    [Senate Hearing 116-22]
    [From the U.S. Government Publishing Office]

                                                             S. Hrg. 116-22

                       MADE IN CHINA 2025 AND THE FUTURE
                              OF AMERICAN INDUSTRY

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

                                    HEARING

                                   BEFORE THE

                          COMMITTEE ON SMALL BUSINESS
                              AND ENTREPRENEURSHIP
                              UNITED STATES SENATE

                         ONE HUNDRED SIXTEENTH CONGRESS

                                 FIRST SESSION

                                   __________

                               FEBRUARY 27, 2019

                                   __________

        Printed for the Committee on Small Business and Entrepreneurship

     [GRAPHIC NOT AVAILABLE IN TIFF FORMAT]

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

                                   __________

                        U.S. GOVERNMENT PUBLISHING OFFICE
    35-699 PDF                  WASHINGTON : 2019

    --------------------------------------------------------------------------------------
    For sale by the Superintendent of Documents, U.S. Government Publishing Office,
    http://bookstore.gpo.gov. For more information, contact the GPO Customer Contact Center,
    U.S. Government Publishing Office. Phone 202-512-1800, or 866-512-1800 (toll-free).
    E-mail, po@custhelp.com.

                COMMITTEE ON SMALL BUSINESS AND ENTREPRENEURSHIP

                         ONE HUNDRED SIXTEENTH CONGRESS

                                  ----------

                         MARCO RUBIO, Florida, Chairman
                  BENJAMIN L. CARDIN, Maryland, Ranking Member
    JAMES E. RISCH, Idaho                MARIA CANTWELL, Washington
    RAND PAUL, Kentucky                  JEANNE SHAHEEN, NEW HAMPSHIRE
    TIM SCOTT, South Carolina            EDWARD J. MARKEY, Massachusetts
    JONI ERNST, Iowa                     CORY A. BOOKER, New Jersey
    JAMES M. INHOFE, Oklahoma            CHRISTOPHER A. COONS, Delaware
    TODD YOUNG, Indiana                  MAZIE K. HIRONO, Hawaii
    JOHN KENNEDY, Louisiana              TAMMY DUCKWORTH, Illinois
    MITT ROMNEY, Utah                    JACKY ROSEN, Nevada
    JOSH HAWLEY, Missouri
                 Michael A. Needham, Republican Staff Director
                     Sean Moore, Democratic Staff Director

                                C O N T E N T S

                                  ----------

                               Opening Statements

                                                                       Page

    Rubio, Hon. Marco, Chairman, a U.S. Senator from Florida.........     1
    Cardin, Hon. Benjamin L., Ranking Member, a U.S. Senator from
      Maryland.......................................................     3

                                   Witnesses

    Setser, Mr. Brad, Senior Fellow, Council on Foreign Relations,
      New York, NY...................................................     5
    Atkinson, Mr. Robert, President, Information Technology and
      Innovation Foundation, Washington, DC..........................    14
    Rush, Mr. Andrew, President and CEO, Made In Space, Inc.,
      Jacksonville, FL...............................................    41
    Glaser, Ms. Bonnie S., Director, China Power Project, Center for
      Strategic and International Studies, Washington, DC............    51

                              Alphabetical Listing

    Atkinson, Mr. Robert
        Testimony....................................................    14
        Prepared statement...........................................    16
        Responses to questions submitted by Chairman Rubio...........    86
    Cardin, Hon. Benjamin L.
        Opening statement............................................     3
    Glaser, Ms. Bonnie S.
        Testimony....................................................    51
        Prepared statement...........................................    53
        Responses to questions submitted by Chairman Rubio...........    92
    Rubio, Hon. Marco
        Opening statement............................................     1
    Rush, Mr. Andrew
        Testimony....................................................    41
        Prepared statement...........................................    43
        Responses to questions submitted by Chairman Rubio...........    89
    Setser, Mr. Brad
        Testimony....................................................     5
        Prepared statement...........................................     7

                       MADE IN CHINA 2025 AND THE FUTURE.
                              OF AMERICAN INDUSTRY

                                  ----------

                          WEDNESDAY, FEBRUARY 27, 2019

                          United States Senate,
                            Committee on Small Business
                                          and Entrepreneurship,
                                                        Washington, DC.
        The Committee met, pursuant to notice, at 2:28 p.m., in
    Room 428A, Russell Senate Office Building, Hon. Marco Rubio,
    Chairman of the Committee, presiding.
        Present: Senators Rubio, Risch, Ernst, Young, Kennedy,
    Romney, Hawley, Cardin, Cantwell, Shaheen, Coons, and Hirono.

    OPENING STATEMENT OF HON. MARCO RUBIO, CHAIRMAN, A U.S. SENATOR
                              FROM FLORIDA

        Chairman Rubio. Today's hearing on the Senate Committee on
    Small Business and Entrepreneurship will come to order.
        I want to thank all of you for being here and really thank
    our witnesses for being a part of this today.
        The title of the hearing is ``Made in China 2025 and the
    Future of American Industry,'' and it is really applicable,
    given both conversations going on about the trade issues, but
    also the impact that it has on small businesses, more
    importantly, just the huge impact that global trade can have on
    small business and huge disruptions in trade and changes in
    those dynamics it can have on small businesses.
        When the history of this century is written, I believe that
    one of the defining factors, if not the defining factor, will
    be the relationship between the United States and China on
    multiple fronts.
        We see a threat to American competitiveness that is
    unprecedented in recent memory and recent history from an all-
    of-government approach that we see from China. We have not
    encountered anything like this, as I said, but unlike our
    previous competitors, they have developed tremendous commercial
    power that they have been able to use against American
    interests across the world.
        While the challenge we face with the Chinese government is
    ultimately one of national security and more fundamentally
    about whether or not in the future of the world, whether the
    future of the world will be marked by authoritarianism, one of
    the most immediate concerns that we face, especially as it
    applies to small business, comes in the form of China's
    industrial policy.
        Their government has a plan. It is called ``Made in China
    2025.'' It is a plan for industrial dominance in 10 key
    technological sectors, some of which the U.S. is the current
    global leader--all of which, and these industries will set the
    tone for the 21st century economy.
        For Chinese companies to meet the production targets that
    the plan sets out, their success will have to be at the expense
    of the United States.
        To some extent, this is already happening. The initial
    period following China's accession to the World Trade
    Organization witnessed a devastation to American small- and
    medium-sized manufacturers in concentrated areas throughout the
    country, an effect that is now known as the ``China Shock.''
        Understanding the goals of Made in China 2025, we must
    decide whether the shock should be allowed to expand up the
    value chain and across industries. I for one believe that this
    cannot be allowed to happen.
        The Committee produced a report. It was recently released,
    titled ``Made in China 2025 and the Future of American
    Industry.'' It lays out the challenges posed by this whole-of-
    society industrial plan, as well as a potential path forward to
    strengthen American economic security.
        One thing is clear. Just as business firms compete, so do
    nations. Through plans like Made in China 2025, the Chinese
    government has set its sights on many of the high-value
    industries that America simply cannot afford to lose.
        Through this whole-of-society strategy, the Chinese
    government attempts to steal and subsidize and ultimately
    compete its way to the top of the global production value
    chain. In sum, they aim to supplant American industrial
    leadership by any means necessary, including illegal ones.
        Fortunately, our system contains intrinsic advantages that
    their totalitarian system does not. Our market-based economy
    and free society operate with an efficiency and openness that
    is impossible in China's command and control regime.
        American freedoms and the open exchange of ideas attract
    talented and idealistic individuals from across the globe who
    contribute to the continuous building of our Nation's
    capabilities.
        American ingenuity and innovation in combination with our
    political freedoms have created the world's most successful and
    most forward-thinking companies.
        Small businesses, which support dignified work, strengthen
    families, and sustain communities, are particularly susceptible
    to the dangers of state-backed import competition. Trade
    normalization with China occurred with the optimistic promise
    of fair-market access, economic liberalization, and an
    improvement in Chinese political and human rights.
        However, instead of opening, China took advantage by
    discounting international trade rules and norms to the
    detriment of American productive capabilities.
        Chinese industrial and trade practices including large-
    scale subsidies, forced technology transfers, and obstructing
    market access to foreign firms underscore the nation's
    disregard for its international trade commitments.
        Beyond merely breaking the rules, the Chinese government is
    seeking to dictate the terms and conditions of the future of
    global trade and to do so for their own benefit.
        In the absence of a concerted American policy response,
    Made in China 2025 threatens to replicate the effects of China
    Shock on high-value capital goods, such as computers and
    aerospace products. It is important to note that these threats
    to American competitiveness are not contingent upon the total
    success of Made in China 2025 or any other industrial plan.
    Command and control central planning is a flawed economic
    approach with countless pitfalls and downsides.
        However, as many American workers know personally, this
    does not mean that such an approach cannot have devastating
    impacts on U.S. production, jobs, and particularly U.S. small
    businesses.
        In many important measures, China has already achieved
    success, capturing leading positions in global economic
    standings that were previously held by the United States. In
    order to confront this challenge, we must choose to prioritize
    national development, economic dynamism, and small business
    competitiveness.
        This growth agenda entails a focus on domestic physical
    investment and labor market stabilization. It also means that
    we must enact in-kind responses to malicious Chinese trade and
    industrial practices.
        As an economic development agency, the Small Business
    Administration is particularly suited to support innovation-
    focused production ecosystems. Programs such as the Small
    Business Investment Company and the Small Business Innovation
    Research and Small Business Technology Transfer, these serve as
    tools which can be used to further promote a nimble,
    innovative, and high-growth industrial strategy.
        I look forward to engaging with the witnesses to explore
    the findings of our study, our report, and also their views on
    this and its implications for the future of American
    competitiveness.
        And now I turn it over to the Ranking Member.

    OPENING STATEMENT OF HON. BENJAMIN L. CARDIN, RANKING MEMBER, A
                       U.S. SENATOR FROM MARYLAND

        Senator Cardin. Well, Senator Rubio, thank you very much
    for convening this hearing. I think it is an extremely
    important subject to take a look at the impact that Made in
    China 2025 will have on American small businesses.
        I do point out that this morning, Ambassador Lighthizer,
    our USTR, testifying before the House Ways and Means Committee,
    indicated that he could not predict the outcome of negotiations
    between China and the United States.
        Therefore, the points that our Chairman has made that we
    need to be prepared to act is one that I fully support. That we
    are going to need to take action in order to make sure we have
    a level playing field for American businesses.
        In May 2015, the government of China released a 10-year
    plan known as Made in China 2025 to transform its high-tech
    manufacturing capabilities and achieve new breakthroughs in 10
    key industries, including aerospace, biomedicine, and
    artificial intelligence.
        China's stated goal is to be 70 percent self-sufficient in
    high-tech industries by 2025 and a leading manufacturing power
    by the year 2049, which is the 100th anniversary of the
    founding of the People's Republic of China.
        China's aggressive strategy to dominate these emerging
    high-tech manufacturing sectors raise serious concerns, not
    just in the area of national security, but also to U.S.
    businesses, both large and small.
        I am particularly concerned about the impact on small
    businesses. Small businesses, as we know, is the growth engine
    for jobs in America and innovation and are very much in the
    supply chain of many of these industries, and if there is
    unfair competition, small companies do not have the deep
    pockets. And we could lose that edge here in America of job
    growth and innovation.
        As our Chairman wrote in his recent report on the subject--
    and I really do applaud our staff and our leadership for the
    report, Made in China 2025, our Chairman said, ``If Made in
    China 2025 is successful, what the China Shock did to domestic
    U.S. productions of electronics, furniture, plastic, metals,
    and vehicle parts could threaten to be repeated itself in
    capital goods like machinery, automobiles, high-end computers,
    rail, and aerospace products.''
        The United States and American workers are willing to
    compete in the global marketplace, but that competition must be
    on a level playing field, where all nations are willing to
    follow agreed-upon international rules and standards.
        I am concerned that to achieve its goal, China will rely
    not on innovation and ingenuity, but instead on its ongoing
    practice of stealing U.S. technologies and other unfair trading
    practices.
        The administration's investigation into Chinese trade
    practices found four major methods by which China attempts to
    coerce or steal U.S. intellectual property. First, China uses
    investment restrictions and licensing procedures to require or
    pressure technology transfer. Second, China imposes
    restrictions and intervenes in U.S. firms' investments and
    activities, often leading to technology licensing terms that
    unfairly favor Chinese firms. Third, China directs and
    facilitates the acquisition of U.S. companies and assets to
    obtain cutting-edge American technology; and fourth, China
    orchestrates state-sponsored cyber theft to gain access to
    critical U.S. intelligence property.
        I recently joined six Senators in a letter to President
    Trump asking him to extract meaningful commitments from China
    on each of these elements and to end the threats that these
    policies pose to the U.S. economy and national security. And
    while I hope the President is successful, I am disappointed by
    his go-it-alone negotiating style in the state for our closest
    allies.
        As Bonnie Glaser, one of our witnesses today, wrote in the
    New York Times, ``Alliances should be at the core of the U.S.
    strategy to effectively compete with rising China.'' Until
    Washington heeds this advice, Beijing will continue to exploit
    the opportunities that are falling into its lap.
        I welcome all of our witnesses today, and I look forward to
    our discussion on this extremely important subject.
        Chairman Rubio. Thank you to the Ranking Member.
        And now I would like to welcome our panel of witnesses.
    Brad Setser is a Senior Fellow for International Economics at
    the Council on Foreign Relations. He previously served in the
    U.S. Department of Treasury as Deputy Assistant Secretary for
    International Economic Analysis. In addition, he was the
    director for International Economics, serving jointly on both
    the National Economic Council and the National Security
    Council.
        Robert Atkinson is the president of the Information
    Technology and Innovation Foundation, a public policy
    organization that promotes policies based on innovation
    economics. He served in three previous administrations and as
    project director at the former Congressional Office of
    Technology and Assessment.
        Andrew Rush of Jacksonville, Florida, is the president and
    CEO of Made in Space, Inc., a company which specializes in
    producing additive manufacturing capabilities for use in outer
    space and other extreme environments.
        Bonnie Glaser is a Senior Advisor for Asia and the director
    of the China Power Project at the Center for Strategic and
    International Studies. Prior to her time at the Center, she
    consulted for a number of U.S. Government agencies, including
    the State Department and the Department of Defense.
        Thank you all for coming today. We will begin with you, Mr.
    Setser.

      STATEMENT OF BRAD SETSER, SENIOR FELLOW, COUNCIL ON FOREIGN
                               RELATIONS

        Mr. Setser. I want to thank the members of the Committee
    for the invitation to testify here today.
        I also want to commend the Committee and its staff for
    their recent report on China's industrial policies.
        I share the report's conclusion that a vibrant advanced
    manufacturing sector is critical to a strong American economy,
    and that Made in China 2025 poses a challenge to many American
    businesses, to U.S. trade policy, and the rules now governing
    the global trading system.
        The policies outlined in China 2025 are troubling not
    because China is looking to strengthen its own development.
    Rather, they are troubling because they appear to mobilize the
    substantial financial capacity of China's state to back a
    strategy of substituting domestic products for imported goods
    and technology.
        China's government often effectively can guarantee a
    captive market for Chinese producers, while informally
    constraining, if not walling off, foreign firms from full
    access to China's market.
        They are troubling because China's government appears to
    have sought to accelerate China's technological development by
    subsidizing the purchase of leading-edge global firms with
    state funds, and in some cases, supporting efforts to steal
    technology from foreign firms.
        It is not yet clear how much progress was made on these
    issues in the current round of trade negotiations. I suspect
    that it will be difficult to negotiate an agreement that
    completely addresses the concerns that China's party state is
    uniquely able to rig China's domestic market.
        I would also note that as China increasingly aims to supply
    the capital goods, central to the technological backbone of a
    modern economy, security considerations are bound to have a
    bigger impact on our economic relationship.
        I want to focus the remainder of my testimony on two
    points; first, the importance of a fairly valued Chinese
    currency to a balanced commercial relationship and then turn to
    the specific challenges posed by China's import-substituting
    industrial policies.
        First, currency. Before the global crisis, there was a
    credible argument that ending China's currency manipulation on
    its own would do much to bring better balance to our trading
    relationship. Today, currency intervention is not the primary
    way Chinese policy distorts global competition.
        In fact, after the dollar appreciated in 2014, China has
    more often intervened to keep the yuan from depreciating and to
    block its appreciation, but it is worth remembering that the
    value of China's currency remains central to the character of
    our commercial relationship.
        The U.S. has benefited from China's domestic stimulus,
    which helped China pivot away from excessive reliance on
    exports, but there is now concern that the reduction in China's
    external surplus after the global crisis was based on an
    unsustainable expansion of credit. Putting the reduction in
    China's overall surplus on a sustainable footing needs to be a
    major U.S. policy priority.
        China still saves too much and consumes too little. It
    often taxes low-wage work too heavily, while leaving capital
    income largely untaxed. To echo the words of the Senate
    Committee report, China also needs a policy agenda that does
    more to meet the needs of working families.
        I will not review in detail the various ways China rigs its
    domestic market to support its manufacturing development. I do
    want to note that I support the call for stronger screening of
    inward Chinese investment and would even support limits on
    Chinese investment in certain sectors as a means of putting
    additional pressure on China.
        I also support proactively preparing dumping and
    countervailing duty cases against those sectors targeted in
    China 2025 and preparing to file more legally difficult adverse
    effect WTO cases.
        I also believe that the United States should be ready to
    match China's export financing to balance the competitive
    landscape in third-party markets.
        Chairman Rubio. I apologize for interrupting. If you could
    move the mic. I have been told people on C-SPAN are watching,
    but they do not know what you are saying, and the closed
    caption guy is going nuts.
        Mr. Setser. There we go. I apologize.
        Chairman Rubio. Can you start from the beginning? I am
    kidding.
        [Laughter.]
        Mr. Setser. I think my time has expired, unfortunately. So
    my testimony, therefore, will remain in the dark.
        [The prepared statement of Mr. Setser follows:]
        [GRAPHICS NOT AVAILABLE IN TIFF FORMAT]

        Chairman Rubio. What a great witness. Thank you, sir. I
    appreciate it.
        Mr. Atkinson.

    STATEMENT OF ROBERT ATKINSON, PRESIDENT, INFORMATION TECHNOLOGY
                       AND INNOVATION FOUNDATION

        Mr. Atkinson. Thank you, Chairman Rubio and Ranking Member
    Cardin and members of the Committee. Press the button; turn the
    mic. It is a pleasure to be here with you.
        I am not going to focus specifically on all the egregious
    things China is doing. We have written about that. We have
    heard about that today. I will say that ITIF as a think tank
    has been focusing on this for almost a decade. We wrote a
    report in 2012 with the provocative title ``Enough is Enough:
    Confronting Chinese Innovation Mercantilism,'' and since then,
    things have not gotten any better.
        I want to really discuss four major points that the
    Committee's report alluded to that I think are critical.
        I think the development of widespread clarity and agreement
    on these points is one of the most important things we can do
    in Washington in this space. If we can agree on these major
    principles, getting the right action to follow is a lot easier.
        First, the report highlights the need for a wake-up call
    when it comes to understanding the nature of the threat from
    China. There are still too many people in Washington who have
    the view that China cannot innovate; they can only copy. And I
    think that is false. We are already seeing that where they have
    gained considerable advantage in industries like jet aircraft,
    high-speed rails, solar panels, personal computers, super
    computers, telecommunications equipment, and internet services.
    We have to remember that people said the exact same thing about
    Japan in the 1960s, Korea and Taiwan in the 1970s. All three of
    those nations are clearly global technology leaders. There is
    no reason China cannot become a global technology leader.
        Second, the report rightly notes that globalization, while
    the narrative that is dominant is that globalization can be
    harmful to some workers, that it is beneficial for us overall.
    And to be sure, two-sided free trade like trade with China,
    with Canada and Mexico, is welfare maximizing for the U.S., but
    I would argue that trade with nations like China that is
    premised on systemic innovation mercantilism reduces overall
    U.S. economic welfare, not just hurts a few individual workers
    or communities.
        Third, the report rightly notes that it is a mistake to
    posit only two choices--laissez faire, free-market capitalism
    on one side and heavy-handed industrial policy on the other
    side. This was always a false choice, and as every governor in
    America knows, regardless of party, every single governor has
    an economic development strategy. Florida has one. Maryland has
    one. And it does not matter the party. They know that if they
    are not putting in place good economic development policies for
    their State, their State will be left behind in global
    competition. We have to think the same way in Washington as
    governors do around the country.
        Finally, the report rightly notes that the choice should
    not be between rolling back Chinese innovation mercantilism and
    getting better policies at home. We saw that recently in a
    Washington Post op-ed by Lawrence Summers who said--I am
    paraphrasing essentially--we should not worry about China; we
    should only do the things we have to do at home. And he got
    that half right. There are other people who say, well, we
    should only worry about China and not do things at home. We
    have to do both. If we do not have a good and aggressive policy
    to force China to comply by the rules, which, by the way, I
    would agree has to be alliance-based, we are not going to have
    the kind of success Chairman Rubio was alluding to. And if we
    do not have better domestic policies around innovation
    competitiveness, we will not.
        Let me just take the last minute here to say a few things.
    I alluded to a number of what I thought could be promising
    policy changes, but let me mention a couple that relate to
    small business.
        Right now, the SBA has, as you all know, a 7(a) loan
    program. Most of those loans go to companies that are in
    sectors that are not traded. They are going to be here, no
    matter what. SBA funds liquor stores. If they do not give loans
    to liquor stores, we are still going to have liquor stores in
    America. Only 7.5 percent of SBA loans go to manufacturers, and
    I think it is an important area to work with SBA to help them
    figure out how can they make sure that more of their loans and
    more of their assistance are going to the kinds of companies
    that are facing tough global competition.
        Secondly, and I know this is not the Finance Committee, but
    there are a number of provisions in the Tax Code that are
    problematic for small technology startups. One is a current law
    regarding how passive investors can take advantage of the
    research and development tax credit, something I know Senator
    Coons is focused on. Under that law, it makes it harder for
    when a company is sold for those R&D credits to go with the
    investor, making it less valuable as a company.
        Finally, Congress should, in our view, allocate, allow a
    small share of SBIR and STTR grants award to be used for
    commercialization activities. Again, Senator Coons, you had a
    bill on that, and we fully support that. SBIR and STTR are
    great programs, but unless you commercialize the technology, it
    is not as effective as it could be.
        Finally, last idea, 10 countries now around the world,
    including many of our allies, have programs to provide very
    small vouchers, about $25,000, to give to small innovation-
    based companies to go to a National Lab or a Federal lab or
    research universities and spend it on getting technical
    assistance or cooperative R&D. We have advocated for a small
    sort of test pilot program to be run by perhaps NIST, the
    National Institute of Standards and Technology, and basically
    allow companies to give them more access to our Federal labs
    and our universities.
        With that, I will stop and apologize for going over my
    time.
        [The prepared statement of Mr. Atkinson follows:]
        [GRAPHICS NOT AVAILABLE IN TIFF FORMAT]

        Chairman Rubio. Thank you.
        Mr. Rush.

      STATEMENT OF ANDREW RUSH, PRESIDENT AND CEO, MADE IN SPACE,
                                  INC.

        Mr. Rush. Chairman Rubio, Ranking Member Cardin, and
    members of the Committee, thank you for the opportunity to
    speak with you today.
        Innovation and technical advancements are really the most
    critical components of our national infrastructure. As the
    global landscape shifts, it is imperative that our Nation
    maintains its superiority in both the commercial markets and in
    defense.
        I believe that America's leadership in space will be the
    key to fortifying our American industry and military strength.
        As the CEO of Made in Space, I am really honored to lead a
    company that is really pioneering a new space economy and
    supporting our Nation's exploration and defense objectives.
    Made in Space is the industry leader in space manufacturing
    technology and products for both commercial and government
    customers.
        We are developing new capabilities to produce in-space
    manufacturable satellites, which leverage additive
    manufacturing and robotic assembly. This new technology will
    really redefine the future of our space infrastructure,
    enabling next-generation spacecraft and platforms to be built,
    reconfigured, and repaired on orbit.
        Key enablers of this incredible progress have been strong
    support from NASA, DARPA, other government agencies, and
    public-private partnerships.
        Specifically, this support has seen us transform our base
    technology and capabilities from programs--into programs
    focused on meeting ambitious exploration and defense
    objectives.
        Our In-Space Manufacturing program was initially
    demonstrated through a grant from NASA's Flight Opportunities
    program, which allowed us to test a gravity-independent 3D
    printer on a parabolic flight.
        After this first successful demonstration, we were rewarded
    a series of NASA SBIR contracts to develop and operate the
    first 3D printers on the International Space Station.
        In 2014, we manufactured the very first functional objects
    that humanity ever made off the face of the planet. This flight
    tipping technology, which is supported by NASA, is now meeting
    the demands of both commercial and government customers on
    orbit.
        Further building on the success, Made in Space was selected
    to participate in the NASA STMD In-Space Robotic Manufacturing
    and Assembly program, or IRMA for short. The IRMA program is a
    two-phase program, which seeks to transform the way that we
    manufacture, assemble, and repair large structures and
    satellites in space, and IRMA is a really powerful example of
    how the government can spur technological innovation and
    advance American industry.
        IRMA operates with a public-private partnership, requiring
    at least 25 percent of the development cost of the program to
    be contributed by industry, with really the primary focus on
    this being to develop tipping point technologies that will be
    used both by commercial and government users.
        Phase I of this was focused on ground demonstration, and in
    Phase II, there is focus on definitive flight demonstrations in
    space to push these technologies past those tipping points,
    enabling the use of this technology for operational defense,
    commercial, and civil space missions.
        This programmatic structure is enabling American industry
    to develop and implement technologies which improve satellite
    design and operation in the future and provide significant
    advantages over the U.S.'s competitors.
        Despite these triumphs, space is becoming an increasingly
    contested environment. Mere years after Made in Space first
    demonstrated the ability to 3D print in microgravity, Chinese
    researchers aboard parabolic aircraft demonstrated that same
    technological feat.
        And just as Made in Space and NASA have been progressing
    from parabolic flights to developing in-space manufacturing and
    assembly technologies for space missions, China is taking a
    similar approach.
        The China Academy of Space Technology Corporation, a major
    Chinese aerospace contractor, has recently announced plans to
    develop and deploy large-scale space-based solar power
    stations. By 2025, using in-space manufacturing and assembly
    technologies, they plan to begin constructing power stations,
    which will beam power from space to the ground in China. The
    technologies used to construct such power stations can also be
    used for next-generation military and civil space assets and
    are potentially being developed at a pace that is faster than
    current U.S. investments in this kind of technology.
        We at Made in Space have benefited enormously from the
    virtuous cycle of technology development and operation enabled
    by NASA and other government agencies. We are grateful to those
    that have helped us along the way and are proud to continue
    this work.
        Over the next decade, the space economy will continue to
    grow due to this support, but competitors such as China have
    taken note of this. While the U.S. currently has an edge in
    high-impact areas, such as in-space manufacturing and assembly
    of satellites, this advantage is eroding.
        Additional investment is required and operational mission
    infusion should be accelerated in order to maintain America's
    edge in these important areas, or else we risk losing the
    ultimate high ground of space.
        Thank you.
        [The prepared statement of Mr. Rush follows:]
        [GRAPHICS NOT AVAILABLE IN TIFF FORMAT]

        Chairman Rubio. Ms. Glaser.

     STATEMENT OF BONNIE S. GLASER, DIRECTOR, CHINA POWER PROJECT,
             CENTER FOR STRATEGIC AND INTERNATIONAL STUDIES

        Ms. Glaser. Thank you, Chairman Rubio, Ranking Member
    Cardin, and members of the Committee for inviting me to testify
    today.
        We are here talking about Made in China 2025. As you have
    said in your opening remarks, this is a 10-year industrial
    policy designed to transform China into an advanced global
    manufacturing leader.
        But let us be clear. This is one of many industrial
    policies in China. This is not the only one. There is a
    thirteenth 5-year plan, very outstanding, which runs 2016 to
    2020. China is moving away from market-led economic decision-
    making, to the extent that they ever were relying on the
    market.
        Xi Jinping has spoken out very clearly about what China's
    goals are, and it is important to put the Made in China 2025
    plan within the context of China's larger geostrategic goals.
        Xi Jinping talked in the 19th Party Congress, October of
    2017. He laid out a plan to achieve the great rejuvenation of
    the Chinese nation, 2049. That is the centennial of the
    founding of the Chinese Communist Party. And then he set out an
    interim goal of 2035 of making China into a top-ranked
    innovative nation. So there are many industrial policies that
    are aimed at achieving this goal.
        So drilling down on Made in China 2025, what are some of
    the challenges and problems that it poses? First of all, this
    program will advance China's goal of military-civil fusion,
    another goal that Xi Jinping has set out, which aims at
    strengthening the country's innovation capability for dual-use
    technologies in key strategic industries. Obviously, this
    includes aviation, robotics, information technologies. It is
    going to help the People's Liberation Army become a more
    effective fighting force.
        Secondly, China's ambition to control entire supply chains
    poses a risk that entire industries could come under Chinese
    control.
        Thirdly, Chinese government subsidies distort markets,
    undercut U.S. and other foreign manufacturers, and results in
    overcapacity and the dumping of cheap products in the global
    market. We have seen this happen in the electric vehicle
    industry with batteries.
        Fourth, made in China 2025 lays out a three-stage plan. So
    it starts with localizing and controlling segments of global
    supply chains, then to proceed with substitution, and finally
    to capture global market share. This is a three-step process
    that could enable China to displace foreign companies in some
    of these industries, both domestically and internationally.
        Fifth, establishing quotas violates WTO rules against
    technology substitution, and you can find very specific quotas
    in all of these 10 areas.
        Sixth, MIC 2025 puts a premium on the acquisition of
    advanced technology, and, Senator Cardin, you talked about some
    of the ways in which China is procuring technology illegally.
    There is also, of course, an emphasis on buyouts of foreign
    companies.
        Finally, number seven, Made in China 20205 will help China
    to spread Chinese standards abroad and undermine Western
    standards. So among these target countries are going to be
    those that are linked to China's ``One Belt, One Road,'' which
    seeks to tie Eurasian economies more closely to China through
    trade and investment.
        I have laid out in my testimony some of the recommendations
    of what needs to be done. First on the list is certainly to
    protect intellectual property. We are doing a lot better, I
    think, and the Department of Justice having stood up the China
    Initiative, prosecuting and enforcement of cases going forward
    of suspected Chinese economic espionage is going to be very
    important. I think the Treasury Department should be
    sanctioning Chinese companies that benefit from cyber
    espionage. And counter-intelligence outreach should be expanded
    to U.S. startups and small businesses in sectors central to
    Chinese technology strategies that are vulnerable.
        Secondly, we should be using the World Trade Organization.
    This is a dispute settlement mechanism that WTO provides a
    means to hold China accountable for its trade practices,
    including persistent theft of intellectual property, cyber-
    enabled espionage, and widespread use of subsidies. The U.S.
    has been successful in the past in winning WTO cases. We have
    won more than any other country, and it is a good means to try
    to protect the interests of American workers.
        Where possible, we should be collaborating with
    international partners to bring trade cases against China at
    the WTO, and one such case could be targeting the forcing of
    our foreign firms to transfer technology and intellectual
    property.
        Thirdly, I agree very much with this Committee's report and
    commend everybody on the hard work that you have put in it. The
    United States, I agree, cannot--and I quote the report--
    ``escape or avoid decisions about industrial policy.'' As the
    U.S. strategizes about how to compete more effectively with
    China, we should consider the pros and cons of industrial
    policy making, rather than imposing tariffs that effectively
    tax U.S. companies they are supposed to defend. The U.S. should
    support innovation at home by providing more funding for basic
    research and development.
        And, finally, I have suggested that we find, when the
    politics are right, a way to rejoin the TPP, now called the
    ``CPTPP,'' because I think it provides one of the best options
    for the United States to compete more effectively with China
    and counter Made in China 2025.
        Apologies for going over my time.
        [The prepared statement of Ms. Glaser follows:]
        [GRAPHICS NOT AVAILABLE IN TIFF FORMAT]

        Chairman Rubio. Thank you.
        I just have one question, and I am going to turn it over to
    the Ranking Member, so all the members can get in.
        Let me just start with Mr. Setser. What areas has China
    already overtaken in the United States on the global production
    value chain?
        Mr. Setser. I think, in general, China still lags. I think
    the most important area where China is approaching, if not
    exceeding U.S. capabilities, is when it comes to
    telecommunications networking infrastructure.
        I think there is a consensus that infrastructure, which to
    be clear still relies on imported U.S. components, but their
    networking equipment is at the top end of the market.
        I think in other sectors, China still lags, but China has
    clearly thrown tremendous resources at trying to catch up in
    semiconductor manufacturing. There is an over $50-billion
    national fund, and then there are multiple provincial funds
    that have over $100 billion collectively. That is an enormous
    war chest to try to catch up.
        I do not think China is close to matching our capacities in
    aerospace, but aircraft is our leading export industry, and
    aircraft is our leading industrial export to China. So even
    though China has not yet caught up, their ambitions and efforts
    to do so should be a concern.
        Thank you.
        Chairman Rubio. Ranking Member.
        Senator Cardin. Thank you, Mr. Chairman, and let me thank
    all of our witnesses.
        All of you agree we should work in alliance with our
    friends on China. That is a little bit more challenging today
    because the President led on trade policies of aluminum and
    steel, which divided our traditional trading partners. So that
    when he went after China, we did not have the same degree of
    cohesion as we should have had in going after a country where
    we have legitimate concerns.
        You all expressed that we should use the WTO, which is
    certainly a multilateral agreement. The challenge is that
    international property in governance issues are not terribly
    strong within the WTO, and how do we use that in the areas
    where China has exploited the fact that the WTO does not cover
    those particular issues.
        Ms. Glaser, you mentioned TPP. TPP was negotiated in light
    of the fact that we were dealing with countries that are not
    market economies, and we had good governance sections
    negotiated within that agreement, which helped us deal with
    some of those issues.
        Now, we are not a member of TPP, but we are looking at
    trying to advance trading relations with nonmarket economies
    with certain levels of requirements on governance, so that we
    can compete on a level playing field.
        So I guess my question to you, how do we use the WTO more
    effectively in order to be able to reign in China's practices,
    particularly as it relates to intellectual property, as it
    relates to these tie-in agreements, as it relates to so many
    other areas that we had not been successful in blocking?
        Yes.
        Mr. Atkinson. I, 100 percent, agree we need to use the WTO
    more effectively.
        The Europeans just brought a very good case against China
    on tech transfer, which I believe we are not part of yet, which
    we should be.
        I think we can put too much faith in the WTO. There is a
    very good article, a Harvard Law Review article by Mark Wu,
    looking at the inherent limitations of how the WTO is
    structured when it comes to China. The WTO is structured where
    it is a lot easier to bring a case when your counterparty has
    written something down on a piece of paper, and China knows not
    to write things down on paper. So they do forced tech transfer,
    but you cannot find the law. But everybody knows they do it.
    They steal our intellectual property, but you cannot find the
    law.
        So I, 100 percent, agree we need to work more with the WTO.
        I think the more important thing, though, is to embrace a
    very aggressive WTO reform agenda, which is what the Europeans
    want to do right now, and I think we need to be part of that,
    to reform the WTO to make it easier.
        Even if we do that, though, I think we are going to have to
    think about this the way President Reagan thought about Japan
    in the 1980s, which was really about results-oriented trade.
        We just cannot get China to stop using process because they
    can figure out ways to get around it. We have to focus on
    results-oriented, and that is going to require us to put
    together a very strong coalition of our allies and bring to
    bear force, not military force, but commercial force to press
    them to comply.
        So I agree we have to do more with the WTO, but I think we
    have to go beyond that as well.
        Senator Cardin. But we have not seen from this
    Administration a reaching-out to our traditional trading
    partners in order to try to bring that type of pressure. It has
    been more America on its own.
        So I agree with you. We have to use our collective power.
    The United States has a lot of power, but we would be stronger
    if we had our traditional trading partners in line with our
    trading policy.
        Yes, Ms. Glaser.
        Ms. Glaser. There may not be laws on the books in China,
    but the practice is clear.
        I travel around the world and talk to other countries and
    CEOs of companies, and all that we need to do is some research
    and interviews.
        I was recently in Canada, talked to a woman who had talked
    to the CEO of every leading Chinese--any--every leading
    Canadian company invested in China, and yes, they have all had
    to transfer some kind of IP.
        So we can put together this database, and we have to work
    with other countries.
        Senator Cardin. Would that be actionable under WTO?
        Ms. Glaser. I am not a trade lawyer, so maybe somebody else
    on the panel can answer that question.
        Senator Cardin. I mean, we know they do it.
        Ms. Glaser. But I think the data is----
        Senator Cardin. We know they do it, but we have not been,
    as I understand, successful in stopping it under the WTO. And
    we have been told that the intellectual property protections
    under WTO are rather weak. So I think that is one of our
    challenges. I think to reform the WTO is critically important.
        I just want to put one other issue on the table, and you
    can probably get back to us on it.
        Mr. Atkinson, I think you mentioned specifically reforming
    the 7(a) program to try to make it more effective in dealing
    with international issues. I would welcome your suggestions on
    any of the SBA tools on how we can make them more effective to
    deal with the international challenges we have for small
    businesses, whether it is the traditional loan programs or the
    SBIR program and STTR program. It would be good if you could
    give us some help in how we could better tailor those programs
    to deal with these international challenges.
        Thank you, Mr. Chairman.
        Chairman Rubio. Senator Romney.
        Senator Romney. Thank you, Mr. Chairman and Ranking Member.
    I very much appreciate the fact that you are holding these
    hearings and focusing on this very critical issue.
        During my career, I had the occasion to work extensively in
    the textile industry, when there was one, and the automotive
    industry as well and, to a certain degree, the metals industry.
    I have long been an advocate of free markets and laissez faire,
    but I watched mercantilist policies not wipe out all those
    industries, although in the textiles almost completely wiped
    out the textile industry, and so recognize that we need to take
    a different course now as we look at many, many other
    industries that are facing a mercantilist strategy.
        I would note that in my State of Utah, Micron, a U.S. chip
    maker, has some 2,000 employees. It is the only manufacturer in
    the United States of dynamic random-access memory, or DRAM.
    China paid employees in Taiwan to steal technology apparently
    from that company, and then a Chinese court banned Micron from
    being able to sell chips in that country, in China.
        And so when there are practices of this nature going on, we
    can go to the WTO, perhaps if they have the provisions that
    will deal with something of this nature, but it can take a
    long, long, long time. And by that period of time, we are out
    of business, and someone else is in business.
        I am looking to you all to offer suggestions as to action
    we can take beyond the WTO, action perhaps that we can take in
    this Committee or in Congress to actually push back against the
    kinds of policies that China and other nations have employed
    against us in the past, so that we do not just simply watch as
    industries that are critical to millions of Americans and
    critical to our economic vitality and our military capacity as
    those technologies are stolen from us and as those industries
    are stolen from us.
        What is interesting is, in reading the report, we document
    all the terrible things going on but have very little to
    suggest as to what we should do about it. So I turn to you for
    any thoughts that you might suggest. If we could just go down
    the line here.
        Yeah, Mr. Setser.
        Mr. Setser. So I think you outlined very lucidly the
    challenges that China poses, particularly in the DRAM sector
    and semiconductors.
        We know China is subsidizing its own semiconductor
    industry. We know they are targeting U.S. companies, and we
    know there will eventually be a legal case for action.
        The problem is that we have to wait for the impact of the
    action before we have the WTO case to file.
        I do think, though, there are things we can do now. We are
    not terribly constrained by the WTO in limiting Chinese inward
    investment. We can, and we have, blocked Chinese attempts to
    acquire U.S. semiconductor technology.
        We could expand that as a sanction to say, ``As long as we
    know you are subsidizing semiconductors, we are going to take a
    more onerous approach to reviewing other investments.''
        I also think we should be documenting now all the various
    ways China is subsidizing its semiconductor industry and be
    prepared to initiate trade actions, but in the U.S. and at the
    WTO, to limit our imports of Chinese semiconductors, once those
    emerge, but also to pursue cases about the adverse effect. So
    if China is displacing our exports, we have some rights to take
    additional offsetting action. I think we can be pretty
    aggressive.
        Senator Romney. Thank you.
        Mr. Atkinson.
        Mr. Atkinson. I could not agree with you more, Senator.
        One of the challenges under U.S. antidumping laws, you have
    to wait for damage. By the time the damage is done, you are
    oftentimes dead, and it is meaningless at that point. We saw
    that, for example, in the U.S. solar industry, where we were
    the leader in the year 2000, and now we have got about 5
    percent of the global market.
        The Chinese actually--by dumping, they eliminated most of
    our solar companies, and then they used State government funds
    to go up and buy the assets, the intellectual property assets
    of these companies at 10 cents on the dollar.
        We wrote a report on that--I will be happy to share with
    your staff--about a year and a half ago listing a very detailed
    set of specific policies that an administration could take or
    that Congress needed to pass. There are many, many things we
    can do that are not just tariffs.
        Let me suggest one. You mentioned this case of Micron. This
    was a Chinese company, Fujian Jinhua. I am pronouncing it
    slightly wrong. Not only did they get stolen DRAM technology,
    but they were subsidized by the Chinese semiconductor fund by
    about $3 billion to build a giant DRAM factory, which no
    commercial company would ever have built on their own without a
    subsidy.
        The Administration did a really smart thing, and they were
    able to ban the U.S. company selling them the equipment they
    needed to make the semiconductors. That company announced about
    3 weeks ago that it was going bankrupt.
        Now, we need to be applying that. The only reason they
    could do that is because somehow there was some connection to
    North Korea or Iran or something like that.
        I would argue we need to expand that, and we should be able
    to block the sales of U.S. company equipment to these kinds of
    companies. We should be able to block their access to all of
    our banking and security systems. If a company has a very high
    likelihood of being based on big subsidies or stolen
    intellectual property, we should not let them use our banking
    and securities system.
        And we should be able to block their imports and then work
    with our partners to be able to do the same.
        Fundamentally, I think the only thing the Chinese
    government responds to is pain. We have negotiated and
    negotiated and negotiated for years, and they have shown that
    that does not really matter much, though I think there are
    specific things we could do.
        Senator Romney. Thank you.
        Mr. Rush and Ms. Glaser, I think my time is up, so I am
    going to go back to the Chairman. Thank you.
        Chairman Rubio. Thank you.
        Senator Shaheen.
        Senator Shaheen. Well, thank you, and thank you, Mr.
    Chairman for a very thoughtful report. I look forward to
    reading it, but part of it recognizes the need for a coherent
    foreign policy, industrial policy, and trade policy and how we
    respond to China's actions.
        It is not at all clear to me that we have that kind of a
    comprehensive policy, and I wonder--I guess I should start with
    Mr. Setser and Ms. Glaser, whether you think we have the kind
    of comprehensive policy that we need if we are going to respond
    to the competitive threat that China poses and what else we
    might do to better coordinate those tools of foreign policy.
        Mr. Setser, do you want to go first, or Ms. Glaser?
        Ms. Glaser. Thank you.
        So my area of expertise is primarily China. It is not the
    United States. There are a whole lot of things China is doing.
    Some of them, we should not be doing. We are not an
    authoritarian country, but there are things that we can learn.
        And I think it has been since the 1980s that we have really
    had a serious discussion, a discussion in this country about
    industrial policies, and I think that is something we should
    take a look at. What are the pros and cons of having some kinds
    of industrial policies providing trade assistance where
    necessary, for example, providing more funding for R&D, higher
    investment in talent development?
        This is going to be difficult to see, but I will put it up.
    If you just look at where R&D in our country comes from, right?
    It is primarily increasingly from businesses. It is not coming
    from Federal spending.
        Now, total R&D is increasing in our country. That is a good
    thing, but if we could get more Federal support for R&D
    spending, I think that would be one of the ways that we could
    compete more effectively with China.
        And then I want to reiterate what Senator Cardin said. We
    really need to be working with our allies. When I talked to the
    Germans 5 years ago, they were not terribly concerned about the
    stealing of intellectual property. You talk to German companies
    now. We all are on the same page. We see the same problems. We
    disagree about the solutions about what to do. So I think we
    really need to be talking more with our partners.
        As we are more divided, which is what the Chinese want, it
    makes it more difficult to effectively compete with them.
        Senator Shaheen. Well, I would certainly agree with that,
    and I would argue that we do not have an industrial policy in
    this country, and we have not had one for a very long time, and
    that that is part of the problem.
        In fact, right now, we are not having any discussions with
    our allies in these areas--or in many areas, and that that is
    equally unhelpful.
        Like some of my colleagues here, I was at the Munich
    Security Conference, and I think for the first time since I had
    been there over the last 10 years, there was real and deep
    concern about the threat that China poses economically and
    militarily.
        So I think it is a huge challenge, and again, appreciate
    the Chairman's report for recognizing that.
        I want to ask you--this may be--I think this is for you,
    Mr. Atkinson, but there has been a lot of--Huawei has been in
    the news a lot recently because of changes in China that have
    allowed--or that have raised questions about anyone who uses
    Huawei components and what that may mean with access to
    information.
        Can you speak to how concerned you think we should be about
    that and whether small businesses should think about using
    other technology, other than what Huawei produces?
        Mr. Atkinson. Yeah. By the way, just quickly, one thing we
    forget, we had massive bipartisan support for competitiveness
    policy in the 1980s, which people forget. It was Republicans
    and Democrats putting in place a slew of laws, like SBIR/STTR,
    a whole lot of things. So we could go back to doing that again.
        With regard to Huawei, I cannot say I am enough of a
    technical expert to say that. I think those are the kinds of
    decisions that folks in the intelligence community need to
    make.
        Now, our U.S. intelligence and national security folks have
    raised significant concerns about Huawei equipment, and part of
    that is about, as we move into a 5G world, the attack vectors
    offer security, are harder in part because a lot of these
    networks now are what is called ``software-defined networks,''
    and so you do not just buy hardware. You buy hardware, but then
    the software gets always redefined. And that can introduce
    vulnerability.
        So I cannot say yes or no, but I think it is important to
    have our government look at it carefully.
        Senator Shaheen. But if we are talking about the theft of
    technology and of our competitive technology that is being
    produced by our companies, whether they are small or large,
    should not we be careful about anything that might create a
    problem in terms of the ability to keep that information
    confidential?
        Mr. Atkinson. Yes. I, 100 percent, agree with that.
        Also, we testified in this Committee recently on how to
    help small businesses with cybersecurity, and I have to tell
    you, what SBA is doing in this is very, very limited. SBA
    really needs to step up their game in helping small companies
    get better cybersecurity. Some of the advice they are actually
    giving is actually wrong advice, if you are a cybersecurity
    expert.
        So that is something we could do tomorrow. We could get SBA
    to work more carefully with small businesses. So we need both a
    defensive and an offensive response.
        Senator Shaheen. Well, thank you. I would hope that as you
    are thinking about the information you can provide to Senator
    Cardin that you would also think about those kinds of areas
    where SBA could be more helpful to small business. That would
    be helpful.
        Thank you.
        Chairman Rubio. And just to note, on March 13th, we will
    have a hearing on cyber and small business.
        Just looking at Mr. Rush for a moment, I imagine if you had
    been the subject of an intellectual property theft early in
    your formation by a large state enterprise, you would not be
    sitting there today in your business, so you think about just
    that threat.
        Senator Ernst.
        Senator Ernst. Thank you, Mr. Chair, and thank you to our
    witnesses today.
        It is good that we are taking time to discuss the threats
    and the challenges in the Made in China 2025 plan.
        There are a lot of threats that are posed to the future of
    American industry, especially when it comes to our small
    businesses. So, again, this is a really important topic. I am
    glad we are discussing it today.
        We do know Iowa produces a lot of ag equipment. That is
    really important to us, and ag machinery is one of the 10
    targeted sectors in the Made in China 2025 plan. And it is a
    critical component of our U.S. industrial base, again, very
    important to my home State of Iowa.
        Mr. Setser, in your view, what are the most important steps
    we can take to protect the agricultural machinery industries
    and other industries that are essential to the U.S.
    manufacturing base from the challenges China poses?
        Mr. Setser. Well, thank you for that question. I guess I am
    not entirely surprised that a Senator from Iowa might take a
    particular interest in agricultural machinery.
        Senator Ernst. A very special interest, yeah. Thank you.
        Mr. Setser. I think, in general, we should recognize that
    China through its industrial policies has become an important
    competitor in a lot of the mechanical engineering sectors.
    Agricultural equipment has some similarities with construction
    equipment.
        Senator Ernst. Absolutely.
        Mr. Setser. They draw on similar mechanical engineering
    expertise.
        We often focus on the electronics and the high tech, but
    the agricultural equipment, the construction equipment, they
    are an important part of our manufacturing base, and they are
    threatened, as you noted, by Chinese subsidies.
        I have noticed over time that our exports of construction
    equipment to China have gone down. Our exports of agricultural
    equipment have gone down, and I think China's global exports
    have gone up.
        What can we do? Well, I think we have to use our trade
    tools--dumping, countervailing duties--where we have a case to
    go after Chinese subsidies, to offset the impacts of their
    unfair subsidies.
        Senator Ernst. Right.
        Mr. Setser. And then I know it is a controversial topic,
    but I think in general--it may not be relevant for tractor
    exports, but it may be relevant for exports of construction
    equipment. Think about how we can use our export finance
    capacities.
        Senator Ernst. Absolutely.
        Mr. Setser. Compete more with China in third-party markets.
        Senator Ernst. I do think there is a role that can be
    played in balancing some of that to make sure that our small
    businesses can compete in that export market, especially
    against countries like China. So thank you for that. I
    appreciate that.
        Ms. Glaser, one of the key components of our national power
    is, of course, the innovation in our small businesses that
    bring fresh ideas into our defense industrial base as well, and
    what we see is Chinese state-owned enterprises will benefit
    from government subsidies, just as we are stating with other
    types of equipment as well, and they unfairly compete with
    American businesses. And it does pose significant risk to us
    and to our future of our industrial base, supply base, the
    defense industrial supply base, as we move forward.
        So, in your view, how can we combat this practice and take
    steps to ensure that there is fair competition for America's
    small businesses, particularly the ones in the defense
    industry?
        Ms. Glaser. Well, again, my focus is primarily on China,
    and that is what I can bring to the table here and explain to
    you the threat that ultimately China poses. If you dig into the
    amount of subsidies that China is putting into every one of
    these 10 industries, the very specific goals that they have set
    in these areas, it is really mind-boggling.
        You mentioned the agricultural machinery, so I will just go
    back to that for a second. One of their goals for 2025 is to
    have domestically made equipment to meet 95 percent of their
    domestic demand. So that goes back to the issue of localizing,
    subsidizing, and then capturing global markets.
        In the defense area, the real challenge is that there is
    really no distinction in China between the civilian and
    defense, and it is increasingly deliberately integrated and
    fused. So if you are dealing with a civilian company in China,
    that is going to easily, very quickly spill over into the
    defense markets.
        And you can see this in the aircraft space----
        Senator Ernst. Right.
        Ms. Glaser [continuing]. Where the Chinese stole basically
    the F-35 blueprints, and they have built their own military
    aircraft. In civilian aircraft technology, they lag way behind,
    and that is an area we have to really protect because Boeing is
    first going to face the challenges potentially losing the
    domestic market in China.
        Over time, if China can produce first Narrow-Body, which
    they now have already the C919, I think it is, and then they
    are going to be building potentially a jumbo-body jet. And it
    will move from domestic into global markets. So we have to
    protect our intellectual property in these areas.
        Senator Ernst. Thank you. I appreciate you making that
    point too, and thank you for your time here today. I think this
    is a really great issue, not just for small business, commerce,
    other areas, but also for our Armed Services Committee. It is
    something we need to pay attention to. So thank you very much.
        Thank you, Mr. Chair.
        Chairman Rubio. Thank you.
        Senator Coons.
        Senator Coons. Thank you, Chairman Rubio and Ranking Member
    Cardin. Thank you, Chairman, to you and the Committee staff for
    this valuable and insightful report.
        I, like many of my colleagues, hear concerns regularly from
    companies from innovators, from manufacturers across my State
    of Delaware, in particular, with relation to IP theft, with
    some of the unfair subsidies, and with some of the ways in
    which we are not playing on a level field with China.
        Rob, I particularly like your phrase ``innovation
    mercantilism'' to characterize that unique combination of
    inappropriate subsidies and IP theft and forced technology
    transfer.
        Let me start, if I could, with you, Rob. Just in terms of
    our trade deficit, some are speculating that the U.S.-China
    trade dispute could conclude soon with an unfortunately small-
    bore deal that would simply be a commitment to purchase more
    agricultural products, which while very pleasing to the soybean
    farmers of my State and many others might miss an opportunity.
        What is the relative importance of commitments by China to
    purchase more U.S. goods versus actually ending cyber espionage
    or government subsidies or other unfair practices you have
    characterized as being ``innovation mercantilism''?
        Mr. Atkinson. I think it would be a vast mistake if we look
    over a deal that is based on reducing the trade deficit. The
    Chinese are more than happy to give us that deal. They would
    love to turn us into Canada or Australia that basically
    supplies raw materials to China. They take all the value-added,
    and they dominate the globe. That is what they would love to
    have, and if we accept a deal that is just about reducing the
    trade deficit with selling more commodity goods, I would argue
    we risk coming to be a country like Alexander Hamilton warned
    of drawers of water and hewers of wood.
        Senator Coons. Bonnie, if I could, in terms of industrial
    policy, I think one of the things the United States has done
    that is successful is Manufacturing USA.
        We have a national network of institutes, and in Delaware,
    one of them is headquartered at the University of Delaware, the
    National Institute for Innovation in Biopharmaceutical
    Manufacturing.
        Made in China 2025 blatantly copies our successful
    Manufacturing USA model, and yet Congress has not authorized an
    extension or an expansion of funding or engagement in what has
    been--it was a very successful model for advanced manufacturing
    in Germany, which we proudly copied. We have not come close to
    their scale. The Chinese see it as a successful strategy for
    advanced manufacturing.
        What is your view about whether we should be trying to
    extend and expand that program and whether or not Federal
    innovation support generally is critical to competing with
    China?
        Ms. Glaser. Senator, I am not very familiar with the
    program.
        Senator Coons. Rob, my hunch is you are deeply familiar
    with the program.
        Ms. Glaser. My guess is that he is deeply familiar with it,
    so maybe he would be better suited to answer that question.
        But I think there are industrial policies that have worked
    for some countries. We certainly have seen Germany's Industry
    4.0 program that is working for them. The Japanese in the past
    have pursued industrial policies. So, again, I think this is
    something we should be looking into the pros and cons.
        Senator Coons. It is a successful and intentional alignment
    of basic research----
        Ms. Glaser. Yeah.
        Senator Coons [continuing]. Applied research, workforce
    training, small startups, and spinoffs around university hubs
    in 25 cities around the United States.
        Ms. Glaser. It makes a lot of sense. It sounds like the
    Chinese have copied the right thing.
        Senator Coons. It is actually working.
        Rob, I will ask you a last question, if I could. As you
    know, I have been an advocate for the Manufacturing Extension
    Partnership, a now decades-long program that helps with quality
    control, with manufacturing streamlining. About three-quarters
    of U.S. manufacturing firms are really quite small or fewer
    than 15 employees, and many of them are in the defense
    industrial supply chain. And there are very few Federal
    programs to actually help them get access to world-class skills
    to compete globally.
        The President has actually tried to eliminate the MEP in
    the last two budgets. Why? And does it actually bring value,
    and what is its impact on the supply chain?
        Mr. Atkinson. Yeah, absolutely.
        By the way, on the Manufacturing USA, the Chinese are on
    target to invest about 50 times more--five-zero times more--
    than we will be investing in that program.
        On the MEP program, that is a program that has been around.
    Actually, when we talked about industrial policy in the 1980s,
    that is where that came from. There was bipartisan support to
    commit to that in the 1980s that President Bush supported.
        That is a very effective program. All the studies show that
    it pays more for itself, more and many times over.
        If you look at what our competitors are doing, the
    Canadians are investing 10 times more in their program for
    small manufacturers and share of GDP; the Germans, 20 times
    more; the Japanese, 40 times more.
        I think the reason why the Administration has zeroed it out
    has absolutely nothing to do with its--the high quality of the
    program and its effectiveness. It is just they are looking for
    things to cut for other priorities. That is not a top priority.
        I think it needs to be a top priority if we want to help
    our SME manufacturing base.
        Senator Coons. If I could, in closing, Senator Cardin asked
    a question earlier about the SBA 7(a) loan program. I do have a
    bill with Senator Gardner that would specifically strengthen
    their small manufacturer loan programs, reduce the fees, expand
    the scope of it, and something I would love to work with you on
    that I think would meet some of that identified need.
        Thank you very much, Mr. Chair.
        Chairman Rubio. Senator Hawley.
        Senator Hawley. Thank you, Mr. Chairman, and thank you also
    for this excellent, outstanding, and timely report from which I
    learned a lot, and I think it is hugely significant.
        One of the most important conclusions, I think, which you
    have all touched on today, is that trade with a system that is
    based on what you have been calling, Mr. Atkinson, this
    ``innovation mercantilism,'' can and will reduce our overall
    economic welfare, unless there are--in fact, it is happening
    right now, unless we make significant reforms. I think this is
    a very, very important thing to understand and needs to become
    a cornerstone of policy changes going forward.
        In that vein, let me just return to a discussion you were
    having earlier with Senator Romney regarding various actions
    that could be taken to stop the forced technology transfers,
    the theft of intellectual property, and I will pose this to the
    whole panel, but I will start with you, Mr. Atkinson.
        Might we consider a regime of IP sanctions, broad-based IP
    sanctions on China or at least affecting China where it might
    prohibit, just flatly prohibit American firms from entering
    into technology transfer agreements and prohibit our market,
    bar from our market, goods sold by industries that we have
    reason to believe have engaged in either theft or have demanded
    a forced technology transfer?
        Mr. Atkinson. Thank you.
        Absolutely, we could do more to block Chinese sales of
    products where we know we have a pretty good estimate that it
    has been based on stolen IP, and I think we should do that.
        There is also some other specific rules that we have laid
    out around how the Chinese force American companies doing
    business in China, to force them to share their technology
    around patents. We should--you know, tit for tat. Any Chinese
    company doing business in the U.S. should comply with the
    Chinese rules on that and see how they like that.
        With regard to your point about forced joint ventures, that
    was litigated last Congress with the FIRRMA bill, and there was
    a big debate, I think as you may know, should you include JVs
    as part of the CFIUS regime, and the choice was to not do that,
    but to put that in BIS, the Bureau of Industry Security. And
    they have come up with their emerging and foundational
    technologies. If you are a technology on that list, you could
    not do a JV. It is not clear to me how many technologies will
    be on that list. It is a little bit of a crude measure because
    we do not want to cut off our nose to spite our face. We want
    to sell the Chinese our products, so we gain market share, but
    we do not want to give them our technology or underlying
    knowhow.
        Senator Hawley. I would invite anybody else on the panel
    who wants to comment on this, on other measures we might take.
        Yes, go ahead, Ms. Glaser.
        Ms. Glaser. I would consider passing a law that mandates
    that companies provide information about what they are doing.
    It might have to be provided privately, not necessarily
    publicly, but if they make a decision as part of a joint
    venture with a Chinese company, that there is some central
    place where we know what is going on, what are they
    transferring, and whether they have done so voluntarily, what
    kind of coercive measures were used.
        There is also a set of things that are, I believe, included
    in legislation, recently introduced by Senator Kamala Harris,
    that would combat economic espionage, that would increase
    damages available for companies that are victims of trade
    theft, which would be very useful, I think, for SMEs; extending
    the statute of limitations for crimes, which apparently is
    fairly short; and expanding the scope of the Economic Espionage
    Act to cover cybercrime and hacking that take place outside of
    the United States so that civil suits could be brought against
    perpetrators that are working abroad.
        So those are some of the things in that legislation that I
    think I support.
        Senator Hawley. That is very helpful. Thank you.
        Mr. Setser.
        Mr. Setser. Just a couple of ideas because I think we are
    all looking for creative responses. In aircraft, I think we
    might explore with our European partners something which has a
    little bit of the character of what you recommended.
        Part of the reason why we enter into JVs is because China
    might give its business to a European company if we do not. If
    we worked with our European allies and sectors like aerospace
    where we are strong, maybe we could informally reach an
    agreement not to compete with each other in ways that end up
    helping China.
        The structural solutions to the tech-transfer problem are,
    in part, getting rid of China's review on inward investment. So
    we can have wholly owned subsidiaries, but also getting rid of
    the Buy China preferences, which make it hard to export into
    China. If we are building products here and selling them to
    China, there is no tech transfer.
        Senator Hawley. That is very helpful.
        Go ahead. Mr. Atkinson and then Mr.----
        Mr. Rush. Yeah. What I would submit is that there are two
    sides to this coin. There are sort of defensive measures and
    offensive measures, and we are having a lot of discussion of
    how to sort of staunch the flow of IP theft.
        I would submit that you could probably look at every single
    industry in China and say there is something going on there.
        So perhaps what we should do is look at the Made in China
    2025 plan that has targeted industries and spur innovation in
    those industries, especially on small businesses in the United
    States. Let us put more gas on the fire for those industries
    and maintain our edge, maintain the gap in between the United
    States, China, and others because, at the end of the day, that
    is actually the core of American industry is our ability to
    innovate and have world-class technology, not prevent others
    from ultimately using that technology.
        Senator Hawley. Thank you very much.
        I see my time has expired. Thank you, Mr. Chairman.
        Chairman Rubio. Senator Hirono.
        Senator Hirono. Thank you, Mr. Chairman.
        So, Mr. Rush, you were talking about that we need to put
    more emphasis on supporting those kinds of innovations that can
    directly compete with China's efforts to take over the world
    economically. So maybe one of the ways is for us to really put
    a lot more emphasis in programs like SBIR and STTR, which we
    have supported. There is not that much money that goes into
    these programs in the scheme of things, not in the kind of
    scale that you are talking about.
        You also mentioned, Mr. Atkinson, that we need to help
    these entities that have these grants or loans to
    commercialize. So how do we do that?
        Either one of you.
        Mr. Rush. I think that one of the really powerful things
    about SBIR is that it helps us go from idea to working
    prototype to something that can be picked up, and one of the
    ways I think that we can help sort of get over that
    commercialization hump is simply the government recognizing its
    power as a good customer and maintaining focus on the
    commercial aspect of these SBIR/STTR and other programs and
    looking not just at the sort of program office that might be
    running any given SBIR contract, but almost a whole-of-
    government approach and saying who might use this really
    interesting thing and incentivizing folks within the government
    to pick those things up as well as looking at things like ICOR,
    the ICOR model to help companies that are new in this regime to
    do better customer discovery along the way with the SBIR, with
    the SBIR program.
        The other thing that maybe we would recommend is going
    faster with SBIR, that it is allowing companies to go faster,
    because for certain industries, the time frame of SBIR Phase I
    and Phase II and Phase III is simply way outside the decision-
    making process and the innovation cycles of these industries.
    Even within aerospace, an industry that has relatively long
    design cycles, we are finding that the SBIR is longer, and that
    is something that it is an opportunity for us to modernize.
        Senator Hirono. Is that time frame by regulation, or how do
    we fast-track?
        Mr. Rush. There are two aspects--or maybe two or three
    aspects, the delta between proposal submission and getting on
    contract.
        Senator Hirono. So is that by regulation? It is not by law,
    is it, that----
        Mr. Rush. I believe it varies according to agency.
        Senator Hirono. Okay. So we probably should talk with you a
    little bit more.
        Did you want to add something, Mr. Atkinson?
        Mr. Atkinson. Yes, a couple things. One is our
    understanding is SBIR awardees are not allowed to use that
    money for commercialization activities.
        Senator Hirono. Okay.
        Mr. Atkinson. There has been legislation in the Senate to
    allow them to use a small portion of that for
    commercialization, and that is one thing we could do.
        Senator Hirono. Okay.
        Mr. Atkinson. Another idea that we have proposed over the
    last few years is an additional add-on. So we have SBIR, which
    is a portion of Federal extramural R&D. We have STTR.
        We propose something called SCNR, spurring the
    commercialization of our Nation's research, and it would be
    about .5 percent. And that money would be used to fund
    universities and State governments who are engaged in
    technology commercialization activity. Hawaii is doing that.
    Most all states have these programs to help their universities
    and their Federal labs do a better job of getting that
    technology out in the marketplace in the hands of small
    companies.
        But it is hit and miss. There is not enough resources. That
    is something the Federal Government could do that I think would
    help with that.
        Senator Hirono. So is there a bill that creates another
    program?
        Mr. Atkinson. There is not a bill, but I would be happy to
    work with your office.
        Senator Hirono. Oh, certainly. There you go. I like that.
        Mr. Rush, you said something that was really interesting to
    me. You said that China is developing technology to beam power
    from space. I mean, this is power to electricity and all of
    that, and at the same time, so many are still looking at wind
    and solar and those things.
        How far away is China from developing this kind of ability,
    and what does it mean for our country that they are doing this
    and we are still Earth-based?
        Mr. Rush. Yeah. So, broadly, this is a real thing, the
    ability to basically collect solar energy and then convert that
    into either microwaves or lasers and send that down to ground
    stations on the ground.
        China has been pretty public in saying that by 2025, they
    want to have demonstrations of this, and then they want to have
    facilities that are gigawatt-class facilities on orbit in the
    next couple of decades, which could represent a complete break
    from traditional terrestrial sources of energy. And it is
    something that honestly would be worthwhile to look at from an
    alternative energy perspective in the United States as well.
        Senator Hirono. Could I just, Mr. Chairman, one last
    question to Ms.--is it Glaser? Glaser.
        So you said that U.S. companies who are in China basically
    have to transfer some kind of IT for that privilege, and I like
    your idea that there should be some disclosure. But Chinese
    company entities are buying U.S. companies, and that is under
    the radar screen. They buy up our stocks and all that. Pretty
    soon, they will own much of our U.S. companies.
        So should we require--there may already be some limitations
    on how much stock a foreign company can own of U.S. companies,
    but is there something that we can require of Chinese companies
    that buy up our companies?
        Ms. Glaser. Well, I certainly think we need a better system
    for review of what the Chinese are trying to buy, and again,
    this is something to be working on with our allies.
        The Chinese are buying companies all over the world, and
    this will enable them to dominate supply chains potentially.
        And we have, of course, seen this, as they have surged
    ahead in innovation, in Huawei and CTE. Now we have Nokia and
    Ericsson are the only two companies that are left that are
    doing this comprehensive telecommunications infrastructure, and
    Motorola is no longer in the game.
        This is an area where we have to prevent China from
    dominating these supply chains, and we should be coordinating
    so that we know what kind of activity the Chinese are looking,
    what companies they are buying.
        Senator Hirono. Are we coordinating that kind of an effort?
        Ms. Glaser. Not as far as I know.
        Senator Hirono. Thank you.
        Ms. Glaser. Perhaps Brad or Rob know something more about
    this.
        Mr. Setser. We do have the CFIUS review process for foreign
    investment in the U.S., and that was modernized.
        I think there is certainly more we could do to coordinate
    with our allies. I think the Germans are moving toward a
    similar system, a national security review. So there is room to
    do better there.
        Ms. Glaser. One thing that I would add is that the German
    government is either considering or has already decided to set
    up a fund to help companies that are struggling in Germany so
    that they can succeed rather than be bought out by the Chinese.
        Senator Hirono. Thank you.
        Chairman Rubio. Senator Risch.
        Senator Risch. Thank you, Mr. Chairman.
        Chairman Rubio. Our Chairman Emeritus.
        Senator Risch. Yes, Chairman Emeritus.
        [Laughter.]
        I apologize for being late to this. There were some things
    I really wanted to hear on this, but we had the Idaho Potato
    Commission in town. And when you are from Idaho, you set all
    things aside and meet with the Idaho Potato Commission.
        Mr. Setser, they tell me you talked a bit about Micron
    Technology and made some observations on that.
        Let me tell you. Micron Technology--this is the Small
    Business Committee. I remember when Micron Technology had three
    people working for it, the three guys that started the company.
    It was in a garage and eventually moved to the basement of a
    dentist's office and then moved on, and the rest is history.
        And now they are caught in an international matter that I
    guess you talked about, and that is really the question I have
    got for you.
        I have been pressing this as hard as I could. I met with a
    Chinese ambassador, amongst others, and he attempted to defend
    the undefendable, but what they are doing is just not
    acceptable. If China is going to become a world player, if they
    are going to become something on the world stage that they want
    to be to make life better for their people and want to compete,
    look, we compete. But you got to do it under rule of law, and
    they are not even close right now.
        What I have been telling people is, look, this Micron case
    is one we need to draw a line in the sand on. This is one that
    if they can do this, look out. If everybody has read 2025,
    everybody knows that the microchips are one of their short
    commodities. Well, so bet it, and we expect that they would
    learn to make it and do it either through licensing or
    according to the rule of law.
        What is your vision? What happens if the Chinese win this
    one? How do you view they go forward with their 2025
    initiative?
        Mr. Setser. Well, that is obviously an important question.
        Right now, as I understand it, there are three major
    producers of DRAMs. Micron is one. There are two South Korean
    firms.
        Senator Risch. They are second. Micron is second.
        Mr. Setser. Second.
        China, I think, intends to enter this industry with massive
    subsidies, drive down prices, and at a minimum make sure that
    the bulk of the memory chips used in Chinese products are made
    in China.
        I think China would obviously love to be able to buy, after
    depressing global prices, one of the three incumbents. They
    clearly have already tried, as you know, to buy Micron. They
    clearly have already tried, as you know, to effectively steal
    Micron's technology through their partners in Taiwan. It is
    clearly an egregious case, and I agree with you. The question
    we now face is how do we respond, and I think we have to be
    very proactive in identifying how China is currently
    subsidizing the semiconductor industry and thinking creatively
    around the set of sanctions.
        The legal case that the Department of Justice has brought
    against the Chinese company directly involved in the theft has
    been very effective, but China has multiple companies trying to
    enter the DRAM market. We have to think creatively about how we
    respond as those subsidized competitors undermine our position
    in global markets.
        Senator Risch. I really appreciate that, and I think this
    is going to be a whole-of-government approach to this thing,
    whether it is Justice, Treasury, or Commerce or what have you.
    But that pressure has got to stay on, and they cannot get away
    with this. If they do, this thing is heading for a very bad
    place.
        Mr. Setser. Can I just add one other point, which is
    another company we have discussed? We have certainly discussed
    Huawei and the information security threats that it poses, but
    Huawei has become very central to China's domestic industrial
    ambitions in the semiconductor business.
        It is designing more and more of its own chips. It seeks to
    displace imported technology from its network equipment and
    from its cell phones. I think that is something we need to
    watch very carefully.
        Senator Risch. Thank you.
        Thank you, Mr. Chairman.
        Chairman Rubio. And I will use the few more minutes, before
    we can wrap up here, but since I did not use the first part,
    let me just start with this.
        There is a sense that--and this has been the way it has
    been for a long time--is that the private sector should be
    stepping forward and doing these things on its own, and that
    when it comes to China's attempts to dominate high-end
    industries, that market engagement should be outside the scope
    of government's role.
        I would ask you, Mr. Atkinson, what are the drawbacks to
    such an approach, in light of what we have discussed here
    today, and particularly for small businesses who are in a--they
    are caught in a nation-against-nation economic competition.
    This is not a small U.S. business competing with a small
    Chinese business to see who has a better idea. This is a small
    or midsized U.S. business trying to innovate and compete
    against a potentially small firm, backed up by a nation state
    with the second largest economy, soon to be largest per
    capita--not per capita--largest gross economy in the world.
        That is not a fair fight. So what are the drawbacks of not
    having some level of government engagement? Not industrial
    policy where we are doing the same things they are doing, but
    the sort of things we have discussed today, allowing them
    access to the U.S. Government, being their customer, that sort
    of thing.
        Mr. Atkinson. Senator, I think you hit the nail right on
    the head. There are two big challenges that a small and even a
    large firm would have.
        The first is that you really have very little access. You
    cannot go to a Chinese court because they are just not going to
    decide in your favor. We have seen that in case after case
    where the Chinese court always decides in favor of the Chinese
    company and against the U.S. company.
        The second big issue is that you are dealing with cases
    where, for a small company, who do they talk to. Where is the
    place in the government where they go? We really have to have
    better systems in the U.S. so that any small company can get
    the right access in government and then get action taken on
    their behalf, and that right now is very haphazard. You are
    lucky if you can find the right person. You are lucky if that
    person then will take your case and sort of wind its way
    through the government.
        We do not have an all-of-government or whole-of-government
    approach to help small companies be able to deal with this.
        Chairman Rubio. Mr. Rush, just talking about that, Made in
    Space, which you got seed funding from the Small Business
    Innovation Research program with NASA and the Department of
    Defense, correct? What role did that--I mean, I guess my
    question to you, could you have done what you did without it,
    and what role did it generally play in taking you to where you
    are today?
        Mr. Rush. Yeah. I would say that from a broad perspective,
    Made in Space would not be the company it is today without SBIR
    and without the support from NASA and other government agencies
    in various ways.
        We took to heart that sort of seed funding mantra, however.
    Like we want to be commercial and government. In the aerospace
    industry, there are lots of folks that are just exclusively
    government, and we see the value of being both.
        But in so many ways, the infrastructure that exists in
    aerospace and in space specifically is enabling of this
    innovation. Without the International Space Station, we would
    not have been able to for single millions of dollars
    demonstrate and productize the technologies we have. It would
    have cost two orders of magnitude more money to do it.
        SBIR is a really important part, but it is not the end of
    it. Having those on ramps into commercial utilization,
    encouraging small businesses to look elsewhere besides just the
    government, as well as saying--as well as encouraging and
    introducing small businesses to other parts of the government
    that might benefit from the technologies under development in
    SBIR, I think would be prudent.
        Chairman Rubio. And to me, the whole notion about providing
    opportunities for new entrants into the field is critical,
    obviously because of the nation state competition, but also
    because of a concerning trend line we have seen in terms of
    business investment in innovation, where you have seen a
    significant percentage of profits increasingly returned to
    shareholders, which is not inherently evil, but it is happening
    in many cases at the expense of being reinvested into research
    and development to pursue new lines of work.
        So part of it is creating demand, so that there is
    attractiveness for that investment to happen, but the other is
    when you have a small innovative idea somewhere, giving them
    the opportunity to be successful, especially if a larger
    marketplace presence is not doing that. These programs seem
    pretty critical, especially if we can prioritize how we use
    these programs to key industries that are critical to our
    future.
        And I would say this Made in China 2025 and the 10
    industries there are a good starting point for the kinds of
    places that we need to be supporting at least for these
    opportunities.
        There has been talk about--Mr. Setser, I wanted to ask
    what--on the WTO, it is an imperfect tool, not that it is a
    useless tool, but there are some imperfections in using it when
    it comes to China. What does their unique state-driven economic
    structure--what challenge does that pose to the ability to use
    the WTO to address all of its behaviors?
        Again, not implying that it is useless, but there are some
    impediments to using it because of how they are structured; is
    that correct? And if you could talk about that a little bit.
        Mr. Setser. Yes, I would be happy to do so.
        One of the aspects of China 2025 that is sort of right out
    there in the open and in your face are these market share
    targets. They look like quotas on imports, but they are not
    structured as quotas on imports. They are in formal documents
    out of China's state planning process that somehow gain force
    in the Chinese system without being legally binding because
    China owns such a large share--I mean China's government owns
    such a large share of the economy.
        Take aircraft, sort of the obvious one. The three major
    airlines are all state-owned. Hainan Airlines is not state-
    owned, but its parent company relies on the state for financial
    backing.
        China does not need to have a formal quota on how many
    aircraft it imports. It just needs to send instructions through
    various channels to the companies, the commanding heights of
    the Chinese economy, and you can effectively be shut out of the
    Chinese market without necessarily having a clear-cut WTO
    violation.
        With subsidies, we have discussed some of the difficulties.
    You have to wait a long time in order to show that there has
    been a material damage to you before you can formally bring the
    case.
        Chairman Rubio. If you are still in business by that time.
        Mr. Setser. If you are still in business, but there is also
    a problem identifying a subsidy. It needs to be a specific
    subsidy, and in the Chinese system, it is hard to identify the
    specific subsidy when everything in a sense is subsidized.
        If there is a state-supported investment fund, we would all
    think that is a subsidy, but unless you can prove that the
    investments were made on noncommercial terms, you do not
    necessarily have a case. So it is that difficulty in applying
    the WTO's rules to the Chinese system, which have created this
    plethora of problems for us as we try to sell into the Chinese
    market.
        Chairman Rubio. Mr. Atkinson.
        Mr. Atkinson. Let me just say quickly a story a couple of
    years ago when I was talking to the chief counsel of a Fortune
    100 company. He was explaining to me that the Chinese were
    systematically stealing their technology. He went and had a
    face-to-face with the minister who was relevant to that area,
    and he was told by the minister--the chief counsel said, ``If
    you do not stop this, we are going to bring a WTO case,'' and
    the minister said to him, looking him right in the face, ``If
    you bring a WTO case, you will never sell another product of
    yours in China again.'' And needless to say, they did not bring
    a WTO case.
        Chairman Rubio. Just on that point, a lot of talk about
    Huawei, and we are hearing now the concerns about
    telecommunication infrastructure around the world. What we are
    seeing now is, despite these concerns, numerous places where
    there are dominant telecom presence, are pushing back on
    locking them out, and one of the things we have learned, one of
    the rationales behind it is that their existing equipment in
    the network relies upon annual or biannual software updates and
    upgrades that belong to Huawei.
        So if, in fact, they take this public position, they are
    going to go through an incredibly disruptive moment in which
    they are going to have to rip out all of that stuff. They are
    going to have to go through a period of time where they do not
    have that latest update as they transition to a non-Chinese
    company.
        It is incredibly disruptive for a Western company who has
    to answer to shareholders and the general public. So the
    leverage--we should not underestimate the amount of leverage
    that they hold, not just about bringing actions, but about the
    fact that despite something being damaging to the national
    interest or even the long-term future of a company, the
    leverage in the short term is enough, either denying the market
    access or denying them access to software upgrades.
        That is critical. It is almost, in some ways, like arms
    sales. When you buy a nation's weapons systems, you are tied at
    the hip for a significant period of time because of spare parts
    and training and the upgrades to it.
        My last question--and I know--I think that while we are
    focused on the small business community in this Committee--that
    is our jurisdiction--and all of the trade talk really focuses
    on the big picture of trade and the big numbers, small
    businesses are the ones that would pay the biggest price,
    especially down the chain on it of trade, and they do not get
    nearly as much attention or coverage in the financial stations
    on television and the like. Most of them are not publicly
    traded, and so they are also not being speculated upon
    constantly in the Wall Street Journal or CNBC or the like.
        I guess my biggest concern is that in these trade
    negotiations that are largely focused on the overall trade
    imbalance, having a deal that basically deals solely with that,
    with concessions where China promises to purchase more American
    agricultural, more soybeans, which that would be great. I want
    our soybean farmers to be successful, but it does not really
    deal with the overwhelming majority of other aspects of our
    trade relationship, especially for the long term.
        So to what extent would trade balance-focused concessions
    such as that address our economic imbalance, especially for
    small businesses within the scope of what we have discussed
    here today, if that is all the deal did is just find more
    balance in the big-picture number but did not really deal with
    the intricacies of individual industries, particularly those
    like yours, Mr. Rush, and others who are outside the scope of
    such a concession?
        It is a jump ball. All right, Ms. Glaser.
        Ms. Glaser. I will just make a few comments, Chairman
    Rubio.
        I think it is important to look at the full scope of the
    problems that businesses have in China, and they really begin
    not with forced technology transfer, to be honest with you.
        If you look at the AmCham Survey that just came out of U.S.
    companies that are in China and if you look at surveys of U.S.
    companies that export to China, you will actually find it is
    pretty low on the list. They are really concerned about market
    access, and there are a lot of things there that we can do
    instantly that we could put pressure on China that need to be
    part of this deal.
        So in this recent AmCham Survey, 53 percent of the
    companies that were surveyed said we need to increase the
    transparency predictability and fairness of the regulatory
    environment. This is really all about nontariff barriers for
    them, and then IP protection is number two.
        So we have to look at various ways, I think, that we can
    deal with these set of things.
        From what I heard about USTR Lighthizer's testimony this
    morning, it sounds like we are going back to where we were in
    2015-2016, where we were negotiating in the strategic and
    economic dialogue, a series of things that China could do to
    protect intellectual property, to open up market access. If
    they actually did all of these things, it would be a step in
    the right direction.
        If all we do is get promises on paper and then the Chinese
    buy LNG and agricultural goods, then we will have squandered
    what I think is an enormous amount of leverage that actually
    President Trump has tried to build.
        Chairman Rubio. I would just say the concessions you are
    talking about go at the heart of their industrial strategy.
        Ms. Glaser. Yes.
        Chairman Rubio. In essence, we were asking them to walk
    away from key components of what they intend to do.
        Ms. Glaser. Maybe the Chinese are in my phone.
        Chairman Rubio. That is what happens when you bring a
    Huawei phone in here.
        [Laughter.]
        Mr. Atkinson. I would actually argue that forced tech
    transfer is more important than that. There is a reason
    companies do not always put it on a survey.
        For example, there is a recent academic study that showed
    that there were 6,000 new international joint ventures in
    China. There is another study that showed that Chinese
    companies have gotten significant intellectual property from
    joint ventures, not just the company that was the joint venture
    tech transfer partner, but there are other companies in that
    same industry. So there is a lot of good evidence that forced
    tech transfer has made a big improvement.
        Senator, to your point, under international economics,
    there is a notion of division of labor. We are a rich country.
    We have a lot of intellectual property assets. We should be
    specializing in high value-added technology-based products.
    Other countries specialize in more commodity-based products.
        The idea that we would somehow balance our trade by only
    selling oil and gas and some commodity products, I think
    would--it violates what international trade theory says. We
    should be the ones that are leading the world in high
    technology, high value-added products. So I think any trade
    deal that would settle for just a trade deficit reduction, it
    would be a mistake.
        Mr. Setser. Let me add a very concrete issue, which could
    be at the center of the negotiations.
        China maintains procurement lists for medical equipment,
    procurement lists that favor products made in China. If U.S.
    firms were free to transfer technology, they could potentially
    qualify for those procurement lists by producing in China. That
    is better than not selling at all to China, but it would be
    even better if products made in the U.S. could be freely
    purchased by Chinese hospitals. That would support more small
    business here at home.
        Top-end medical devices have historically been an important
    U.S. export strength, and I personally think addressing those
    barriers to U.S. exports needs to be at the center of our trade
    agenda.
        The other point to make is that China's own economy is a
    point of weakness. There is a risk, at least in my judgment,
    that if China does not put its own community on a sounder
    basis, China could be tempted to go back to an export-based
    model.
        While our current trading relationship with China is far
    from perfect, we would be much worse off if China reversed the
    rebalancing that has taken place after the global financial
    crisis, went back to looking to exports to support its growth,
    and then many small businesses would face even larger
    challenges.
        Thank you.
        Chairman Rubio. Well, just at the core--and we will wrap it
    up--the basic core of this is it is nearly impossible to make
    something somewhere else and then sell it inside China, and it
    is very difficult to invest and produce in China for the
    Chinese market unless you joint venture with someone in China,
    where you run the risk of having your intellectual property
    stolen.
        So the first point is it is nearly--very difficult to
    impossible in most key industries to make it somewhere else and
    send it in. So if you are not even in there, they cannot steal
    your IP. They could, obviously, from here, but they cannot
    force the transfer.
        But if you do get in and they allow you in, you run the
    risk that within a number of years, once they figure out how to
    do it, they put you out of business, and that is at the crux.
    And that is what we are going to ask them to change, and I
    think that is a heavy lift but most concerning of all for small
    businesses.
        Do you have anything else?
        Senator Cardin. I want to thank the witnesses. I thought
    this was extremely helpful. It is clear the challenges here are
    multiple. We clearly need to take action against China's unfair
    practices, whether we try to do that under an existing WTO,
    improve the WTO, or take action here or take action in
    conjunction with our trading partners. We cannot sit still as
    they are stealing intellectual property or they are doing
    things that are clearly in violation of international norms.
        But we also have to be better prepared, and I think this
    Committee particularly, with the tools we have under the SBA,
    we need to see whether we can fine-tune them.
        I was impressed by how important the SBIR program was for
    you. We have the STEP program to help exports. We can certainly
    look at that program and see if we can improve it.
        Looking at traditional programs such as 7(a) or 504 as to
    how they can be more effective, looking at the SBIC as to a
    source to help small businesses, I think all of that, this
    Committee can play an important role.
        But the bottom line, as the Chairman has pointed out, is
    that the strategy of a controlled economy such as China with
    their ability to control all the knobs, they have a strategy
    that has certain results, and those results are very clear.
    They are going to achieve certain levels without imposing legal
    conditions that could be raised as objections under WTO. They
    will do it by their government reactions to their businesses.
        So it requires us to be more sophisticated. It does require
    us to work with our trading partners, our allies. It is
    critically important that we join in alliances, but we have to
    really recognize if we do not do this, we are in danger of
    really jeopardizing the economic strength of this country.
        Chairman Rubio. Thank you for that.
        As we wrap up this Committee, we are facing, as we have
    talked about, a whole-of-government challenge. Ours has to be a
    whole-of-government response, and that includes the programs of
    the Small Business Administration. So that is what we are going
    to be focused on very much is ensuring that the programs and
    the policies under the jurisdiction of this Committee support
    the ability of small businesses in America to compete in the
    21st century, which increasingly means compete in a nation
    state-level competition.
        I want to thank all of you because I think a lot of ideas
    came from the testimony today. You saw a couple members take
    away some ideas that I hope will be part of our ongoing work
    over the next 2 years.
        The hearing record for this is going to remain open for 2
    weeks, and if there are any statements or questions for the
    record, they should be submitted by Wednesday, March 13th, at
    5:00 p.m.
        Again, I thank you all for being here, and with that, this
    hearing is adjourned.
        [Whereupon, at 4:11 p.m., the Committee was adjourned.]

                          APPENDIX MATERIAL SUBMITTED

    [GRAPHICS NOT AVAILABLE IN TIFF FORMAT]

                                        [all]