2739, the Transit Infrastructure Vehicle 
Security Act. H.R. 2739 would prohibit transit agencies from using 
federal dollars to acquire rolling stock produced by a company that is 
owned, controlled, or subsidized by any country with a non-market 
economy. In addition, it would ensure that transit agencies develop and 
execute a cybersecurity plan.
---------------------------------------------------------------------------
    \1\ Tracking the Power of Rail Supply, The Economic Impact of 
Railway Suppliers in the U.S.: 5. September 2018
---------------------------------------------------------------------------
    During the hearing on May 16, there was discussion regarding the 
``lack of a U.S. manufacturer'' of passenger railcars and that all 
manufacturers are foreign-owned. As you may know, there are thousands 
of U.S.-based employees who work for foreign-owned companies that 
manufacture passenger railcars or their components here in the U.S. in 
full compliance with Buy America requirements. In September 2018, 
Tracking the Power of Rail Supply: The Economic Impact of Rail 
Suppliers in the U.S. was released as a major new study that quantifies 
the economic and workforce impact of the products and services produced 
by the railway supply industry in the U.S. RSI, partnering with the 
Railway Engineering-Maintenance Suppliers Association (REMSA), Railway 
Systems Suppliers, Inc. (RSSI) and Railway Tie Association (RTA) 
commissioned Oxford Economics to develop the report. It highlights the 
importance of the industry to the U.S. economy in terms of jobs, tax 
revenue, and gross domestic product (GDP) on both the state and 
national level. The economic contribution of the railway supply 
industry in 2017 amounted to more than $74.2 billion in GDP, as well as 
$16.9 billion in taxes to local, state and federal governments. Workers 
in the industry are highly productive, and wages reflect this at 
$78,800 annual income on average, placing them well above the median 
income earners in most states. In total, the railway supply industry 
directly employs more than 125,000 people in manufacturing, repair, 
maintenance, and leasing, among others. In addition, for each worker 
directly employed by the railway supply industry, a further 4.2 jobs 
are supported in the wider economy, either in the supply chains of 
railway suppliers or through the wage spending of those employed by the 
firms themselves or in their supply chains. On average, these indirect 
and induced jobs pay an average annual salary of $63,980.
    This study solidifies that the U.S.-based domestic rail supply 
industry delivers well-paying jobs across the country. In the passenger 
rail sector, much of this is possible because of the Buy America 
program, which was created to promote U.S. manufacturing and help the 
domestic economy by creating jobs for Americans. Several of the foreign 
owned companies employing these manufacturing jobs here in the U.S. are 
finding it very difficult to compete against a SOE that receives 
significant support from their government and often are only assembling 
(versus manufacturing) their railcars here in the U.S. By design, Buy 
America laws were written to ensure that public transportation funds 
are used to create American jobs constructing and manufacturing our 
public transportation systems, rail cars, and buses here in the U.S. 
RSI member companies have played by the rules and built their business 
models to comply with Buy America, however having one SOE dominate the 
market and establish a heavy foothold that spans the United States has 
raised many red flags. The U.S. DOT should be directed to ensure that 
strict enforcement of existing Buy America provisions is occurring to 
help ensure that public investments in passenger rail lead to domestic 
jobs. It is critical to the continued health of American manufacturing.
    Finally, several members of the committee highlighted the 
importance of robust, consistent federal funding for passenger rail, 
both to improve the efficiency and productivity of the nation's rail 
network and incentivize companies that follow Buy America requirements 
to invest in the United States. We agree. Increased public investments, 
coupled with policies that incentivize private investments, could 
relieve major bottlenecks and chokepoints and increase track, tunnel, 
bridge and station capacity across the passenger and freight rail 
system.
    Thank you for consideration of our comments. We look forward to 
working with the House Transportation & Infrastructure Committee as we 
continue to look for ways to innovate, enhance and promote investment 
in rail infrastructure.

                                 
    Letter from Jeffrey D. Knueppel, General Manager, Southeastern 
Pennsylvania Transportation Authority, Submitted for the Record by Hon. 
                                DeFazio
                                                      May 22, 2019.
Hon. Peter A. DeFazio
Chairman
Committee on Transportation and Infrastructure, U.S. House of 
        Representatives, Washington, DC 20515
Hon. Sam Graves
Ranking Member
Committee on Transportation and Infrastructure, U.S. House of 
        Representatives, Washington, DC 20515
    Dear Chairman DeFazio and Ranking Member Graves:
    The House Transportation and Infrastructure Committee hearing last 
Thursday on The Impacts of State Owned Enterprises on Public Transit 
and Freight Rail Sectors provided Congress an opportunity to continue 
evaluating how best to balance the needs of transit agencies to replace 
aging vehicles together with domestic manufacturing interests. Given 
the Southeastern Pennsylvania Transportation Authority's (SEPTA) 
significant rail vehicle replacement needs, we appreciate the 
Committee's thoughtful consideration of this important subject, and I 
respectfully request that the following information be added to the 
hearing record.
    With a consistently constrained capital budget, access to a broad 
marketplace for rolling stock, materials and services has been critical 
to ensuring the best product at the most competitive price for SEPTA 
and its funding partners, including state and federal taxpayers. SEPTA 
is proud to rely on the skill and expertise of hundreds of American 
businesses--large and small--to ensure safe and efficient mass transit 
service for the one million riders who depend on SEPTA every day. Over 
the last five years, alone, SEPTA's domestic procurement has exceeded 
$3.5 billion, including more than $1 billion from Pennsylvania 
companies.
    SEPTA's railcar procurement needs are significant. More than 37 
percent--roughly $1.7 billion--of SEPTA's $4.6 billion state of good 
repair backlog is earmarked for vehicle replacement and related 
activities. SEPTA has a need to replace 231 Silverliner IV railcars--
approximately two-thirds of the Regional Rail fleet--that were built in 
the mid-1970s and are more than 40 years old. SEPTA will also replace 
all of its trolleys, which are nearly 40 years old and do not meet ADA 
requirements.
    Following an open and competitive process in 2017, SEPTA awarded a 
contract to CRRC MA for 45 multi-level coach cars to be assembled at 
CRRC's Springfield, Massachusetts facility. The multi-level coach cars 
will meet or exceed FAST Act Buy America requirements and include parts 
and materials from domestic manufacturers from across the country. The 
contract also includes an option for 10 additional cars, which SEPTA 
has not yet exercised.
    The number of transit railcar manufacturers worldwide is very 
limited, and there are currently no domestically-owned transit railcar 
manufacturers. Acquisition costs are a substantial obstacle to 
replacing aging rail vehicles, and future railcar procurements will 
benefit from competition generated in a robust marketplace. As Congress 
continues to evaluate important considerations related to rolling stock 
procurement, it is our hope that already executed contracts, including 
options, will be preserved, while efforts to develop and incentivize 
domestic production will reinvigorate a dormant industry and create 
increased competition.
    Strengthening and securing America's transportation infrastructure 
is a vital national interest. We are grateful for the Committee's work 
on this important matter and look forward to continuing to support 
initiatives that grow and enhance the nation's public transportation 
systems.
        Sincerely,
                                        Jeffrey D. Knueppel
                                                    General Manager

cc: Pasquale T. Deon, Sr., SEPT A Board Chairman
The Honorable Brian K. Fitzpatrick
The Honorable Lloyd Smucker

                                 
Letter from John Samuelsen, International President, Transport Workers 
  Union of America, AFL-CIO, Submitted for the Record by Hon. DeFazio
                                                      June 5, 2019.
    Dear Representative:
    On behalf of more than 150,000 members of the Transport Workers 
Union (TWU), I am writing to encourage you to cosponsor the Transit 
Infrastructure Vehicle Security Act (H.R. 2739). This important piece 
of legislation is an essential part of ensuring American workers and 
companies have a level playing field to compete against state-owned and 
subsidized enterprises.
    Until August 2018, rail cars for transit agencies across the 
country were manufactured in Philadelphia, PA. Over 300 TWU members 
lost their jobs and livelihoods when the plant that did that work was 
closed. These jobs disappeared after their company was underbid by 
CRRC, the Chinese state-owned, highly subsidized rail car manufacturer. 
In Boston, Chicago, Los Angeles, and, finally, Philadelphia itself, 
CRRC offered a price well below any of their competitors not because of 
any efficiencies, but rather because their shareholder (the government 
of China) had given them a directive to conquer the U.S. market.
    TWU members are not the only ones whose jobs are being threatened 
or destroyed by unfair competition from state-owned enterprises. 
China's ``Made in China 2025'' initiative directs all of their state-
supported corporations to increase their market share across the globe, 
regardless of profitability. In the U.S., this is leading to massive 
turnover in transit manufacturing, with thousands of jobs potentially 
at risk.
    H.R. 2739 directly addresses this issue and ensures that workers 
building and assembling transit cars are competing in the free market 
rather than against foreign governments. Corporations from non-free 
market economies would become ineligible from receiving federal funds. 
Additionally, the bill would increase cybersecurity protections for our 
transit vehicles--an essential component of our 21st century 
infrastructure.
    The TWU believes H.R. 2739 is essential for ensuring that American 
workers can compete on a level playing. We urge you to cosponsor this 
legislation by contacting                     @mail.house.gov in 
Representative Harley Rouda's office. Please contact                  (  
        @      .org) at       -      -         if you have any 
questions.
        Sincerely,
                                             John Samuelsen
                                            International President

                                 
  Report, ``Assessing How Foreign State-Owned Enterprises' U.S.-Based 
Operations Disrupt U.S. Jobs,'' Oxford Economics, June 2019, Submitted 
                     for the Record by Hon. DeFazio
    [This report is retained in committee files and is available online 
at https://www.oxfordeconomics.com/recent-releases/assessing-how-
foreign-state-owned-enterprises-us-based-operations-disrupt-us-job.]

                                 
  Statement of Ian Jefferies, President and Chief Executive Officer, 
  Association of American Railroads, Submitted for the Record by Hon. 
                           Graves of Missouri
    Thank you for the opportunity to provide a statement for the record 
regarding the impacts of state-owned enterprises on the public transit 
and freight rail sectors. AAR's railroad members account for the vast 
majority of U.S. freight rail traffic, employment, and revenue. AAR 
Associates include many firms that are suppliers to freight railroads, 
including several railcar builders and many firms that supply 
components to railcar builders.
    Some have expressed concern that, among other things, increased 
state-owned penetration of the U.S. freight and passenger railcar 
markets could lead to increased cybersecurity risks. The purpose of 
this statement is to briefly describe the many ways that freight 
railroads are addressing cybersecurity risks, no matter their source.
    Through multi-faceted cybersecurity plans and programs guided by 
internationally recognized standards, kept up to date by recurring 
assessments, and supported by specialized cybersecurity staff, 
railroads are constantly analyzing potential cyber threats, identifying 
potential vulnerabilities, and developing and implementing effective 
countermeasures.
       railroads are addressing the cybersecurity threat head on
    Railroads use computers and information technology in every aspect 
of their operations. Consequently, railroads know the importance of 
guarding against cyberattacks.
    The rail industry's cybersecurity efforts are unified, 
multifaceted, and proactive. The Rail Information Security Committee 
(RISC) leads the way. The RISC is comprised of the chief information 
security officers and information assurance officials of major U.S. 
railroads, augmented by AAR staff and representatives of other industry 
groups.
    The RISC was formed in 1999--meaning the rail industry had already 
established a forum for consultations and coordination on enhancing 
cybersecurity well before such vigilance became common across many 
different industry sectors.
    Railroads enhance their cybersecurity in a number of other ways, 
including:
      Maintaining an industry information sharing and analysis 
center that collects, evaluates, and disseminates cyber threat alerts 
and advisories, with recommended protection actions drawn from diverse 
sources.
      Defining and periodically reviewing and updating specific 
intelligence requirements with government entities in the United States 
and Canada to ensure timely awareness, understanding, and action to 
address prevailing and emerging cyber threats.
      Regular participation in classified presentations and 
discussions on cyber threats and incidents with the Department of 
Homeland Security (DHS), including the Transportation Security 
Administration (TSA), the Federal Bureau of Investigation (FBI), the 
National Security Agency (NSA), the Department of Transportation, and 
other government agencies.
      Engaging directly with various federal cybersecurity 
readiness and response teams to ensure continued cyber threat 
awareness.
                    intelligence sharing is crucial
    Even the most effective cybersecurity plans and procedures will 
falter if useful information on cyber threats is not shared. That's why 
timely intelligence and information sharing is essential if 
cybersecurity efforts are to succeed, and it's why a key element of 
railroads' cybersecurity efforts involves working with public sector 
partners to share information on cyber threats and effective 
countermeasures. The focus is on sharing tactical intelligence on what 
perpetrators are doing and how they are doing it.
    As a recent Congressional Research Service (CRS) report on 
cybersecurity points out, information sharing allows one party to 
bolster the knowledge of its partners. Information may provide 
opportunities for organizations to learn from one another, reduce their 
vulnerability to hacking, and quickly adapt to changing conditions. 
Successful information sharing occurs when an organization receives 
information, has the capability to process it, knows how to use it, and 
makes a change to its practices to better secure itself. The advantage 
to sharing information is realized when the result is a valuable change 
in behavior because of the information shared.
    Unfortunately, as the CRS points out, some organizations may miss 
critical information, lack the expertise to understand it, lack the 
resources to take action, or otherwise not change their behavior. A 
major goal of the RISC is to make sure this does not happen.
    The Rail Intelligence Working Group (RIWG) is a key element of rail 
cybersecurity efforts and information sharing. The RIWG is a public-
private partnership, comprised of experts from the federal government, 
transit, freight and passenger rail industries, that reviews threats 
and produces rail-focused intelligence analyses that are widely 
disseminated among security and law enforcement professionals in 
industry and government. These materials provide reliable, accurate, 
and timely intelligence along with recommendations on appropriate 
actions to take in response to real and perceived threats.
    Other steps the rail industry has taken to enhance timely 
information sharing, in coordination with partners at DHS, including 
the TSA, the FBI, and other agencies, include:
      Deploying secure telephone equipment to connect major 
railroads, the AAR, and government officials. This capability ensures 
timely sharing of classified intelligence and related security 
recommendations.
      Sharing classified information with authorized Canadian 
railroad officials, thereby harmonizing cross-border security awareness 
and preparedness. Canadian authorities have hosted classified threat 
briefings for U.S. railroads.
      Establishing a classified information sharing network 
with TSA, enabling authorized rail industry personnel to access secure 
TSA facilities and review relevant materials in dozens of metropolitan 
areas nationwide.
      Participating in a multi-industry initiative with DHS to 
establish a secure video teleconference network that simultaneously 
links more than 40 U.S. metropolitan areas. This capability is 
available for use by industry security coordinators, law enforcement 
officers, government officials, and others. Classified briefing and 
discussions focused on cyber threats, led by analysts from DHS, 
including TSA, the NSA, and the FBI have been provided through this 
network.
    As a result of these collective efforts, which reflect exceptional 
cooperation between government and industry, what had formerly 
sometimes required weeks or even months of effort (e.g., arranging in-
person briefings or meetings in Washington, D.C. or at regional 
locations) can now often be accomplished in a matter of hours. This 
greatly enhances the ability of everyone involved to identify and 
effectively respond to cyberthreats.
    The industry's cyberthreat intelligence priorities emphasize 
tactical analysis of successful cyber intrusions and blocked attempts 
that have targeted private sector and governmental entities. This focus 
draws upon the experience and knowledge of experts at the DHS, the FBI, 
and elsewhere in analyzing cyberattacks and assisting affected 
organizations.
    In particular, the rail industry seeks analyses that highlight 
tactics that are most commonly employed to gain illicit access to 
computer systems; vulnerabilities most commonly exploited; indicators 
of illicit activities most often noted in post-incident analyses that 
were missed or disregarded; and protective measures that could have 
made a difference.
             regular testing of cyber-response capabilities
    The rail industry helps ensure maximum sustained effectiveness in 
the face of evolving cybersecurity threats through the use of recurring 
exercises that simulate emergency situations. Lessons learned from 
these exercises and from actual security-related incidents inform 
reviews and updates and assure that railroads' plans continue to evolve 
to meet changing circumstances.
    Railroads and industry organizations also conduct comprehensive 
cyber risk assessments based on realistic threat scenarios drawn from 
intelligence analyses, including ``penetration testing'' that simulates 
an attack from malicious outsiders.
    Insights gained from risk assessments and cyber threat advisories, 
as well as experience gained in drills and exercises, enable railroads 
and industry organizations to incorporate a variety of effective 
safeguards and protective measures into their business and operational 
practices. Railroads know that, going forward, cyber awareness must 
remain a fundamental component of their day-to-day operations.



                                Appendix

                              ----------                              


 Questions from Hon. Henry C. ``Hank'' Johnson, Jr. for Scott N. Paul, 
             President, Alliance for American Manufacturing

    Question 1. Your testimony expresses clear concern that the CRRC is 
taking intentional action to dominate our nation's transit rail sector. 
With the completion of several U.S. public transit projects already, 
CRRC has postured themselves to be a noteworthy competitor in our 
transit manufacturing industry.
    (a) Will CRRC make a gradual impact on our rail sector, or can we 
expect swifter action?
    Answer. With the seemingly endless backing of a foreign, non-market 
economy government and the stated goal of dominating the U.S. rail 
sector, CRRC poses a grave danger. A look at the Australian market 
offers perspective. In just the last decade, CRRC undertook a similar 
campaign leading to the obliteration of that country's rail 
manufacturing sector. CRRC's ambitions are sizeable, that is to 
establish a substantial foothold into our public procurement market as 
a means of expanding into private sectors such as the freight rail 
market--a sector that not only supports 65,000 manufacturing jobs but 
is also responsible for moving 40 percent of all goods in the United 
States.

    (b) What will be the economic impacts of CRRC as a sudden and 
significant competitor in our rail market?
    Answer. Established firms in the U.S. rail manufacturing space are 
already facing unprecedented economic pressure to stay afloat. And, 
high-wage jobs throughout the domestic rail manufacturing supply chain 
are at risk of being displaced by workers operating under harsh 
conditions and little pay in China. With the financial backing of 
Beijing, CRRC is systematically working to drive established 
competitors out of the market and to achieve a monopoly in transit rail 
car production. If successful, this would be a disaster for taxpayers 
and for transit providers that are looking for legitimate, fair and 
broad competition for their contracts. Once established competitors are 
driven out of the U.S. market, it is reasonable to assume that the 
lowball bids of CRRC will disappear and U.S. customers will be at their 
mercy in terms of pricing.

    Question 2. CRRC benefits from state subsidies that allow them to 
offer lower bids on rolling stock contracts than many of their 
competitors. This presents the threat of market shrinkage--if transit 
agencies can save hundreds of millions of dollars from contracts with 
CRRC, they may be unlikely to shop around.
    (a) How do we engage with transit agencies to further consider 
contracts with established competitors?
    Answer. I urge Congress to pass the bipartisan Transit 
Infrastructure Vehicle Security Act, which has been introduced in the 
House and Senate. This bill would prohibit federal funds from being 
used by transit agencies to purchase rail cars or buses manufactured by 
foreign-government-owned, controlled, or subsidized companies. 
America's tax dollars should not be used to support Chinese SOEs 
seeking to undermine legitimate competition. It is necessary to apply 
further pressure to transit systems that aim to employ clever 
accounting as a means of using non-federal resources to award contracts 
to these Chinese SOEs. Transit agencies should not be permitted to 
allocate ``non-federal'' resources for the procurement of rail cars 
from CRRC when they also receive large sums annually from the federal 
government. Additionally, there is a role for the federal government to 
educate and provide guidance to local transit agencies regarding the 
economic and national security threats posed by state-influenced 
entities such as CRRC.

    (b) Do you think transit agencies are likely to favor market impact 
over exceptionally low bids?
    Answer. Left to their own devices, many transit agencies will award 
contracts based on price alone. And, on a local level, it is 
understandably a positive outcome that CRRC is establishing assembly 
operations and hiring American workers--in many cases, skilled, union 
workers that deserve our utmost respect. However, it is the duty of 
Congress to examine how these firms are systematically destroying the 
competitive national landscape for U.S. rolling stock manufacturing. 
With the seemingly endless backing of a foreign, non-market economy 
government and the stated goal of dominating these sectors, these firms 
pose a grave danger to established competitors. And, because their U.S. 
assembly operations are merely a supply line for imported components, 
ultimately the jobs of millions of American workers throughout our 
domestic supply chains are at risk. Thus, because transit agencies are 
required to adhere to federal programmatic requirements as a condition 
of receiving federal assistance, it is the duty of Congress to enact 
policies that result in a favorable market impact and to prevent the 
destruction of the competitive landscape for rolling stock 
manufacturing.

Questions from Hon. Peter A. DeFazio for Brigadier General John Adams, 
            U.S. Army (Retired), President, Guardian Six LLC

    Question 1. General Adams, your testimony provides a list of 
expanding technological capabilities that are being deployed on the 
rail system, such as onboard freight car location and asset health 
monitoring sensors, and you reference the national security challenges 
associated with them. The vulnerability of these types of connected 
technologies to intrusion is echoed in Mr. Cilluffo's testimony.
    General Adams, do you believe that, once granted access to our rail 
network, state-owned enterprises would share information gained from 
connected technologies with the company's home country? Could this be 
done even without the company's knowledge?
    Answer. China routinely spies on and engages in cyber espionage 
against the United States and other nations. For example, in September 
2016, the Department of Defense released an intelligence report which 
made clear that computers manufactured by Lenovo, a Chinese company, 
could potentially insert malware to compromise the Pentagon's supply 
chains.\1\ Couple this with the recent presidential national emergency 
declaration on Huawei, and it is certain that China seeks 
vulnerabilities in critical American systems.
---------------------------------------------------------------------------
    \1\ Bill Gertz, ``Facebook and Lenovo'', The Washington Times, June 
6, 2018,https://www.washingtontimes.com/news/2018/jun/6/facebook-
lenovo-put-cybersecurity-at-risk/
---------------------------------------------------------------------------
    The average life of a freight car is about 30 years. Transit cars 
can have a similar lifespan. The technology in these cars is incredibly 
sophisticated and future upgrades will only enhance their complexity. 
We can surely anticipate that the Chinese government will exploit these 
opportunities and do so surreptitiously.
    There are serious national security risks to the United States in 
giving a Chinese State-Owned Enterprises (SOE) access to such critical 
equipment as transit and freight cars which carry passengers, 
commodities, military equipment, and dangerous toxic substances. Aside 
from the cars themselves, China would have access to rail lines through 
critical tunnels, ports, and military bases, and gain access to 
sensitive data including, but not limited to, the timing and location 
of sensitive deliveries.
    It is absolutely possible that cyber vulnerabilities could be 
exploited without a company's knowledge. China has strong espionage and 
national security laws. The two pieces of Chinese legislation that 
allow cyber vulnerabilities to be exploited are the 2017 National 
Intelligence Law and the 2014 Counter-Espionage Law.\2\ The first law 
states, ``any organization or citizen shall support, assist, and 
cooperate with the state intelligence work in accordance with the law'' 
while the second law states, ``when the state security organ 
investigates and understands the situation of espionage and collects 
relevant evidence, the relevant organizations and individuals shall 
provide it truthfully and may not refuse.'' We are well-aware that CRRC 
is 100 percent government-owned and is thus mandated by Chinese law to 
provide any and all information to the government.
---------------------------------------------------------------------------
    \2\ Murray Scot Tanner, ``Beijing's New National Intelligence Law: 
From Defense to Offense'', Lawfare, July 20, 2017, https://
www.lawfareblog.com/beijings-new-national-intelligence-law-defense-
offense
---------------------------------------------------------------------------
    Furthermore, as stated in my testimony, ``CRRC's bylaws direct that 
the company seek guidance from the Communist Party of China on 
significant matters affecting the company's operations.\3\ Three of 
CRRC's current board members previously held high-level positions at 
several state-owned defense companies including, Aviation Industry 
Corporation of China (AVIC), which produces fighter and bomber 
aircraft, helicopters, and unmanned aerial vehicles for the Chinese 
Army, and China Shipbuilding Industry Corporation (CSIC), which 
produces submarines, warships, and other naval equipment for the 
Chinese Navy. Furthermore, two former CRRC board members held positions 
at AVIC and China North Industries Group Corporation Limited (NORINCO), 
a state-owned defense company that supplies tanks, aircraft, missiles, 
firearms, and related products for the Chinese military.''
---------------------------------------------------------------------------
    \3\ ``CRRC Corporation Limited Articles of Association,'' CRRC 
Corporation Limited, at 70.http://www.crrcgc.cc/Portals/73/Uploads/
Files/2018/6-4/636637164457871915.pdf
---------------------------------------------------------------------------

 Questions from Hon. Eleanor Holmes Norton for Brigadier General John 
        Adams, U.S. Army (Retired), President, Guardian Six LLC

    Question 2. Brigadier General Adams, as you noted in your 
testimony, the China Railway Rolling Stock Corporation (CRRC) has 
increased its presence in the U.S. mass transit market through its 
successful bids for railcar manufacturing contracts in several major 
cities such as Boston, Chicago, Los Angeles, and Philadelphia. And now, 
given CRRC's expected participation in the Washington Metropolitan Area 
Transit Authority's (Metro) ongoing procurement for its new 8000 series 
railcars, the challenge of how to respond to the risks posed by state-
owned enterprises has landed right on our doorstep here in the nation's 
capital.
    You noted a number of potential vulnerabilities that could arise as 
a result of state-owned enterprises manufacturing U.S. infrastructure 
components. These vulnerabilities range from the theft of information 
for espionage or computer network exploitation, to the mapping of 
infrastructure, to physical attacks.
    Metro is unique among transit agencies because many of its stations 
are located near critical hubs of legislative, defense, and 
transportation operations such as the U.S. Capitol, the House and 
Senate office buildings, the Pentagon, and Ronald Reagan Washington 
National Airport.
    (a) What security risks could arise from having CRRC build railcars 
for our Metro system here in the nation's capital?
    Answer. The security risks that could arise from CRRC winning and 
building transit cars for the Washington Metropolitan Area Transit 
Authority (WMATA) are both numerous and alarming. WMATA is a unique 
rail system for several reasons including the fact that it is located 
near critical hubs around Washington, D.C. including the Pentagon and 
United States Capitol. Modern day transit cars are complex and possess 
technologies such as Wi-Fi, passenger counters, cameras, and vital 
sensors, among other critical components. These could be easily used to 
track American citizens and more specifically targets of interest to 
the Chinese government, as well as, monitor conversations and data 
transmissions, and confiscate sensitive materials such as military 
plans or national security secrets.
    China is already tracking its own citizens. Using over 200 million 
cameras and widely deployed facial recognition software, the Chinese 
government is giving each citizen a social credit score.\4\ By 
monitoring behaviors and allegiance to the government, citizens are 
either rewarded or punished. Punishments are believed to be as severe 
as being placed in reeducation camps. If China is capable of keeping 
such a watchful eye on their own citizens, it seems entirely plausible 
that they would also surveil American citizens, especially those living 
and working in our Nation's Capital.
---------------------------------------------------------------------------
    \4\ Paul Mozur, ``Inside China's Dystopian Dreams: A.I., Shame and 
Lots of Cameras,'' The New York Times, July 8, 2018. https://
www.nytimes.com/2018/07/08/business/china-surveillance-technology.html

    (b) What steps should our region's Metro system take to minimize 
the risks associated with the potential purchase of railcars from CRRC?
    Answer. Zero tolerance is the best decision for WMATA when it comes 
to SOEs. In other words, WMATA must not engage in any activity with 
CRRC, or other similar SOEs, and that includes executing contracts with 
them. After all, trusted sources of transit cars are available from our 
allies. Moreover, even if WMATA believes that it could mitigate against 
the possible cyber-security and other risks posed by CRRC today and in 
the future, WMATA seems woefully unprepared to do business with CRRC, 
only recently amending its request for proposal for new cars to include 
cyber security protections.
    It should be acknowledged that there are no American-based 
manufacturers of transit cars. That said, the foreign companies that do 
manufacture cars in the United States are trusted friends and allies of 
the United States including France, Germany, Switzerland, Canada, 
Japan, and South Korea. Equally important, these countries employ 
thousands of Americans and source their products locally, unlike SOEs.
    In sum, WMATA has many ready options from which to procure new 
transit cars. The most recent generation of metro cars are Kawasaki, a 
Japanese company, that manufactures the cars in Lincoln, Nebraska. CRRC 
may offer cheap transit cars, but that cheap price includes the latent 
cost of serious risk to the economic and national security of the 
United States.
    When doing business with a trusted foreign ally, the United States 
can count on the protection of over 650,000 American jobs, and $74.2 
billion dollars in GDP according to a September 2018 report from the 
Railway Supply Institute.\5\ This is in addition to the 65,000 jobs 
that could be impacted in the freight industry should CRRC gain stable 
footing and attempt to take over that market.\6\
---------------------------------------------------------------------------
    \5\ Railway Supply Institute, Tracking the Power of Rail Supply: 
The Economic Impact of Rail Suppliers in the U.S, September 2018, at 5
    \6\ Oxford Economics, Will We Derail US Freight Rolling Stock 
Production? May 2017, at 5

    (c) What steps should Congress take to minimize the security risks 
associated with CRRC railcars in operation throughout the country?
    Answer. Congress has awoken to the threat of CRRC, as clearly 
demonstrated by H.R. 2739, the Transit Infrastructure Vehicle Security 
Action (TIVSA). Passing commonsense legislation like TIVSA would deny 
federal transit funds from going to CRRC contracts. Congress should 
also enact robust cyber security measures aimed at protecting freight 
and transit rail in the United States; support Administration proposals 
that put economic pressure on China; and further educate federal, 
state, and local officials on the predatory nature of Chinese SOEs.

  Questions from Hon. Peter A. DeFazio for Hamilton Galloway, Head of 
             Consultancy for the Americas, Oxford Economics

    Question 1. In your testimony you explain that the core purpose of 
state-owned enterprises (SOEs) is to fill a social or economic need 
within their home country's economy, yet in recent decades SOEs have 
increasingly been used to expand into foreign markets.
    In your opinion, is it fair to conclude that SOEs are being misused 
when they break into, or gain a significant share of, foreign markets? 
How concerned should countries be by the growing presence of SOEs?
    Answer. It is a very fair conclusion that state-owned enterprises, 
especially those in the People's Republic of China, are using 
anticompetitive practices and state-subsidies to gain unfair economic 
advantages in foreign markets. These practices and business activities 
do not represent market economy business activities. In the United 
States alone, companies like CRRC underbid competitors by up to 
hundreds of millions of dollars. A 2019 Oxford Economic report found 
that CRRC undercut the next highest bidder by 7-21 percent for certain 
transit contracts.
    What is great about operating in the United States is that fair and 
open competition reigns supreme. However, a state-owned company 
significantly reduces fairness and risks pushing out market 
competition. This has negative consequences on long-run prices and 
competitiveness, moving more toward monopoly-like economic distortions.
    Thus far, CRRC has won four major contracts in the United States 
for transit rail by underbidding competitors by hundreds of millions of 
dollars. Moreover, a number of these contracts use American taxpayer 
dollars to financially benefit the already subsidized state-owned 
enterprise.
    In a recent June 2019 report released by Oxford Economics, we found 
that state-owned enterprises do not face the same budget constraints as 
other manufacturers and thus have a greater ability to engage in anti-
competitive strategic pricing behavior. Furthermore, CRRC touted 
American job creation with the establishment of two final assembly 
facilities in the U.S. (Springfield, MA and Chicago, IL). However, our 
analysis shows that the United States actually loses between 3.5 to 5.4 
jobs for every job created by a Chinese state-owned enterprise, given 
documented assumptions about offshoring the U.S. supply chain. This 
amounts to a net loss of more than 5,000 middle-class American jobs for 
every $1 billion in contracts won by Chinese SOEs.\1\
---------------------------------------------------------------------------
    \1\ Oxford Economics, Assessing How Foreign State-Owned 
Enterprises' U.S. Based Operations Disrupt U.S. Jobs, June 2019, at 3.
---------------------------------------------------------------------------
    Other countries that have existing privately-owned railcar 
manufacturers should be concerned. China's Belt and Road Initiative 
impacts 152 countries around the globe. If SOE impacts are as 
significant here as they have been elsewhere in the world, Chinese SOEs 
have a serious, if not insurmountable economic advantage.
    I have attached our newest analysis to this response in case you 
have additional questions.

 Questions from Hon. Eleanor Holmes Norton for Hamilton Galloway, Head 
           of Consultancy for the Americas, Oxford Economics

Australia's Experience 
    Question 2. Why were state-owned enterprises able to eliminate 
Australia's freight railcar manufacturing industry? How long do we have 
before the same happens in the U.S.?
    Answer. The Chinese state-owned enterprise, CRRC (previously CNR 
and CSR), was able to fully displace the Australian freight railcar 
manufacturing market in less than a decade. This stemmed from state-
subsidies, below-market rate bank loans, and an aggressive, anti-
competitive entry into an unprepared market.\2\ Australia's economic 
dependence on China--especially during the Global Recession--provided 
further leverage to China's state-owned enterprises to disrupt and 
distort Australian businesses across the energy, natural resource 
extraction, construction, railcar manufacturing, and other 
manufacturing industries.
---------------------------------------------------------------------------
    \2\ Oxford Economics, Will We Derail US Freight Rolling Stock 
Production?, May 2017, at 5.
---------------------------------------------------------------------------
    The United States is at risk of following the same trajectory as 
Australia. Thanks to strong action by Congress, including legislation 
and important hearings like the one I had an opportunity to testify at, 
that window has likely been pushed back. That being said, it is vital 
to keep the pressure on Chinese SOEs, their unfair practices, and their 
negative impact on the United States.

    Question 3. In your opinion, what would be the most effective way 
to ensure that state-owned enterprises do not eliminate the United 
States' freight railcar manufacturing industry?
    Answer. In my personal opinion, there are a number of measures that 
will help to protect the economic integrity of the freight (and 
passenger) railcar manufacturing industry. These measures include: 1) 
passage of key pieces of legislation like H.R., 2739, the Transit 
Infrastructure Vehicle Security Act; 2) enacting robust cybersecurity 
measures aimed at protecting freight and transit rail in the United 
States; 3) supporting Administration proposals that put economic 
pressure on the People's Republic of China to abide by market economic 
principles; and 4) further educating federal, state, and local 
officials on the predatory nature of Chinese SOEs. Long-run policy 
measures should focus on pressuring and promoting privatization of 
globally expanding Chinese SOEs.

    Question 4. How can we monitor state-owned enterprises that have 
already established operations in the U.S. to ensure they aren't taking 
over the industry?
    Answer. We can monitor state-owned enterprises in the United States 
by increasing transparency and oversight on existing contracts 
including those in the cities of Los Angeles, Chicago, Philadelphia, 
and Boston--all cities that are currently under contract with the 
Chinese SOE, CRRC.
    Further educating local, state, and federal officials on the 
economic and national security impacts of SOEs in the United States is 
also vital to protecting American industries and our broader homeland.
    Supply-chain and origin audits should also be conducted by the 
transit authorities or an authorized objective third party--especially 
where Buy America provisions apply. This will enable better monitoring 
of upstream industry displacement effects.

    Questions from Hon. Henry C. ``Hank'' Johnson, Jr. for Hamilton 
    Galloway, Head of Consultancy for the Americas, Oxford Economics

    Question 5. The presence of state-owned enterprises can inhibit and 
shrink competitive markets. CRRC and numerous other SOEs eye competing 
aggressively in ours, and we must consider its effect on the presence 
of American jobs in transit and rail manufacturing.
    (a) Anti-competitive behavior in the market may threaten the 
presence of manufacturing jobs--can you provide examples of this in the 
freight rail sector?
    Answer. In a recent June 2019 report released by Oxford Economics, 
we found that state-owned enterprises do not face the same budget 
constraints as other manufacturers and thus have a greater ability to 
engage in anti-competitive strategic pricing behavior. Furthermore, 
CRRC has attempted to use the false narrative of American job creation 
when our analysis shows that the United States actually loses between 
3.5 to 5.4 jobs for every job created by a Chinese state-owned 
enterprise in the passenger rail sector. This amounts to a net loss of 
more than 5,000 middle-class American jobs for every $1 billion in 
contracts won by Chinese SOEs.\3\
---------------------------------------------------------------------------
    \3\ Oxford Economics, Assessing How Foreign State-Owned 
Enterprises' U.S. Based Operations Disrupt U.S. Jobs, June 2019, at 3.
---------------------------------------------------------------------------
    Currently, CRRC has won four major passenger transit contracts 
across the United States in the cities of Los Angeles, Chicago, 
Philadelphia, and Boston.
    A similar story has played out before. In the mid-late 2000s, CRRC 
entered the Australian rail market--seemingly on the heels of the 
Chinese-Australian Free Trade Agreement (ChAFTA). Much like CRRC in the 
United States, it started to win transit railcar manufacturing 
contracts in key cities. Once those finite orders were completed, CRRC 
switched its facilities to freight railcar manufacturing and completely 
decimated a robust domestic market in less than a decade.\4\
---------------------------------------------------------------------------
    \4\ The Australia experience is based on interviews of railcar 
manufacturer executives and backed by data. Further information can be 
found at: Oxford Economics, Will We Derail US Freight Rolling Stock 
Production?, May 2017
---------------------------------------------------------------------------
    CRRC has attempted to gain a foothold in the freight rail market in 
North America twice--the first through a joint venture in Wilmington, 
North Carolina, called Vertex and the second through a partnership 
called American Railcar Systems in New Brunswick, Canada. The Vertex 
facility closed due to lack of orders and the launch of the company in 
Canada appears to be suspended.\5\
---------------------------------------------------------------------------
    \5\ Buckland, Tim. Vertex closing: Rail car maker shuttering 
Wilmington plant. StarNews Online. October 26, 2018. https://
www.starnewsonline.com/news/20181026/vertex-closing-rail-car-maker-
shuttering-wilmington-plant Accessed 6/21/2019.
---------------------------------------------------------------------------
    CRRC has sought to penetrate both the transit and freight car 
industries in the United States. These industries directly and 
indirectly support the jobs of 650,000 Americans and contribute $74.2 
billion dollars in GDP according to a September 2018 report by Oxford 
Economics for the Railway Supply Institute.

    (b) How can we mitigate state-owned enterprises trying to 
manipulate competitive markets so that we don't ultimately suffer 
significant job loss?
    Answer. It is all about leveling the playing field in the United 
States. We are a country that embraces competition to ensure a robust, 
free, and competitive market. It is vital that the United States 
protect American jobs and taxpayers by acknowledging that state-owned 
enterprises do not play by the same rules as private companies. One can 
try to find ways to mitigate SOEs manipulating competitive markets, but 
the most strategic way to avoid any job losses in the United States is 
through risk avoidance, which means not purchasing rail cars from CRRC 
in the first place--at least not until CRRC conforms to market economy 
standards.
    The Railway Supply Institute estimates that over 650,000 American 
jobs are directly and indirectly tied to the rail industry. Freight 
railcar manufacturing industry in the United States alone is 
responsible for employing over 65,000 Americans, according to a 2017 
Oxford Economics analysis.\6\ To protect these jobs, it is vital that 
the United States publicly acknowledge the unfair practices of SOEs and 
institute commonsense solutions to rebalance the playing field.
---------------------------------------------------------------------------
    \6\ Oxford Economics. Will We Derail US Freight Rolling Stock 
Production?, May 2017.

    (c) If we can mitigate anti-competitive behavior in the market, 
will this promote the health of our transit and rail manufacturing 
industries?
    Answer. In principle, yes. If the United States, through the work 
of Congress and the Trump Administration, can mitigate Chinese SOE 
anti-competitive advantages, including ceasing state-subsidies, below 
market-rate loans, and predatory practices, the United States can 
ensure that its rail industry remains a strong, family-sustaining wage 
job creator, and helps bolsters U.S. GDP.
    According to an Oxford Economics report for the Railway Supply 
Institute, the rail supply industry supports over 650,000 jobs through 
direct, indirect and induced activities. These jobs contribute almost 
$74.2 billion to the GDP of the United States. It is these jobs, value 
and economic health that effective policies will both promote and 
preserve.\7\
---------------------------------------------------------------------------
    \7\ Oxford Economics. Tracking the Power of Rail Supply: The 
Economic Impact of Railway Suppliers in the U.S. September 2018.
---------------------------------------------------------------------------

 Questions from Hon. Peter A. DeFazio for Frank J. Cilluffo, Director, 
   McCrary Institute for Cyber and Critical Infrastructure Security, 
                           Auburn University

    Question 1. General Adams' testimony provides a list of expanding 
technological capabilities that are being deployed on the rail system, 
such as onboard freight car location and asset health monitoring 
sensors, and he references the national security challenges associated 
with them. The vulnerability of these types of connected technologies 
to intrusion is echoed in your testimony, Mr. Cilluffo.
    Mr. Cilluffo, do you believe that, once granted access to our rail 
network, state-owned enterprises would share information gained from 
connected technologies with the company's home country? Could this be 
done even without the company's knowledge?
    Answer. Response was not received at the time of publication.

   Questions from Hon. Eleanor Holmes Norton for Frank J. Cilluffo, 
   Director, McCrary Institute for Cyber and Critical Infrastructure 
                      Security, Auburn University

    Question 2. Mr. Cilluffo, as you noted in your testimony, the China 
Railway Rolling Stock Corporation (CRRC) has increased its presence in 
the U.S. mass transit market through its successful bids for railcar 
manufacturing contracts in several major cities such as Boston, 
Chicago, Los Angeles, and Philadelphia. And now, given CRRC's expected 
participation in the Washington Metropolitan Area Transit Authority's 
(Metro) ongoing procurement for its new 8000 series railcars, the 
challenge of how to respond to the risks posed by state-owned 
enterprises has landed right on our doorstep here in the nation's 
capital.
    You noted a number of potential vulnerabilities that could arise as 
a result of state-owned enterprises manufacturing U.S. infrastructure 
components. These vulnerabilities range from the theft of information 
for espionage or computer network exploitation, to the mapping of 
infrastructure, to physical attacks.
    Metro is unique among transit agencies because many of its stations 
are located near critical hubs of legislative, defense, and 
transportation operations such as the U.S. Capitol, the House and 
Senate office buildings, the Pentagon, and Ronald Reagan Washington 
National Airport.
    (a) What security risks could arise from having CRRC build railcars 
for our Metro system here in the nation's capital?
    Answer. Response was not received at the time of publication.

    (b) What steps should our region's Metro system take to minimize 
the risks associated with the potential purchase of railcars from CRRC?
    Answer. Response was not received at the time of publication.

    (c) What steps should Congress take to minimize the security risks 
associated with CRRC railcars in operation throughout the country?
    Answer. Response was not received at the time of publication.

Intelligence Gathering
    Question 3. Your testimony states that the economic impacts state-
owned enterprises pose to the transportation sector are intertwined 
with national security. For instance, you indicate that CRRC's entrance 
in the transit supply chain provides China a wealth of intelligence.
    (a) Is it possible for a foreign actor to use a state-owned 
enterprise as an unknowing conduit for malevolent actions?
    Answer. Response was not received at the time of publication.

    (b) If yes, has this already happened? Can you share an example?
    Answer. Response was not received at the time of publication.

    Questions from Hon. Henry C. ``Hank'' Johnson, Jr. for Frank J. 
     Cilluffo, Director, McCrary Institute for Cyber and Critical 
               Infrastructure Security, Auburn University

    Question 4. The integration of CRRC technology into our transit 
network is intertwined with national security. With the implementation 
of GPS, safety features, Wi-Fi systems and numerous other nuanced 
technologies, China gains considerable access to gather intelligence. 
This requires hyper-vigilance from our intelligence community.
    (a) Should CRRC make its entry as a powerful rail market 
competitor, how can we work with transit agencies to safeguard against 
malicious intent?
    Answer. Response was not received at the time of publication.

    (b) Are you seeing evidence of malicious intelligence gathering in 
sectors other than transportation?
    Answer. Response was not received at the time of publication.

    (c) What does a coordinated U.S. response to malicious intelligence 
gathering look like?
    Answer. Response was not received at the time of publication.

  Questions from Hon. Peter A. DeFazio for Zachary Kahn, Director of 
          Government Relations, North America, BYD Motors LLC

    Question 1. Mr. Kahn, in your testimony, you state BYD buses are 
exceeding Buy America requirements.
    (a) Does BYD import their chassis, shell, electric motors, or the 
drive train?
    Answer. Yes. To clarify, the shell arrives in five pieces and is 
built in Lancaster and put onto the chassis in a labor intensive 
welding and riveting process. The front axle is imported, but from 
Germany.

    (b) How much of the bus uses Chinese steel?
    Answer. There is steel in the chassis which represents 3% of the 
total cost of the vehicle. It should be noted that BYD's C10, 45, coach 
bus uses stainless steel in its chassis, sourced from the U.S. and 
Canada.

    Question 2. Mr. Kahn, when the Committee invited you to testify, it 
did so on the belief you would be testifying on behalf of BYD as a 
whole. Your testimony and Truth in Testimony statement indicated you 
are testifying on behalf of BYD Motors. BYD Motors is the sales team 
subsidiary of BYD US Holdings. Another subsidiary, BYD Coach and Bus, 
makes the buses.
    The House mandated Truth in Testimony statement asks all witnesses 
to ``list any contracts or payments originating with a foreign 
government related to the subject matter of the hearing.'' You answered 
no on behalf of BYD Motors. What would have been your answer if you 
were testifying on behalf of BYD US Holdings or BYD Coach and Bus?
    Answer. No.

 Questions from Hon. Peter A. DeFazio for Phillip A. Washington, CEO, 
        Los Angeles County Metropolitan Transportation Authority

    Question 1. Mr. Washington, your goal of a truly U.S. rail 
manufacturer has my full support. What do you need from Congress to 
move forward on developing this proposal into reality?
    Answer. Thank you for your support Mr. Chairman and for the 
opportunity to provide a detailed response as to how Congress can 
support our goal to establish a U.S. based industrial park where bus 
and rail rolling stock could be manufactured.
    I believe there are several areas that Congress can focus on to 
help achieve the Los Angeles County Metropolitan Transportation 
Authority's (Metro) goal of creating a rolling stock manufacturing 
facility--a transportation center of excellence--that allows for the 
full manufacturing, rather than just the assembly, of rail and bus 
rolling stock.
    First, in order to enhance our goal of creating rolling stock 
manufacturing facilities in the United States I believe Congress should 
focus on Buy America laws. To achieve the goal of creating an 
environment necessary for U.S. rolling stock manufacturers to emerge, 
Congress should consider further changes to the Buy America rules 
relating to minimum U.S. content by value for all rolling stock 
procured with federal funds. The current Buy America rules of 70% 
minimum domestic content creates an environment that makes large 
capital investments in rolling stock engineering, design and 
manufacturing challenging for new U.S. entrants to rail car and bus 
manufacturing. In addition to increasing the 70% threshold for domestic 
content, I believe that specific changes need to be made with respect 
to systems and components used for rolling stock vehicles.
    Mr. Chairman, you referenced this issue during the committee's May 
16, 2019 hearing, when you raised the example of how a foreign 
manufacturer of system components can be Buy America compliant if the 
finished product's sub-components equal 70% of the total value of the 
finished product and the finished product has its final assembly and 
testing done in the United States. The current Buy America sub-
component rule distorts the true U.S. domestic content value of 
finished rail cars and buses.
    Second, I believe that Congress should work to reinstate a program 
to allow for geographic hiring preferences and also for geographic 
preference for contractors to occur when using federal funding for the 
purchase of rolling stock. In the case of Metro, we provide a majority 
of the funding for most of our transit projects, including the purchase 
of rolling stock, through local and state funding. We believe with this 
change from Congress, it will give transit agencies the tool necessary 
to attract companies that are willing to invest in the communities that 
they are supplying with vehicles. Further, Congress should also require 
the use of the U.S. Employment Plan which is a contractual provision 
that incentivizes companies to create U.S. jobs through facilities 
investment.
    Lastly, we believe Congress should provide direct funding to give 
local efforts the extra push needed to become successful in 
establishing a domestic rolling stock manufacturing facility--a 
transportation center of excellence--that allows for the full 
manufacturing, rather than just the assembly, of rail and bus rolling 
stock.
    Specifically, we recommend altering an existing authorized federal 
transportation program or creating a newly authorized program that 
would provide grant funds to assist transportation agencies in the 
development of rolling stock manufacturing centers of excellence. 
Similar to other innovative discretionary grant programs for various 
transit pilot programs, it would be very helpful to have the Federal 
Government's involvement as a funding partner in standing up facilities 
that could host a rolling stock manufacturer.

 Questions from Hon. Greg Stanton for Phillip A. Washington, CEO, Los 
          Angeles County Metropolitan Transportation Authority

    Question 2. In your testimony you discuss the lack of domestic 
manufacturers of mass transit railcars and the need for fostering an 
environment where manufacturing of this stock can happen in the United 
States. And I appreciate the example you shared of the Apache 
helicopter that is manufactured in Mesa, Arizona.
    You outline your vision to create a transportation industrial park 
in Los Angeles County and in the future--transportation industrial 
parks in other places across America--to manufacture, not just 
assemble, mass transit railcars. And most importantly, this vision is 
focused on making sure the significant investments the transportation 
authority will make over the next few decades stay local and benefit 
the local economy.
    (a) What are the key barriers you see ahead that will pose the 
biggest challenge in realizing this endeavor?
    Answer. In my considered opinion, there are a number of barriers 
with respect to moving ahead with the development of a domestic rolling 
stock manufacturing center of excellence. These issues include, but are 
not limited to, matters related to increasing federal Buy America 
content requirements, restoring local hire reforms and securing federal 
funding for such a center of excellence. I will expand on these topics 
in response to your second question.
    Locally, the first barrier we have faced--thus far successfully--is 
working to identify an appropriate location for such a manufacturing 
center and dedicating sufficient local resources to ensure its future 
success. This has required working cooperatively with several levels of 
local government, including with the County of Los Angeles.
    The second barrier we anticipate, after finding the appropriate 
location for such a facility and working with the appropriate local and 
state officials on a package of incentives, is going to be building a 
manufacturing center that would attract a manufacturer to build their 
rolling stock in Los Angeles County. With respect to this barrier, it 
is most likely that we will need federal support to ensure that our 
agency and others committed to developing domestic rolling stock 
manufacturing centers of excellence, have the resources needed to build 
such a center.

    (b) What steps could the federal government take to help support 
these types of efforts?
    Answer. I believe there are several areas that Congress can focus 
on to help achieve LA Metro's goal of creating a rolling stock 
manufacturing facility--a transportation center of excellence--that 
allows for the full manufacturing, rather than assembly, of rail and 
bus rolling stock.
    First, in order to enhance our goal of creating rolling stock 
manufacturing facilities in the United States I believe Congress should 
focus on Buy America laws. To achieve the goal of creating an 
environment necessary for true U.S. rolling stock manufacturers to 
emerge, Congress should consider further changes to the Buy America 
rules relating to minimum U.S. content by value for all Rolling Stock 
procured with federal funds. The current Buy America rules of 70% 
minimum domestic content creates an environment that makes large 
capital investments in Rolling Stock engineering, design and 
manufacturing challenging for new U.S. entrants to rail car and bus 
manufacturing. In addition to increasing the 70% threshold for domestic 
content, I believe that specific changes need to be made with respect 
to systems and components of rolling stock vehicles.
    Chairman DeFazio mentioned, during your committee's May 16, 2019 
hearing, the example of how a foreign manufacturer of system components 
can be Buy America compliant if the finished product's sub-components 
equal 70% of the total value of the finished product and the finished 
product is final assembled and tested in the U.S. The Buy America sub-
component rule distorts the true U.S. domestic content value of all 
finished rail cars and buses.
    Second, I believe that Congress should work to reinstate a program 
to allow for geographic hiring preferences and geographic preference 
for contractors to occur when using federal funding. In the case of 
Metro, we provide a majority of the funding for most of our transit 
projects, including the purchase of rolling stock, through local and 
state funding. We believe with this change from Congress, it will give 
transit agencies the tools necessary to attract companies that are 
willing to invest in the communities that they are supplying with 
vehicles. Further, Congress should also require the use of the U.S. 
Employment Plan which is a contractual provision that incentivizes 
companies to create U.S. jobs through facilities investment.
    Lastly, we believe Congress should provide direct funding to give 
local efforts the extra push needed to become successful in 
establishing a domestic rolling stock manufacturing facility--a 
transportation center of excellence--that allows for the full 
manufacturing, rather than just the assembly, of rail and bus rolling 
stock.
    Specifically, we recommend altering an existing authorized federal 
transportation program or creating a newly authorized program that 
would provide grant funds to assist transportation agencies in the 
development of rolling stock manufacturing centers of excellence. 
Similar to other innovative discretionary grant programs for various 
transit pilot programs, it would be very helpful to have the Federal 
Government's involvement as a funding partner in standing up facilities 
that could host a rolling stock manufacturer.


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