[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
    
    
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            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.]

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