[Senate Hearing 116-41]
[From the U.S. Government Publishing Office]
S. Hrg. 116-41
CONFRONTING THREATS FROM CHINA: ASSESSING CONTROLS ON TECHNOLOGY AND
INVESTMENT, AND MEASURES TO COMBAT OPIOID TRAFFICKING
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HEARING
BEFORE THE
COMMITTEE ON
BANKING,HOUSING,AND URBAN AFFAIRS
UNITED STATES SENATE
ONE HUNDRED SIXTEENTH CONGRESS
FIRST SESSION
ON
EXAMINING THE AGGRESSIVE ROLE CHINA PLAYS IN THE AREAS OF INVESTMENT
AND TECHNOLOGY TRANSFER. THE COMMITTEE WILL ALSO EXAMINE THE PRODUCTION
AND EXPORT OF POWERFUL SYNTHETIC OPIOIDS AND WHETHER CURRENT U.S. LAWS
IN EACH OF THESE AREAS ARE ADEQUATE, AND BEING APPROPRIATELY
IMPLEMENTED AND ENFORCED TO CONFRONT THESE THREATS
__________
JUNE 4, 2019
__________
Printed for the use of the Committee on Banking, Housing, and Urban
Affairs
[GRAPHIC NOT AVAILABLE IN TIFF FORMAT]
Available at: https: //www.govinfo.gov /
__________
U.S. GOVERNMENT PUBLISHING OFFICE
37-244 PDF WASHINGTON : 2019
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COMMITTEE ON BANKING, HOUSING, AND URBAN AFFAIRS
MIKE CRAPO, Idaho, Chairman
RICHARD C. SHELBY, Alabama SHERROD BROWN, Ohio
PATRICK J. TOOMEY, Pennsylvania JACK REED, Rhode Island
TIM SCOTT, South Carolina ROBERT MENENDEZ, New Jersey
BEN SASSE, Nebraska JON TESTER, Montana
TOM COTTON, Arkansas MARK R. WARNER, Virginia
MIKE ROUNDS, South Dakota ELIZABETH WARREN, Massachusetts
DAVID PERDUE, Georgia BRIAN SCHATZ, Hawaii
THOM TILLIS, North Carolina CHRIS VAN HOLLEN, Maryland
JOHN KENNEDY, Louisiana CATHERINE CORTEZ MASTO, Nevada
MARTHA MCSALLY, Arizona DOUG JONES, Alabama
JERRY MORAN, Kansas TINA SMITH, Minnesota
KEVIN CRAMER, North Dakota KYRSTEN SINEMA, Arizona
Gregg Richard, Staff Director
Joe Carapiet, Chief Counsel
John O'Hara, Chief Counsel for National Security Policy
James Guiliano, Professional Staff Member
Laura Swanson, Democratic Deputy Staff Director
Colin McGinnis, Democratic Policy Director
Cameron Ricker, Chief Clerk
Shelvin Simmons, IT Director
Charles J. Moffat, Hearing Clerk
Jim Crowell, Editor
(ii)
C O N T E N T S
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TUESDAY, JUNE 4, 2019
Page
Opening statement of Chairman Crapo.............................. 1
Prepared statement........................................... 35
Opening statements, comments, or prepared statements of:
Senator Brown................................................ 2
Prepared statement....................................... 35
WITNESSES
Kevin Wolf, Former Assistant Secretary of Commerce for Export
Administration, Bureau of Industry and Security, Department of
Commerce....................................................... 5
Prepared statement........................................... 37
Responses to written questions of:
Senator Sasse............................................ 62
Senator Moran............................................ 62
Senator Menendez......................................... 64
Senator Warren........................................... 71
Senator Sinema........................................... 72
Scott Kennedy, Senior Adviser, Freeman Chair in China Studies,
and Director, Project on Chinese Business and Political
Economy, Center for Strategic and International Studies........ 6
Prepared statement........................................... 49
Responses to written questions of:
Senator Sasse............................................ 72
Senator Menendez......................................... 74
Senator Warren........................................... 77
Senator Cortez Masto..................................... 78
Senator Sinema........................................... 79
Richard Nephew, Former Principal Deputy Coordinator for Sanctions
Policy, Department of State.................................... 8
Prepared statement........................................... 55
Responses to written questions of:
Senator Sasse............................................ 79
Senator Menendez......................................... 83
Senator Warren........................................... 87
Senator Cortez Masto..................................... 91
Senator Sinema........................................... 91
Additional Material Supplied for the Record
``Fighting Fentanyl'', Washington Post, by Sari Horwitz, Scott
Higham, Steven Rich, and Shelby Hanssen, May 22, 2019,
submitted by Senator Brown..................................... 93
(iii)
CONFRONTING THREATS FROM CHINA: ASSESSING CONTROLS ON TECHNOLOGY AND
INVESTMENT, AND MEASURES TO COMBAT OPIOID TRAFFICKING
----------
TUESDAY, JUNE 4, 2019
U.S. Senate,
Committee on Banking, Housing, and Urban Affairs,
Washington, DC.
The Committee met at 10:02 a.m., in room SD-538, Dirksen
Senate Office Building, Hon. Mike Crapo, Chairman of the
Committee, presiding.
OPENING STATEMENT OF CHAIRMAN MIKE CRAPO
Chairman Crapo. This hearing will come to order.
Today, June 4th, is the 30th anniversary of China's brutal
Communist Government authoritarian crackdown on unarmed
civilian protesters in Tiananmen Square, dashing a pro-
democracy movement's highest hope for reforms.
That image of a young man standing in front of a row of
rolling tanks is an indelible reminder of the true character
and intentions of the Government in China that today is
pursuing Made in China 2025, the most ambitious, unorthodox
industrial policy program in the history of the world.
The Made in 2025 program aims to shift China's economy into
higher-value sectors such as those associated with robotics,
aerospace, and artificial intelligence, more generally.
In a very short span, Beijing has managed to transform
itself from the perennial hope of being a cooperative trade
partner to an all-out strategic competitor, in part to confront
China's industrial policy program, which, among other things,
includes subsidies for its domestic companies, developing
advanced semiconductors, the bedrock of all things today.
Worse still, China is one of the United States' largest
trading partners, and it is in part pursuing that policy
through a concept known as ``civil-military fusion,'' which is
intended to provide the missing link between China's
technological and military rise.
While the United States pursued policies aimed to integrate
China into the global economic order, China persisted in
predatory practices at home: to force American companies to
disgorge their technologies, to subsidize its own firms
domestically and their trade around the world, and otherwise
throw various roadblocks in front of foreign firms.
Today's escalating trade and technology tensions can be
seen as consequences of a Government that not only brutally
rejected its own people's hope for reform 30 years ago, but has
since exploited the openness of a global economy and embarked
on its own brand of economic nationalism and technological
supremacy. This path, if unchecked, advantages not only Chinese
firms but can boost Chinese military strength at the same time.
More and more, U.S. national security grounds are called
upon to confront threats to America's dominance in high-
technology manufacturing and other threats from China.
The work of the Banking Committee, with its jurisdiction
over banks, markets, export promotion, export controls, and
reviews of foreign direct investment security and economic
sanctions, sits at the intersection of U.S. national security,
U.S. economic prosperity, and the global economy.
Today the Committee will focus on three threats from China.
The first two threats arise from emerging national security
issues associated with foreign investment in the United States
and the export of critical technologies, particularly in the
semiconductor industry, which is a primary target for illicit
acquisition.
Last year, the Committee successfully negotiated and the
President signed into law the Foreign Investment Risk Review
Modernization Act--FIRRMA--and the Export Control Reform Act.
Together, these bipartisan, bicameral pieces of legislation
work to enhance the Federal Government's authorities to protect
America against illicit foreign investments in, acquisitions
of, and transfers of America's most sensitive technologies.
Today the Committee will hear from a variety of
perspectives on whether these new laws are sufficient to
counter China's threats or if other measures must be
considered.
Of particular interest is the question of how we separate
and protect U.S. cutting-edge technology from the non-national
security-related trade that finances America's greatest
innovative achievements.
The third threat involves the illicit supply of fentanyl to
the United States, which is causing close to 38,000 American
deaths a year now. This question is if a set of sanctions tools
can be effectively leveraged to restrict the supply of illicit
fentanyl into the United States.
Senator Brown.
OPENING STATEMENT OF SENATOR SHERROD BROWN
Senator Brown. Thank you, Mr. Chairman, for calling this
important hearing. Thank you for noting the 30th anniversary of
Tiananmen Square, as we remember those who fought for democracy
and human rights as part of that movement.
Today we focus on whether to provide the Administration
with new sanctions tools to complement existing Foreign
Narcotics Kingpin sanctions, targeting traffickers in China,
Mexico, and elsewhere who contribute to the rising tide of
illicit opioids coming into the U.S., including powerful new
forms of fentanyl.
Last month, China took the long overdue step of controlling
the full range of fentanyl analogs. This should mean that all
forms of synthetic drugs which look and act like fentanyl will
be subject to China's drug control laws. I am glad China's
Government took that step. Now we have to make sure they
implement and enforce it. As we know from watching Ohio's steel
industry, without strict enforcement, promises from China do
not mean very much.
We cannot wait to see whether China enforces its laws.
Fentanyl has become the leading cause of overdose deaths. On
average, in my State, more than any State in the country, 14
Ohioans die every single day due to an overdose. Those families
cannot afford to wait and see whether China will enforce its
rules.
A recent Washington Post study found that the Ohio Valley
in eastern Ohio, generally coinciding with the Appalachian part
of Ohio, is suffering the most from the surge in overdose
deaths due to synthetic opioids. I ask consent, Mr. Chairman,
to include the Washington Post article, entitled ``Fighting
Fentanyl''.
Chairman Crapo. Without objection.
Senator Brown. Thank you.
We can bolster Chinese efforts by taking steps of our own
to target traffickers. Our bipartisan Fentanyl Sanctions Act
led by Senator Schumer would give the Administration new
sanctions tools to help stem the tide. It would help provide
intelligence and funding to keep these dangerous drugs out of
Ohio communities.
We will also address today the range of challenges posed by
China in export control, intellectual property theft,
technology transfer, and certain foreign investments--including
through China's massive Belt and Road Initiative, its Made in
China 2025 initiative, and targeted collaborative investments
in U.S. firms with critical technologies that China seeks to
acquire.
We must respond forcefully when China's ambitious and
sometimes illegal acquisition strategies are deployed against
U.S. firms, raising critical national security or economic
security questions here at home. This is what we did last year
when we passed the Foreign Investment Risk Review Modernization
Act--expanding and updating both CFIUS, the Committee on
Foreign Investment in the United States, and export control
laws.
Almost a year after enactment of these reforms, we will
hear testimony that some foreign investors continue trying to
capture the intellectual property of leading-edge U.S.
technology companies for their home country's military uses or,
worse, to disrupt U.S. supply chains.
Our current control systems attempt to prevent this type of
technology transfer through multilateral and unilateral export
controls. This system identifies dual-use products, technology,
and software that may not be exported or is strictly limited.
Is this approach still sufficient, when coupled with new
constraints on emerging and foundational technologies and other
reforms contained in export control reforms enacted last year?
Is the law being implemented as written?
China continues to use nontariff barriers to block foreign
producers from entering its market. Chinese State-owned
enterprises, such as those in steel and other sectors, receive
extensive Government subsidies that allow them to compete with
no consideration of market forces. That makes it harder for
U.S. companies and workers to compete--again, as our Ohio steel
industry knows too well.
I do not think CFIUS and its investment review process can
or should bear the burden of trying to bring about a fair
trading relationship with China. That is beyond its scope. It
has its hands full trying to police the national security
threats that some Chinese investments pose.
But as we know, much foreign investment in the United
States falls outside of the scope of CFIUS. We do not have a
good way to review it to make sure it is in our economic
interests as a Nation. It is not always easy to make a
distinction between national security and economic security.
I have introduced legislation with Senator Grassley--the
Foreign Investment Review Act--that would require the Secretary
of Commerce to review certain foreign investments, particularly
those made by State-owned enterprises, to make sure they are in
the long-term, strategic interests of American workers and
American companies.
Other issues in our Committee's jurisdiction also need
attention. Chairman Crapo and I have joined with Senators
Baldwin, Cornyn, and 40 other sponsors on a bill to prohibit
Federal funds from being used by transit agencies to purchase
rail cars and buses manufactured by Chinese State-subsidized
companies. Federal dollars should not support anticompetitive,
heavily subsidized Chinese products that undermine our workers
and threaten the future of U.S. automotive and rail
manufacturing. The bill also addresses cybersecurity risks
facing our Nation's transit systems.
Finally, Mr. Chairman, our Committee must move quickly to
provide a long-term reauthorization to the Export-Import Bank.
Each year, China's export credit agencies--get this--provide
more medium- and long-term investment support than the rest of
the world's export credit agencies combined. American
manufacturers need a reliable Export-Import Bank that is
authorized for the long term to stay competitive as they pursue
business abroad.
It is clear that on China we have lots of work to do.
Thanks to the witnesses.
Chairman Crapo. Thank you, Senator Brown.
Our witnesses today will be:
The Honorable Kevin J. Wolf, the former Assistant Secretary
of Commerce for the Export Administration in the Bureau of
Industry and Security, or BIS;
Mr. Scott Kennedy, Director of the Project on Chinese
Business and Political Economy at the Center for Strategic and
International Studies;
And Mr. Richard Nephew, the former Principal Deputy
Coordinator for Sanctions Policy at the U.S. Department of
State. We welcome all of you with us today.
Each of these witnesses is knowledgeable about U.S.
controls and the aggressive role of China, drawing from their
experiences in industry, Government, and academia.
I want to thank you again for your written testimony. It is
very helpful to us and will be made a part of the record. I
also want to remind you that we have a 5-minute rule on your
oral testimony. Please pay attention to that so there will be
time for our Senators, who have their own 5-minute rule, and I
ask them to pay attention to that.
With that, Mr. Wolf, please begin.
STATEMENT OF KEVIN WOLF, FORMER ASSISTANT SECRETARY OF COMMERCE
FOR EXPORT ADMINISTRATION, BUREAU OF INDUSTRY AND SECURITY,
DEPARTMENT OF COMMERCE
Mr. Wolf. Chairman Crapo, Ranking Member Brown, and other
Members of the Committee, thank you for inviting me today. The
views I express are my own. I am not advocating for or on
behalf of any particular law or regulation on behalf of
another. Rather, as requested, I am here to answer your
questions with respect to existing laws and regulations.
This is a very serious topic. The United States never wants
to be in a fair fight with an adversary, and the appropriate,
aggressively enforced, clearly written, and well-funded export
controls are an important part of that tool. They are also a
very important tool in our foreign policy, particularly
including with respect to achieving include human rights
objectives.
I have never subscribed to the view that export controls
should ``balance'' between our national security and foreign
policy objectives and economic and trade policy. National
security objectives and foreign policy, including human rights
objectives, stand on their own merit and should never be traded
off for a particular transaction.
That said, it is vital that export controls be tailored to
specific, identifiable, clear national security and foreign
policy objectives; otherwise, if you have overbroad or
uncertain controls, it ends up doing more harm than good to the
very thing that we are trying to protect, which is the U.S.
industrial base. And for the U.S. to be a global leader, we
absolutely need to have access to markets worldwide.
With respect to China, the issues pertaining to dual-use
controls, items that have commercial and military applications,
are among the hardest intellectually and from a policy
perspective to decide and implement and have been for decades.
While as you mentioned it is one of our largest trading
partners, there are obviously significant issues with respect
to internal diversion of commercial items for military
applications.
With respect to military or commercial satellite and space-
related items, oddly enough, the analysis is really quite easy
because particularly since Tiananmen, there are some very
clear, absolute statutory and regulatory embargoes and very
clear national security and foreign policy reasons for them.
When it comes down to, thus, deciding what the right level
of control is on a dual-use item, it ultimately boils down to
how you define ``national security.'' The traditional
definition is to have the national security experts go to those
items that provide us with military or intelligence advantage
for commercial items and then to work backward from those very
clear, specific identified threats to determine which
commercial items feed into that, identify them, and then work
with our international allies so that they impose similar
controls as well to enhance the effectiveness of the control,
regulate them in a very clear, interagency process, and then
enforce violations in order to motivate or compel compliance.
Another definition of ``national security'' is to see China
as such as a per se economic threat. Its very economic
existence in competition with U.S. companies creates the
national security threat, and as such, aggressive controls
should be imposed on the transfers of technology that lead
into, for example, everything identified in 2025.
So without arguing about either particular perspective or a
definition of ``national security,'' what I hope to be able to
do today is to give you my perspective of having worked in this
area for about 25 years and what, regardless of your worldview
is or approach or issue with respect to China, is the key to
effective controls, which is clarity, certainty, and
multilateralism. Because if you do not have clear controls or
if they are uncertain or if you go it alone, all you eventually
do is end up hurting the very sector of the economy or the
objectives that you are trying to enhance. And the best way now
to do that is with the Export Control Reform Act that you
referred to earlier. It is a very good piece of bipartisan
legislation. The career staff and others at the Bureau of
Industry and Security are still writing implementing
regulations, and as described in my written testimony, I put in
a big plug for more support, more resources, and more oversight
of the very clear standards in that statute that this Bureau is
going to be implementing.
And as noted, I have a 3-minute, a 30-minute, a 3-hour, and
a 3-day version of each topic. So I am going to stop there and
leave the rest to your questions.
Thank you very much.
Chairman Crapo. Thank you very much, Mr. Wolf.
Mr. Kennedy.
STATEMENT OF SCOTT KENNEDY, SENIOR ADVISER, FREEMAN CHAIR IN
CHINA STUDIES, AND DIRECTOR, PROJECT ON CHINESE BUSINESS AND
POLITICAL ECONOMY, CENTER FOR STRATEGIC AND INTERNATIONAL
STUDIES
Mr. Kennedy. Thank you very much, Chairman Crapo, Ranking
Member Brown, and the Committee, to talk about the commercial
relationship with China and both the national security and
economic challenges that we face and how we should respond.
Certainly this being the 30th anniversary of the Beijing
massacre reminds us of the challenges and the long road that we
have to follow, and also as someone working on China for all of
that time and longer, taking an approach of principled
pragmatism, being principled about what we want to achieve but
also pragmatic and effective.
China's efforts in high-tech I think you already summed up
pretty well, and I do not need to go into much detail. But they
are driven by commercial motivations, domestic security, what
they can do to keep the Communist Party in power, and national
security. And their goal is simply leadership in every
industry.
The list, not just Made in China 2025 but their 13th Five-
Year Plan, has hundreds of industries they want to achieve
dominance in, and this is a threat to the U.S. and others, not
because of China's goals necessarily, but the way they want to
achieve them with massive Government and party intervention.
And the business model is simple: Throw as much money as you
can, scale up as fast as you can, do not worry about the
losses, and then once you get market share and you lose, you
know, competitors, you will be successful. That is maybe a good
approach for China if you do not care about the price tag, but
it is horrible for these industries and for their competitors
and supply chain, so it has huge commercial and national
security relevance for us, not just because of China's strategy
but because of its scale.
But I think one thing I want to emphasize is that China has
got a very mixed performance record on this strategy. Overall,
China is much more innovative than it was in the past. It ranks
17th amongst countries in the world in terms of its innovation
capacity, which separates it from other developing countries
and makes it closer to advanced industrialized economies. The
U.S. is ranked 6th now, Germany 9th, South Korea 12th, Japan
13th.
At the same time, there is lots of variation. In some
industries the Chinese are amazingly successful. In some places
they are flops. China has obviously made huge strides in
telecom and pharma through having a mostly privatized,
globalized industry. Some of that is through real hard work,
and some of it is through theft. In other areas, they have had
successes which are generating huge, huge problems--electric
cars, solar, wind, robotics, massive overcapacity that
threatens those industries globally.
And then there are failures--commercial aircraft,
semiconductors--where they are spending hundreds of billions,
wasting money and distracting the rest of the global industry,
and these are serious problems. But they do not have--the
results vary significantly.
I want to say a couple things about American policy, and
then I look forward to the conversation.
Some of the things that we are doing I think make total
sense. China has been dragging its feet on meeting its WTO
commitments. We have been overly patient for far too long. And
so I have been a grudging supporter of tariffs. I was a
supporter of the reforms for foreign investment and export
controls, I think also long overdue. But I also think we need
to recognize that we are losing focus on what the overall goal
is and where the Trump administration at least is becoming so
focused on the tool of unilateral pressure that it has lost
focus on what the outcome should be. The outcome should not
preferably be just simply disengagement and moving along with a
new cold war. Instead, it should be finding a way to level the
playing field, find a way to peacefully coexist.
Now, of course, that cannot be guaranteed. The Chinese have
to respond. But we should use the best tactics we can to
achieve that. The strategy of only relying on unilateral
pressure is causing a lot of collateral damage in the United
States and elsewhere. And so I would just reinforce what my
colleague Mr. Wolf said about what our strategy should be,
which we should stop bashing our allies, threatening tariffs
with them; collaborate with them both on defense and offense,
so multilateralizing investment controls, export controls;
working with them on multilateral solutions; reforming the WTO;
and then something we have not talked much about, which is
strengthening the U.S.' own innovation ecosystem. Regardless of
what the Chinese are doing, we need to do that, and I have got
specific suggestions in each of these areas that I am happy to
share with you during the discussion.
Chairman Crapo. Thank you, Mr. Kennedy.
Mr. Nephew.
STATEMENT OF RICHARD NEPHEW, FORMER PRINCIPAL DEPUTY
COORDINATOR FOR SANCTIONS POLICY, DEPARTMENT OF STATE
Mr. Nephew. Thank you, Chairman Crapo, Ranking Member
Brown, and other distinguished Members of this Committee, for
inviting me to speak here today.
The scope of this Committee's inquiry today is much broader
than the Fentanyl Sanctions Act or, for that matter, the use of
sanctions in general in addressing policy differences with
China. But it is a privilege to offer my thoughts with respect
to this specific set of issues. I am also honored to join my
fellow panelists here today who have such long experience in
issues germane to this Committee's consideration, and like
them, I should note that my comments here reflect my own views
and not any of the institutions with which I am affiliated.
I think the decision to explore sanctions as a possible
means of securing additional leverage to manage the supply of
fentanyl to the United States--and sanctions' active use in
other foreign policy contexts with China--is fitting due to the
established utility of sanctions in managing other policy
problems. As I have written about extensively since I left
Government in 2015, sanctions can be an effective tool. But
they should neither be the only nor the dominant tool in
managing every foreign policy problem. There are real dangers
in the overuse of sanctions and in the reduction of U.S. policy
interests with key countries--China foremost among them--to
sanctions management exercises.
I am particularly grateful the Committee has decided to
study and debate this issue rather than leap immediately into
the business of applying sanctions against entities in China
or, for that matter, any other country in which there are
entities involved in fentanyl trafficking.
That concern notwithstanding, and acknowledging that my
opinion is only in the context of sanctions design rather than
as an expert in fentanyl, I do think the Fentanyl Sanctions Act
is an appropriate step forward in the redress of our concerns
with China in this regard.
In my written testimony, I offer specific thoughts with
respect to the provisions of the FSA and the diplomatic
strategy it would support. Let me say here that in my view it
has sound, clearly articulated objectives. It offers a flexible
approach that provides substantial discretion to the executive
branch. It provides for proportional and limited sanctions and
in a manner that is distinct from but complementary to the
existing sanctions structure, including the Kingpin Act. It can
facilitate a diplomatic approach, especially in that it is not
limited solely to China as a target. And it is complemented by
other steps--including the creation of a commission,
establishment of an intelligence program dedicated to the
problem, and the provision of funding--that can help to create
a ``whole of Government'' approach.
There are three challenges or concerns that do need to be
considered in the context of the FSA. They are:
First, the reality that the U.S.-China relationship is
already very complicated. Adding FSA measures to the mix may
make it harder to address our broader array of interests with
China. In my opinion, though, the limited scope and scale of
the FSA and the fact that this issue is already on the agenda
mitigates some of this risk. But it is an important one to
acknowledge.
Second, the United States has a lot of sanctions in place
already that affect Chinese interests. From Iran to human
rights to Russia, our sanctions plate with China is full. One
can reasonably argue that this will only reinforce Chinese
reluctance to cooperate with any part of our sanctions since
their demands are, in their view, never-ending. Some Chinese
scholars are also already starting to advocate retaliatory
sanctions measures.
That said, in my view, this only argues in favor of being
more careful in our sanctions approach, picking and choosing
which sanctions to create and how to enforce them. If the U.S.
Government prioritizes fentanyl trafficking, then in my view it
can and should make space for this issue and its approach to
other sanctions matters.
Third, there is the risk of contributing to the sanctions
overuse problem. In my view, this is a very real concern and
one that might in time affect U.S. economic performance and
access. It is not, however, likely to be triggered by this one
measure. I do believe that the overuse problem needs
examination, and I commend those on Capitol Hill who are
beginning to mull options to do just that, through reporting
requirements and even commissions to study the issue.
In sum, though I believe there are legitimate questions
about the FSA, I believe that it is a reasonable next step to
take in our efforts to redress our concerns regarding the
supply of fentanyl to this country. The sanctions proposed are
proportional, reasonable, subject to executive discretion,
consistent with the diplomatic approach, and manageable in the
overall policy context. In an ideal world, no sanctions
measures included in the FSA would ever need to be used, as
their mere existence would contribute momentum to ongoing
diplomatic efforts to confront the challenge of illicit
fentanyl trade. And even if sanctions had to be imposed, I
believe there are mechanisms in the FSA to manage their
deleterious impacts as well as to provide relief in the context
of future diplomatic progress.
I appreciate the opportunity to speak with you today and
offer my testimony. I look forward to your questions.
Thank you.
Chairman Crapo. Thank you very much, Mr. Nephew, and I
appreciate the comments that each of you have already made.
One thing that was, I think, a common theme among each of
you was that sanctions are an effective tool and that we need
to be careful to use them with precision. And they are not a
blunt instrument. To me, this is a lesson that we learned here
in the Committee as we tried to work through FIRRMA and the
Export Control Act reforms that we did last Congress on a
bipartisan basis.
The question that I want to focus on here is: How do we do
that? And I am primarily--you know, Mr. Kennedy, you said there
were hundreds of industries where China is seeking to basically
leapfrog itself into global dominance. I want to focus on the
semiconductor industry, which I believe is one of the most
significant ones that is currently under direct threat. And the
first question I have is: For the U.S. companies in the
semiconductor industry to maintain what I believe they
currently have as a dominant lead, but for them to maintain
their position in developing and leading in cutting-edge
technologies, do we not have to make sure that they have access
to global markets? I assume that is an easy answer, but go
ahead.
Mr. Kennedy. Yes, I appreciate the first one being a
softball. American companies are leaders in all aspects of
semiconductors, and we should be exporting them. It is a huge
part of the industry, not just because China and other places
are the end consumers but also because of global supply chains,
and if you--obviously, you need--in the context of the Chinese,
they are throwing hundreds of billions of subsidies at these
industries, and they are trying to steal this technology. You
have to guard against that as much as you can. But you also
have to keep your industry healthy, so investing in R&D,
keeping these markets open.
If those markets are closed off for whatever reason, then
it is going to be the Chinese investing and building their
supply chain now. They are very far behind, and they have a
long way to go. But if we just pull up the drawbridge too
quickly, then what they are going to do is eventually they will
figure out how to make a semiconductor, and that will be
dangerous for our industry and our national security.
Chairman Crapo. Well, as a matter of fact, wouldn't it be
the case that if we use this tool wrongly or ineffectively, we
would actually advantage China's movement into the
semiconductor position that it is seeking to achieve?
Mr. Wolf. Absolutely. I agree with everything you said and
what was just said a moment ago. If we, as a matter of both law
and psychology, encourage buyers to want to go and dual source
from outside of the United States, then that reduces the amount
of ability of U.S. companies to invest in R&D to stay ahead
with respect to the next generation and be the world leader
from the United States. And so U.S. companies absolutely need
access to all markets, both as a matter of law and psychology,
and that these tools that we all--we did not coordinate, but we
all were basically saying the same thing, is do not overuse
them in order to avoid spooking potential buyers and
overcontrolling that which does not need to be controlled. So I
agree with everything you said in your question.
Chairman Crapo. So let me just conclude with a more
specific point here and ask your comment on this. I very
strongly support both ZTE and Huawei being put on the entity
list and having the sanctions that we have begun implementing
against them.
At the same time, I am concerned that if we utilize the
sanctions in this context without the precision that we need,
we could actually benefit China by losing our market share for
our semiconductor industry or weakening it badly and then
allowing other suppliers, not necessarily Chinese suppliers but
other suppliers, to take over U.S. markets and ultimately
facilitate China's objective in this very field.
I would just like any of you to jump in on that if you
would like. Mr. Kennedy.
Mr. Kennedy. Yeah, I would agree. Although I have been
supportive of some of the unilateral measures the
Administration has taken and also the efforts to increase our
defenses across these industries, I think the entities list
action was taken prematurely and is too broad. So I probably
would have waited some time before I went forward with that
step because of the huge consequences it can have, and then I
would--if you end up having to implement it, I would have
tailored it much more closely. So there are elements of
Huawei's business in consumer electronic cell phones which are
not the type of threat that they could be, for example, in base
stations for 5G. So I think I would have been much more
specific in how I would have targeted it if I had gotten there,
but I probably would not be there at this point because it is
really having a huge effect on the overall trajectory of the
relationship and the negotiation, so I think we would have--I
would have preferred greater coordination about that decision.
Chairman Crapo. Well, thank you. And, Mr. Nephew and Mr.
Wolf, my time is up. I do want your answers to this, so if you
would give them to me in writing following this.
Mr. Wolf. Pretty much what you said I agree with, so that
is the short answer.
Chairman Crapo. All right. Thank you.
Senator Brown.
Senator Brown. Thank you, Mr. Chairman. And thank you all
for shedding light on the importance of sanctions and the
limitations and the importance of precision on how we apply
them. I do not want to overstate their power, but I want to
explore with you, Mr. Nephew, to understand better sort of how
this plays out.
What do you see the major targets of sanctions,
particularly on targeting fentanyl, what do you see the major
targets, Chinese chemical companies who look the other way,
pharmaceutical companies whose employees may be engaged in
these lucrative crimes, individual traffickers? Talk to me
about how that should go.
Mr. Nephew. Yes, Senator, I think you have listed actually
all the ones that I would imagine would be on the list. It
would be those companies and those entities that are either
deliberately or with malice of ignorance allowing for their
goods to be transferred to the United States. And I think there
is a range of companies, both pharmaceutical companies and
chemical companies, that could be potentially targeted. But
there are also, you know, those involved in the shipping and
the transfer and the transiting of goods as well, especially
not just to the United States directly but also to third-party
or third-destination countries that could potentially be used
to transfer to the United States as well.
But, importantly, I should say, I do not see that as being
the first step of implementation of the FSA. My sense of this
is that we would take the existence of the FSA, if it were to
become law, and to use it in a diplomatic approach with the
Chinese where we would identify to them specific areas where we
have concerns, including specific companies, as we have done
with nuclear proliferation, missile proliferation, and other
such things, and to expect them and ask them to take action on
their own. And to me, it is those incorrigibles that the
Chinese are unable or unwilling to address that we would then
eventually have to impose sanctions against.
Senator Brown. OK. Thank you for that thoughtful answer.
Mr. Wolf and Mr. Kennedy, let me shift to another issue.
Chinese State-owned rail car manufacturers use low-ball bids to
win four major contracts to supply subway and commuter rail
vehicles to transit systems, to large transit systems in large
cities. That company wants to sell up to 800 subway cars to the
D.C. Metro system, a public contract that would be worth
upwards of $1 billion. A major Chinese electric vehicle
manufacturer that has received generous support from its
Government has sold electric buses to U.S. transit agencies in
13 States. Chairman Crapo and I are working with three dozen
colleagues on legislation to prohibit Federal grants from DOT
from supporting contracts with these Chinese subsidized
companies. Is that the right approach, Mr. Kennedy, Mr. Wolf?
Mr. Kennedy. I guess what I would encourage is being as
specific as you can to stop the problem that you see. So in the
case of companies that are State-supported or State-owned, we
have rules already. We can use countervailing duties. If they
have captured so much market share that they are abusing their
dominant position, you can use antitrust rules.
So there are ways, if you are sure what they are doing is
giving them an unfair advantage, to be very targeted. State-
owned enterprises obviously are very difficult. It would be
nice if we had global rules related to State-owned enterprises
in particular, either at the WTO, or, you know, the TPP has
those. But if those did not work, then the methods that you
propose might be a good next step.
Mr. Wolf. I agree it would be an effective tool, and one of
my main themes is that export controls and CFIUS are not the
solution to all problems, and when other areas of law do not
address the issue that you just described, then new ones need
to be created. So, yes, I agree.
Senator Brown. OK. I did not know I would have a minute
left. Let me shift back to the fentanyl issue with Mr. Kennedy,
and from Mr. Nephew's response on fentanyl, that you go to the
Government first and you give them that opportunity, if you
will, to, for want of a better term, behave better, are you
hopeful, Mr. Kennedy, the decision in early May to treat as
controlled substances under their law to treat fentanyl will be
effective in the way perhaps that Mr. Nephew suggested we
follow through?
Mr. Kennedy. Had we continued on a path to reach a broad
trade agreement and stabilize the relationship, yes,
cautiously. With that increasingly unlikely, I am very
pessimistic that we will make much progress because of the
broader change in the atmosphere of the relationship.
Senator Brown. OK.
Chairman Crapo. Senator Toomey.
Senator Toomey. Thank you, Mr. Chairman. And I also want to
thank our witnesses.
I just want to make a quick observation following up on a
point that Mr. Kennedy made in his opening comments, and Mr.
Kennedy rightly, in my mind, reminded us of the massive scale
of mal-investment and misallocation of capital that happens in
the Chinese economy precisely because it is a managed economy.
It is not a truly free economy. And so the smartest people in
the world are never going to figure out exactly where capital
should go, exactly where resources should go. Markets discover
that far better than any committee, and if that were not true,
then the socialist economies of the world would have long ago
surpassed ours.
So while China is a very serious threat in many important
ways, I just hope we will remember that this power that they
exercise is actually a weakness for their overall economic
performance. And our greatest strength is not the head start
that we have in modernization but, rather, the relative freedom
that we have and the ability to discover how to allocate
capital through a market mechanism.
I would like to switch back to the discussion about
fentanyl as well. It is stunning to me just how powerful this
drug is, and I will give you one illustration that was mind-
blowing for me. In June of 2017, so 2 years ago, the U.S.
Customs and Border Patrol seized 110 pounds of fentanyl at the
port of Philadelphia. One hundred and ten pounds. Now, that is
about the weight of a relatively large German shepherd. It is
enough fentanyl to kill every man, woman, and child in
Pennsylvania twice. That is how powerful this is. And like
Ohio, Pennsylvania has experienced a huge surge in the number
of opioid deaths that are directly attributable to fentanyl. So
I am pleased to be an original cosponsor of the Fentanyl
Sanctions Act.
I have also introduced legislation with Senator Jones that
is a little bit different, but it goes after the same problem.
It is called the ``Blocking Deadly Fentanyl Imports Act''.
Currently, the Foreign Assistance Act forbids most forms of
U.S. foreign aid to countries if they are not assisting our
efforts sufficiently in block illicit substances. There is a
specific list of these substances. It is heroin, marijuana,
cocaine, methamphetamine and its precursor chemicals, but
fentanyl is not on the list. And I think that is because the
list has not been updated as it should be. So our bill would
simply update that list to include fentanyl, so I have just got
a couple of questions about this.
One, to start with, for Mr. Kennedy, some experts on
Chinese behavior are concerned that China may lack the capacity
to enforce its fentanyl controls, and others think that maybe
it is convenient for China to use fentanyl as an issue that
gives them some leverage over the U.S. in other areas. Can you
give us your thoughts on the extent of the Chinese Government's
capacity to enforce its own broadening? As you know, recently
they banned the entire class of fentanyl and not just a
discrete list of analogs. That is a step in the right
direction, but could you address their ability to properly
enforce this?
Mr. Kennedy. I think it is difficult for anyone to enforce
it when it is that small and that powerful. Right? So it is
like diamonds in your pocket. It is that level of problem. And
given the size of China, yes, it is difficult. But the Chinese
have shown in so many other areas that when they have political
will to do something, they are able to make progress, if not
fix a problem.
So I think the question is: What is their incentive in the
broader relationship so that they can put more resources toward
this problem? This is the same issue in intellectual property
rights, in many other areas. Given the proper incentives, they
will change their behavior. If this is just a capacity problem,
we certainly have the ways to collaborate with them, also with
Mexico and others, because this is not just a U.S.-China
problem, even though a lot of this stuff originates in China.
Senator Toomey. And then for anyone on the panel, does
everybody agree or does someone disagree with the premise of
the Blocking Deadly Fentanyl Imports, with the idea that
fentanyl is as dangerous or more dangerous than the existing
list of drugs and, therefore, fentanyl should be added to the
regime under the Foreign Assistance Act? Any opinions on that?
Mr. Nephew. So I will just say, you know, as someone
speaking to the fentanyl issue, I do think that tends to make
sense. I would see no reason why it would not. Again, I think
that this is a broader conversation for experts in drug
trafficking and fentanyl specifically, but I see no reason why
that would not make sense, sir.
Senator Toomey. Any disagreement?
[No response.]
Senator Toomey. All right. Thank you very much, Mr.
Chairman.
Chairman Crapo. Thank you.
Senator Menendez.
Senator Menendez. Thank you, Mr. Chairman.
Let me continue along the line of this question on
fentanyl, and I would like to ask Mr. Nephew, with your
experience coordinating U.S. sanctions, can you speak to how
the United States can best use its sanction authorities to
combat international opioid trafficking? And what is your
assessment? Does the U.S. have sufficient authorities under our
kingpin sanctions to tackle illicit opioid trafficking? Or are
new authorities needed to hold accountable Chinese companies
involved in fentanyl trafficking?
Mr. Nephew. Thank you, Senator. So I would say two things.
First, I think that were the Fentanyl Sanctions Act to
become law, I could see it being part of an integrated strategy
of both intelligence collection, analysis, and identification
of targets, that that would then facilitate diplomatic
engagement with the Chinese to see if they can be convinced or
compelled to implement their own laws when it comes to the
regulation of fentanyl, and then failing that, along the lines
of the schedule of reports that is outlined in the FSA to
impose sanctions against those that either are unwilling or
unable to be corrected by the Chinese Government.
And I think this speaks to the second issue, which is the
Kingpin Act. To me the Kingpin Act is very valuable. It allows
you to impose very significant and substantial sanctions on
narcotics traffickers, and I think the fact it has been used at
least once with respect to fentanyl is useful. But I do think
that having more authorities, especially at the lower scale of
punishment, may be valuable. And I think that is where the FSA
is so useful because it adds new tools. It adds sanctions
against import-export financing. It adds, you know, sanctions
on visas for senior officials. It would give the U.S.
Government more tools to apply against some of these companies
and entities, which I think may be more effective as part of a
diplomatic approach, and especially the fact that there are
means for tailoring implementation of sanctions in the long
term for countries that are cooperating. I think that also
adds.
Senator Menendez. I appreciate that insight. I hope we can
get the Fentanyl Sanctions Act passed. I have sponsored it with
Senator Schumer. I think there is not a part of our country
that is not touched by this issue, and every tool that we can
use to prevent fentanyl from coming into the United States in
the first place I think is incredibly important.
I would like to ask Mr. Kennedy, as I look at China now 30
years after Tiananmen Square, I see an Orwellian State. Xi
Jinping has obviously developed one of the most sophisticated
technological surveillance systems of its people in Xinjiang,
obviously, with the Uighurs. How should we be balancing our
values such as concerns about human rights in Xinjiang and
American companies that are engaged in selling surveillance and
security goods and services to China, especially when we see
China promoting that very essence of that technology to other
countries in the world to repress people as well?
Mr. Kennedy. I agree it is a huge problem. Chinese people
do not have middle names, but if they did, Xi Jinping's would
be ``Control''. Every problem he sees he wants to solve with
increasing control, whether it is technological, economic,
every element of State power. And I think it is really
important that American companies not blindly serve, to the
extent possible, any of those kinds of goals and that use of
party power.
It may be that we need legal restrictions on participating,
and I think that is certainly--we have some of those already.
In addition, public--shining lights on these companies that are
involved could also be involved--but I think it also needs to
be multilateral, and we need to be relatively consistent to the
extent that we can on a range of Chinese behaviors, not just in
Xinjiang but otherwise, and through our own actions show that
we are not just picking on the Chinese because they are the
Chinese, but because we care about human rights everywhere in
the world across people of all faiths.
Senator Menendez. And, last, given that the President has
announced that he is going to impose across-the-board tariffs
on Mexico, the second largest market in the world for U.S.
goods and services, as we are starting the process for
ratification of USMCA and Mexico just started their
ratification process, as we are trying to deal with China and
its unfair trade practices, what message does that send to
China that even if they strike a deal with us, then the
President goes ahead and says, ``Well, I am going to strike
tariffs on you for some other reason''?
Mr. Kennedy. The biggest reason China wanted a deal was
that they thought it would stabilize the relationship. But they
do not want a deal if they feel on day two we will break our
word. And they also feel that if we are isolated because we are
hitting everyone else with tariffs and penalties, that it will
be us that are isolated at the end of this, and they will just
wait out the President until the next Administration.
Senator Menendez. Thank you.
Chairman Crapo. Senator Kennedy.
Senator Kennedy. Thank you, Mr. Chairman. Thank you,
gentlemen, for your testimony.
Mr. Kennedy, if I referred to ``controlled technology,''
would you understand that term?
Mr. Kennedy. If you could explain just a little bit?
Senator Kennedy. Well, it is important technology,
important to the Nation's commerce and the Nation's defense. Do
we have university students, citizens of foreign countries,
China, for example, in our universities that have access to
controlled technology?
Mr. Kennedy. Well, there are laws governing Federal grants
to universities, and as far as I understand, in many
circumstances there are supposed to be restrictions to access
to those technologies in the lab and----
Senator Kennedy. I think it is called a ``deemed export
license.''
Mr. Kennedy. Yes, yes.
Senator Kennedy. But if you have a university student who
is just in the lab, just present, a deemed export license is
not required. Is that not the case?
Mr. Kennedy. That is correct.
Senator Kennedy. Are there foreign university students,
university students in our universities from foreign countries
like China that are stealing our technology, controlled
technology?
Mr. Kennedy. Well, there are 369,000 students from China in
American universities.
Senator Kennedy. It is the most in the world, isn't it?
Mr. Kennedy. Yes, by far. You know, at least half----
Senator Kennedy. And many of them are in the sciences, are
they not?
Mr. Kennedy. That is right, in science technology----
Senator Kennedy. And many of them are in labs that are
developing controlled technology, are they not? But as long as
they are just there observing, we do not require a deemed
export license, do we? Do you know, Mr. Wolf?
Mr. Wolf. Well, it is actually the area of law I used to be
responsible for, and the laws apply equally whether you are a
student or in a university with nonpublic technical information
that is controlled or in a company. And a release of technology
to that student that is not in the public domain requires a
license the same way as exporting to----
Senator Kennedy. Yeah, but if they are just there--they are
just in the lab.
Mr. Wolf. Yes.
Senator Kennedy. It is not considered a release, is it?
Mr. Wolf. No, actually, it is. The revealing of information
in any context, orally or visually, is a controlled event,
assuming it is not public and on the Internet to be available
to anybody.
Senator Kennedy. So you are telling me that if a student is
merely in the lab, our universities are not getting deemed
export licenses?
Mr. Wolf. The act of revealing to a foreign person in a
university setting or any other settings is a controlled event
with controlled technology.
Senator Kennedy. I do not agree with you.
Mr. Wolf. OK.
Senator Kennedy. I think the deemed export license is being
applied very narrowly, and there are a lot of universities that
are not obtaining them. And I have got a bill to do something
about that to tighten that up.
Mr. Wolf. OK.
Senator Kennedy. Do you see any problems with that
legislation?
Mr. Wolf. I was unaware of it until just now, but I would
be happy to look at it and discuss it with you and provide
however much help I could.
Senator Kennedy. All right. Let me ask you this, gentlemen:
The law obviously in China is underdeveloped and many law firms
are underdeveloped. But we have seen a growing occurrence of
foreign law firms, law firms foreign to China, who are
affiliating with Chinese law firms. Are they covered by CFIUS
if they are an American law firm affiliating with a Chinese law
firm?
Mr. Wolf. If it does not involve an investment in a U.S.
business, then no.
Senator Kennedy. Well, the reason we have CFIUS is to keep
China and other countries--I do not mean to pick on China--from
taking our technology. Correct?
Mr. Wolf. And other things, yes.
Senator Kennedy. Right. Well, if an American law firm is
affiliating with, let us say, a Chinese law firm and that
Chinese law firm has access through the American law firm to
American technology, why doesn't CFIUS cover it?
Mr. Wolf. Well, the export control rules would prohibit the
release of controlled technology by a lawyer----
Senator Kennedy. It does not apply to law firms.
Mr. Wolf. Actually, it does. It applies to anybody moving
information across the border. There is not an exclusion for a
lawyer to provide controlled technology.
Senator Kennedy. Well, when Dentons--Dentons is now the
largest law firm in the world. They just gobbled up an Atlanta
firm. Dentons merged--I do not think you can merge in China,
but affiliated with a large Chinese law firm. They did not get
a deemed export license.
Mr. Wolf. I do not know anything about that, but it would
depend upon whether controlled technology was being provided to
a foreign person.
Senator Kennedy. It is not being provided. I am saying that
the foreign law firm, foreign to the United States, the Chinese
law firm that has access to the data of the law firm can access
the American technology.
Mr. Wolf. OK.
Senator Kennedy. Is CFIUS being applied to that?
Mr. Wolf. Well, CFIUS is focused on the investment and the
export control----
Senator Kennedy. I get that. I get that. But before the
merger between the American law firm and the Chinese law firm,
is the American law firm coming to CFIUS and saying, ``Is this
OK?''
Mr. Wolf. Probably not, but I would love to discuss this
more with you. It is a new fact pattern to me that I have not
thought about until today.
Senator Kennedy. Thank you, Mr. Chairman.
Chairman Crapo. Senator Tester.
Senator Tester. Thank you, Mr. Chairman, Ranking Member
Brown, for holding this hearing. I want to thank you all for
your testimony.
I want to just touch on what Senator Kennedy said. Is it
fairly common knowledge that in the university and the private
sector, whether you have a fellow or a student in the lab
dealing with controlled information, that that controlled
information cannot be transferred? Is that fairly common
knowledge?
Mr. Wolf. I would hope so, yes.
Senator Tester. OK.
Mr. Wolf. Whether it is enforced is a different question,
but the rules regarding deemed export apply to a national of
that country the same way as the technology going to the home
country.
Senator Tester. I think Senator Kennedy brings up a good
point. In fact, if they do not know about it and it is the law,
we ought to figure it out pretty darn quick. And if they do
know about it, then it is there.
I just want to--there are a lot of different ways to go
here today, and I just appreciate you all being here. Huawei is
on the Department of Commerce's entity list, so you know the
rules that go around that. And this is for Mr. Wolf or Mr.
Kennedy or anybody. What impacts does this listing have on
Huawei's business operations? Is that listing significant to
them?
Mr. Wolf. Oh, it is dramatic because an entity listing
prohibits the export of anything from the United States,
whether it is a semiconductor or----
Senator Tester. Got it. And one of you brought up, if not
more than one of you brought up, the fact--I think it was Mr.
Kennedy brought up we have got to quick bashing our allies and
working together and this has got to be a multilateral
operation. So I am not sure that the other folks see it the
same way I do that are our allies in the world. Let us just be
frank. Can it be steered through a third country, third-party
country, so they can still get what they need?
Mr. Wolf. Well, the prohibitions apply to U.S.-origin items
anywhere around the world.
Senator Tester. OK.
Mr. Wolf. So if a foreign company were transferring U.S.-
origin items, that is still illegal to a listed entity.
Senator Tester. OK. Mr. Kennedy.
Mr. Kennedy. There are certain technologies which only
American companies have, which they cannot get from anywhere
else, and so if faithfully implemented across the board, this
could be potentially fatal to Huawei, and not just Huawei as a
company but all the networks that are currently running on
Huawei equipment. So it is going to degrade those networks in
the 170 countries in which they operate. So, yeah, this is a
massive action which the U.S. can unilaterally do on its own,
even if others are not happy with it.
Senator Tester. OK. So the trade war that is currently
going on with China, is this helping them achieve their 2025
goals?
Mr. Kennedy. Well, no, the trade war is an annoyance
because what they prefer is to go back to business as usual so
that they can continue to invest and follow the business model
that I described at the beginning and that they are so familiar
with.
The trade war is not stopping them. They have got plenty of
money, and they have not been fully disengaged from the global
economy, and certainly globalization is central to their
success. They cannot do this all by themselves, even though
some Chinese think they could. But, you know, unless we are
looking to fully disengage and try to entirely isolate the
Chinese, they are going to keep moving in the direction that
they want to go until they feel----
Senator Tester. But the truth is without our allies being a
part of the sanctions that are put onto the trade war, we
cannot achieve isolation of China alone.
Mr. Kennedy. No, we cannot.
Senator Tester. OK. Our stepping back and getting out of
the TPP, is that helping them achieve their 2025?
Mr. Kennedy. I recognize that there are some elements of
TPP which people find objectionable, and TPP is not an ideal
agreement, but it would have been helpful to have tried to put
some measures of constraints on some of Chinese industrial
policy and gain multilateral collaboration in keeping the
Chinese out of TPP until they made those reforms. Of course,
the Chinese often do not live up to their agreement, and so
they could have gamed that system, too. But TPP would have been
helpful in combination with the other types of defensive
measures that we are using as well.
Senator Tester. OK. So not being in it was a net negative
as far as our abilities, OK.
Mr. Wolf. I agree.
Senator Tester. You guys talked about China's ability to
enforce controls of fentanyl, implement their own rules if they
had the proper incentives. Tell me what those proper incentives
are.
Mr. Nephew. Well, Senator, I would start off with the fact
that, you know, there is a general incentive to not have this
be a bilateral issue between the United States and China, at
least insofar as the Chinese have demonstrated throughout the
trade war that they wanted to try and deconflict this issue.
Now, that could be because they are trying to buy good will
from the United States, or it could be, you know,
independently. But I think this also then speaks to the need
potentially for sanctions, because sanctions can also provide
the disincentive to continue with allowing their companies to
do behavior that we find objectionable, and that could be
helpful in this regard.
Senator Tester. OK. I think I understood what you said, and
I have got to shut up because I am past time, but I am more
looking for what we need to do to give them the incentives to
enforce their rules.
Mr. Nephew. Well, Senator, I would say one of the
incentives that we can give them is the need to avoid U.S.
sanctions penalties.
Senator Tester. I got it.
Mr. Nephew. Right? So that is definitely one----
Senator Tester. But, once again, don't those sanctions have
to happen--I mean, in the instance I took up before, you said,
right, it can be done unilaterally. But most of the time, don't
those sanctions have to come with our allies' help?
Mr. Nephew. Yes, Senator. As a general point, multilateral
sanctions will always be more effective than unilateral ones.
Senator Tester. Thank you. Thank you all very, very much. I
appreciate it.
Chairman Crapo. Senator Cotton.
Senator Cotton. Thank you, gentlemen, for joining us for
this hearing on the 30th anniversary of the massacre at
Tiananmen Square by the Chinese Communist Party.
I would like to speak first about Huawei, a simple question
to get answers from all three of you, starting with Mr. Wolf.
Who owns Huawei?
Mr. Wolf. It is complex, but obviously it is closely
affiliated with the Chinese Government. But I do not know the
exact legal answer, but I agree with the premise of your
question.
Senator Cotton. Mr. Kennedy.
Mr. Kennedy. Officially, on paper, all of their employees
own the company. But that has been shown to be quite suspect,
and so actually it is not clear. Also, since they are not
publicly listed, there is very little required transparency to
give you an answer to that question.
Senator Cotton. Mr. Nephew.
Mr. Nephew. Senator, I do not have any more independent
information than these two.
Senator Cotton. So the leadership of Huawei along with
Chinese Communist Party officials often talk about Huawei being
employee-owned. It sounds like you would dispute the claim that
it is employee-owned as opposed to have perhaps at most some
kind of employee incentive profit-sharing plan. Mr. Wolf, you
nodded your head in a way that does not reflect in the record.
Mr. Wolf. No, I agree with the basis of what you are
asking. That is all I was nodding my head for.
Senator Cotton. Mr. Kennedy, Mr. Nephew, anything to add?
Mr. Kennedy. I would just say its ownership is ambiguous
for sure.
Senator Cotton. So the holding company of Huawei is 1
percent owned by its founder, 99 percent owned by a mysterious
trade union committee. Mr. Kennedy, I see you nodding your
head. Do you know anything about this trade union committee?
Mr. Kennedy. Well, all Chinese companies are supposed to
have unions that are associated with the All-China Federation
of Trade Unions, which are not really bottom-up unions that
represent their members. They represent the Chinese State.
Senator Cotton. So is it fair then to say that the Chinese
Communist Party, if it does not own Huawei according to Western
legal standards, at least controls at a fundamental level the
decisions of that company?
Mr. Wolf. Or could give it instructions to do something in
the interest of the Chinese Government at some point, yes.
Mr. Kennedy. I would just say I have followed Huawei and
interacted with it for a couple decades, and my sense is that
at the operational daily level, they walk, talk, and look like
a company that makes their own strategic decisions. But given
the industry that they are in and how strategically important
it is, I would expect a great deal of behind-the-scenes
interaction with every side of the Chinese State--central and
local.
Senator Cotton. Mr. Nephew, anything to add?
Mr. Nephew. No, Senator.
Senator Cotton. I think, Mr. Wolf, it was you in the answer
who mentioned stock listings. I would like to--oh, I am sorry.
Mr. Kennedy mentioned stock listings. I would like to turn to
stock listings here in the United States. There are several
hundred Chinese firms currently trading on the New York Stock
Exchange, the Nasdaq, and other exchanges, yet they are largely
immune from oversight, for instance, from the Public Company
Accounting Oversight Board and other common practices in our
market-based economy. Should Chinese firms be allowed to trade
on our stock exchanges given that they are largely immune from
the kind of Western scrutiny and auditing that American and
other Western companies face?
Mr. Kennedy. I think ideally I would have required them--
when we started giving listings, I would have required--would
have preferred that to be a precondition that they were exposed
to that. But now that you have several hundred, I do not know
if it makes sense to just automatically de-list them all until
China complies, or if you should have the SEC or others
investigate these companies one by one to see if there is some
place that they are not in compliance and have action taken
that way, or by their shareholders.
Senator Cotton. Mr. Wolf, Mr. Nephew, anything to add on
that question?
[Witnesses shaking heads.]
Senator Cotton. Why was it decided to allow opaque Chinese
companies to be publicly listed on our stock exchanges?
Mr. Kennedy. My sense is that when this decision was done
in the late 1990s, there was an effort to get more companies
listed on American stock markets and help investors, and there
was the expectation that these were--that these looked like
private companies, and that the transparency of listing would
provide outsiders a chance to monitor the companies in a way
that they could have confidence that even had they come from
China, you could still learn a lot more about them than if they
were not listed.
Senator Cotton. Like so many wishes about China's economy
and Government from the late 1990s, it turned out not to be
true. Thank you, gentlemen.
Chairman Crapo. Senator Warner.
Senator Warner. Thank you, Mr. Chairman.
I want to pick up where Senator Cotton left off, and let me
preface it by saying I think China is a great Nation,
extraordinary Nation, extraordinary history, extraordinary
power, going to be a great power going forward. But I dealing
with concur with Senator Cotton in his comment that the vast
majority of Chinese companies are in a sense fronts for the
Communist Party. And my concern with Huawei and ZTE is not only
the direct concerns around Huawei and ZTE but around the notion
that what China is attempting to do is to set the standards in
5G. In a certain way, this should be a wake-up call not just
for the United States but for the West, writ large, because I
would argue across the board post-Sputnik, most technology and,
more importantly, the standards around the technology, whether
it is the Internet, telecom, space, social media, have
generally been defined by the United States, and the rest of
the world has followed that, and while we have not always
gotten it right, I think there has been a general agreement
that directionally we have headed appropriately.
I fear that that leadership is fading away, the fact that
we have not stepped up and set any guard rules around social
media and defaulted that to the Europeans or California or
others I think will have long-term ramifications. I think in
the case of 5G the Administration was very late to recognizing
this more macro threat.
I guess, Mr. Kennedy, I would slightly disagree with you. I
think because, as we were trying to make the case to countries
around the world of the security--inherent security concerns
with Huawei equipment that in a distributed 5G network you
cannot stop a company from sending upgrades on a regular basis,
and those upgrades are where the potential vulnerabilities will
fall--it is not that there is a back door right now--and,
consequently, that the Administration had to take a fairly
draconian action in terms of putting Huawei on an entity list
to send the message to the world that we were serious about
this issue, candidly as well to say to some of our own rural
telcos and satellite providers they have got to rethink. But I
would like you to drill down a little bit because one of the
things--and Senator Crapo and I have met with folks in the
semiconductor industry, that entity designation being so
broadly based really was a fairly blunt instrument and could, I
think as Senator Crapo pointed out, have a negative impact on
one of our strongest American domestic industry, the
semiconductor industry.
So how would you rethink that entity designation? There is
in my mind a great deal of difference about buying equipment
from an enterprise like Huawei versus the ability for us to
sell chips into a Chinese market that is still 35, 40 percent
of the overall world. Do any of you have any comments on how
you might refine that entity designation with certain
exemptions that might again keep the market down? And I would
also argue that what is ironic--let me as a quick aside--I do
not want to use up my whole time with my question, but a quick
aside, though, is that many of the countries a la Korea and
others who have been anxious for us to make that designation
and to sound the alarm on 5G and Huawei, it would be ironic if
in sounding that alarm we created a circumstance where actually
Korean chip manufacturers benefited while the American chip
manufacturers lost out.
So how would you go about refining that entity designation?
Mr. Wolf. The answer is in your question: carve out that
which we care about, aggressively enforce it, enforce the
rules, and that which is less sensitive or benign or
commercial, that allows the U.S. to maintain dominance in this
area to on a very tailored, controlled, monitored basis, allow
that to go forward in order to prevent the very foreign
dominance that you were just describing.
So I would just take your question and work it back to you
as the answer. I agree with it completely.
Senator Warner. Mr. Kennedy.
Mr. Kennedy. I guess I would put more emphasis on the
Executive order that the Administration issued banning purchase
of Huawei equipment into the United States. It is probably
being the best step toward protecting ourselves and then having
allies follow along so that the Western world just simply does
not introduce that equipment, if it is 5G, if it presents the
danger that you said, and I would be extremely tailored and
narrow on the entities list, leaving out, you know, chips and
things that go into cell phones and things that are on the very
edges of networks, which do not present that type of security
concern.
Senator Warner. Mr. Nephew, do you have anything to add?
Mr. Nephew. No, Senator.
Senator Warner. But you would, Mr. Kennedy, just use more
the EO rather than the entity list--although I would argue that
the entity list carries a greater weight. But I would love to
have additional follow-up and refinement from both of you
because this is an issue that we are continuing to make the
case to American industry about some of the challenges of doing
business with China right now.
Mr. Kennedy. Yes.
Senator Warner. And I did not get to my question about
venture capital investment from Chinese firms into American
venture capital firms, which prevents a whole other set of
issues. But we need to do it with some level of refinement.
Mr. Wolf. Sure. One last--I was the father of the ZTE
entity list action and how that was handled and would love to
continue the discussion, both in specific and in abstract,
how----
Senator Warner. My fear would be that the White House, in
an effort to try to make a deal with China, may tradeoff--for X
billion dollars of agricultural sales, may tradeoff this
national security issue around intellectual property theft and
technology standards, which is a much, much bigger deal, I
would argue.
Mr. Wolf. I agree.
Senator Warner. Thank you, Mr. Chairman.
Chairman Crapo. Thank you.
Senator Tillis.
Senator Tillis. Thank you all for being here. I was just
down in a Judiciary Committee hearing where we were talking
about fentanyl and China's role in poisoning and killing some
38,000 people in the United States. They are one of the major
suppliers, and they are sending it either directly by mail or
through precursors and through drugs that are ultimately being
manufactured in Mexico.
Over the course of the past couple of months, I have met
with a number of people in my travels across the State and the
Nation, and I had a very interesting meeting about 2 months
ago. This group, this business, which actually manufactures
freight rail cars here in the United States, talked about a
very successful 10-year investment of the Chinese in one of
their State-owned enterprises for convincing Australia that
they should ``manufacture''--I will put that in quotes--their
commuter rail cars because they could do it for a lower price
point, they would maintain manufacturing in Australia, and they
would have a reliable product.
The Australians bought that, and over the course of a few
years, it was very clear that all they were doing was
assembling in Australia for a brief period of time, and now
they basically send shrink-wrapped commuter rail cars directly
from China to Australia.
So when they diminished that portion of the industrial
base, they did the same thing for freight rail cars, and now in
Australia they have no indigenous industrial base for something
that I would consider on the rail side a very important
strategic asset.
Now if you go to Boston and you go to Chicago and you go to
L.A., guess who is offering a lot of their commuter rail cars?
China, starting with the promise of indigenous manufacturing,
but basically trying to play out the same thing since they have
proven it in what we could consider a pilot project in
Australia, now they are trying to play out the same thing here.
In fact, they also tried to make an investment in freight rail
capability that was actually in my State that, for a variety of
reasons, did not go through. I think they are doing something
similar down in Miami.
What I see China doing is arising as a military threat
clearly and an economic threat, and it is one of the reasons
why I tend to support the President going after all facets of
the relationship with China right now. I do believe the
designation of Huawei was appropriate not only because of the
threat in the 5G space, but because of their repeated theft of
intellectual property, not really innovating, reverse
engineering and creating competitive products for companies,
many of them based in the United States just months after a new
product is introduced.
So if you look at just the broader, the bigger picture, is
there any Nation out there that we should be more worried about
economically and technologically than China?
Mr. Kennedy. Yeah, I guess my answer would be no, that
China's size, scale, its focus on these industries, the very
frosty strategic relationship which we have with them which
could get much worse means that China should be front and
center, and that means that other challenges that we have that
are problematic but do not rise to the same scale, we should
differentiate, and there are others that we can collaborate
with in addressing that challenge, which is, as you said,
number one.
Senator Tillis. What about the future--you know, China has
got a lot of smart people, a lot of them good people. It is the
leadership that I have a concern with, and I think there are
malign objectives. But what about the future in the financial
space? Could we see ourselves at some point in the near- to
long-term future that we have pension systems and a number of
people in the United States invested in a way that future
economic actions that may diminish Chinese economic growth and
prosperity is becoming a political issue because taking those
actions could ultimately have people rise up and say, ``You are
hurting my pension plan''?
Mr. Kennedy. Well, certainly we already have a whole
variety of economic contact with China. Financially, there is
some--you know, through the stock markets and securities
markets. What we do not have now is a lot of American money,
assets in the Chinese financial system, and they have opened it
up, and I would say we ought to be very hesitant about----
Senator Tillis. What about future Chinese assets invested
and a part of broader investment portfolios? So I am talking
about the reverse.
Mr. Kennedy. Yes, so Chinese investing here as well. Right
now we do not have--those restrictions are really from the
Chinese side limiting the----
Senator Tillis. No, I am talking about like maybe a
diversified international portfolio that has a significant
amount of dependence on economic performance in Chinese
markets, reaching a point where now all of a sudden--I served
in the State House before I came up here. When you start
messing with policies that could affect pension plan
performance, then you get American people worried about their
pocketbooks. I am worried about that end game at some point. I
do not think we are there yet, but, I mean, what kind of
controls do we have in place to prevent that sort of an end
game?
Mr. Kennedy. We have zero controls on that. But I would
also be worried that if we have so much money dependent on
China, that the stability--that our investors would think the
stability of the Communist Party is as important as the Chinese
think it is, and we want to avoid that.
Senator Tillis. That is my concern. It is not something
that we have talked about a lot, but the Chinese are playing
the long game, and I have no doubt in my mind at some point
they would like to see punitive actions taken toward China
representing an existential military or other threat, suddenly
it becomes a political issue because it could harm the
pocketbooks of pensioners.
Mr. Nephew, I will let you finish your thought.
Mr. Nephew. Senator, if I could just say one thing, I very
much share your concerns, and I would just note that there are
some Chinese scholars who are already starting to think about
ways in which they can weaponize U.S. access to the Chinese
economy, frankly, playing back to us some of the sanctions
tools that we have used in the past, and I think this is part
of the reason why we ought to be very careful about how we
approach all of those tools.
Senator Tillis. Thank you.
Chairman Crapo. Senator Van Hollen.
Senator Van Hollen. Thank you, Mr. Chairman. I thank all of
you for your testimony today, and I just want to say at the
outset I support the legislation, the Fentanyl Sanctions Act,
and that is a crisis everywhere in the country, including in
Maryland.
I also want to follow up on some of the questions Senator
Cotton had with respect to Huawei. My sense is that it is the
consensus of the U.S. intelligence community that if Huawei
were to come to dominate the 5G network globally, that would
pose a national security risk to the United States, an
unacceptable one. Do you all agree with that conclusion?
Mr. Kennedy. Well, I have never worked in the U.S.
Government, so I do not have the security clearance to be able
to give you the kind of answer which you have gotten from
others with much more information than me.
Senator Van Hollen. Does anyone dispute that conclusion?
[Witnesses shaking heads.]
Senator Van Hollen. So then the question is: Where we do we
go from here, right? And, obviously, this Administration has
been trying to work with our European partners and others to
persuade them that it is a mistake to go down the Huawei road,
and they had mixed success with that. A lot of our European
allies are, I think, thinking of going a different way. And
then the Administration obviously put Huawei on the entities
list, which was a tough move but I think in my view sent an
important signal.
But my question is: If the preferred strategy is to work
with others around the world in terms of preventing others from
becoming reliant on Huawei as the 5G network, how do we do it?
You have an Administration that has been essentially
threatening sanctions against all of our allies with clubs. I
mean, we threatened Canada. Now we have threatened Mexico. You
know, now Australia was under consideration. How do you go
about getting our partners on board with respect to the
strategic threat posed by Huawei at the same time we are
clubbing our partners with tariffs? How would you suggest we
proceed if you all agree or do not dispute the conclusion that
Huawei dominance of a 5G network would be a threat?
Mr. Kennedy. I guess I would just say, you know, when the
U.S. was preparing to invade Iraq in 2003, Secretary of State
Powell went to the U.N. and gave a speech and outlined the
risks regarding weapons of mass destruction. Now, it ended up
not being the best information, but I think the U.S. owes it to
the American people and others to talk more publicly about what
the risks are. You are not going to build a political consensus
within the U.S. or with your allies without greater sharing of
information. So I would suggest even though there are risks to
sharing some of that information, I think it would be valuable
to building the argument.
And then, second, you are going to need to work with Nokia,
Ericsson, other suppliers in telecom in 5G so that you have
enough capacity so that you can build that equipment and then
you can provide the services on top of it. So I think it is
going to be collaborative between Governments and across
industry--to get this to be successful.
Mr. Wolf. What he said.
Mr. Nephew. Senator, if I can, I would just add an
additional point, too, which is prioritization, and I think you
are speaking to this when you bring up all the various
different sanctions that we are threatening on our partners and
so forth. If we believe that this is a very serious and
substantial threat to U.S. national security, then we ought to
be elevating that above other threats and other interests. And
I think the fact that we are at this point not prioritizing
amongst our various interests is problematic. It makes it hard
to dissect what we care about the most, and it certainly makes
it more difficult when you go in with 15 different things you
are trying to get out of a country as opposed to four or five.
In the Iran sanctions experience which I have done a lot of
work in, we went into most of our international meetings with
that as our number one, two, and three international agenda
items, and people understood where that sat in our
prioritization. I think we need a similar, more strategic view.
Senator Van Hollen. I share your view. I mean, I do believe
this is a strategic issue for the United States, and I think we
do need to prioritize it. And I think when we are fighting with
all our allies on other trade issues, it undermines that
concerted effort. Would you all agree with that?
[Witnesses nodding heads.]
Senator Van Hollen. Very quickly, Senator Kennedy and I
have introduced legislation dealing with the problem where you
have some Chinese-owned companies trying to enter the United
States market without complying with the oversight requirements
of the Public Company Accounting Oversight Board, which all
other countries have to comply with. Would you agree that we
should hold China to the same standards and rules that
everybody else has to comply with?
Mr. Kennedy. Yes. I think that would be the ideal goal. The
question is: What do you do with the existing firms? And do you
grandfather them in? Do you create some type of process to
allow them to come into compliance? So I think the goal is
worthy. The question is do you have to create a transition
process to make it effective and do not harm those who came in
under different rules, have complied with those different
rules, and could, if given the opportunity, comply with the new
rules.
Senator Van Hollen. Good. I appreciate that, and I think we
will reach out to you to work on that. Thank you.
Chairman Crapo. Senator Cortez Masto.
Senator Cortez Masto. Thank you.
Mr. Kennedy, back to fentanyl, I do not think any
community, whether it is opioid abuse or now fentanyl, is free
from seeing it in, unfortunately, the overdose and the number
of deaths and the impact on families. That is true in Nevada.
I was encouraged to see that on May 1st the Chinese
Government implemented a ban on all fentanyl-related substances
by adding them to a controlled substance list. Now, though, the
ban has to be enforced.
So here is my--I am curious. Based on your work with the
Chinese Government, do you believe that the Chinese Communist
Party has the will to implement the fentanyl ban both at the
national and the provincial levels?
Mr. Kennedy. I think Mr. Nephew is probably more of an
expert in this area than me, but in looking at the Chinese
behavior in the past and with regard to this, I think it
depends on where the overall relationship with the U.S. goes.
If they see that we could stabilize the relationship and that
we want to peacefully coexist, they will generate the political
will. But if not, this will be a lower priority, and this will
continue to be a problem.
Senator Cortez Masto. Thank you. And, Mr. Nephew, I am
going to ask you to answer that, but also this, because I
noticed in October 2018 in Foreign Affairs you wrote about the
importance of multilateral coordination to ensure the U.S.
Government does not overuse the power of sanctions. So can you
touch on both of those questions?
Mr. Nephew. Absolutely, Senator. So on the first, I would
tend to agree that there is a relationship element to how
Chinese enforcement goes, but I think there are two other
elements that are important, too.
There is a capacity issue, especially when we are dealing
with materials that are relatively low signature, and I can
give as a comparison some dual-use export controlled goods that
even if I think the Chinese Government wanted to enforce some
rules on them, they had difficulty given the number of
workshops and so forth that exist in China. That does not mean
they could not do better, and I think that was always our
demand, especially when we presented them with intelligence
about problems. But I think that is a crucial component of
making this work.
Second is I think the Chinese do care about international
reputation. It has been very important to them in other export
control kinds of contexts, in other concerns about problems
emanating from China. So I think to the extent--and this goes
to your second point--that we are multilateralizing the
conversation with the Chinese, that will be very effective
because then they will sense there is a multilateral risk if
they do not take appropriate action.
I think one of the problems we have at present--and there
are others more expert in fentanyl than I am certainly--
fentanyl remains a very U.S. problem at this point, and to the
extent that it has yet to spread to a number of other
countries, that makes multilateralizing it more problematic.
But I do not think that does not mean it cannot be part of the
conversation, especially, unfortunately, as we do see it spread
as a problem in other countries and jurisdictions.
Senator Cortez Masto. Thank you. I appreciate that.
Listen, I spent 8 years as Attorney General and addressing
just in general illicit drugs coming into the country. The U.S.
consumes, I know, 80 percent of the drugs that just come in
from Mexico. You are right. It is a supply and demand issue.
But at the same time, other than just the enforcement piece of
it, we need other tools and mechanism procedures to really
force some of these countries to work with us. And so I
appreciate the comments here today.
Let me, Mr. Wolf, talk on another subject. A few weeks ago
the New York Times reported that as many as 18 countries are
using Chinese-made surveillance systems. In some cases, these
systems allow Governments to monitor the citizens' faces and
hunt down dissidents. What, in your terms--and you talked a
little bit about it earlier, but what are the national security
implications for the United States if we do not respond to
China's expanding exports of this type of technology?
Mr. Wolf. Well, in addition to national security, the
export control rules allow for foreign policy objectives to be
achieved through regulating particular items, types of
equipment, or particular end uses or end users that are
engaging in acts contrary to our interests. So the export rules
would allow , for example, designations of entities or items
and, better yet, if we work with our regime allies in concerted
action to address the threat you are dealing with. And all that
authority exists in the new law that was implemented or,
rather, passed last August. So the authority exists to address
the concern that you are describing, and it is a function of
the Administration coming together to identify the
technologies' end uses and end users to be able to work with
the issue and to get our allies to cooperate.
Senator Cortez Masto. Thank you. I appreciate that. I know
my time is up. I will submit the rest of my questions for the
record.
Mr. Wolf. I will be happy to help.
Senator Cortez Masto. Thank you.
Senator Brown [presiding]. Senator Smith.
Senator Smith. Thank you, Ranking Member Brown, and thank
you to all of you for being here and testifying today. It is
very interesting.
I would like to return to an area of questioning that
Senator Brown touched on and also Senator Tillis. We know that
Chinese-funded State-backed enterprises are aiming to become a
dominant global manufacturer in new energy vehicles like buses.
Minnesota is home to two New Flyer manufacturing plants in St.
Cloud and Crookston that make these kinds of buses. And several
years ago, a Chinese-funded bus manufacturer set up shop in the
United States, and they are unfairly competing with buses that
are being made in my State, Minnesota, thanks to Chinese
subsidies. So this is the underpinning for the bill that
Senator Brown and Senator Crapo and others of us have
introduced that would prevent Federal transit dollars from
being used to procure passenger rail cars and transit buses
from Chinese State-owned or subsidized enterprises, and this
makes just eminent sense to me.
So I would like to ask you, what should we be doing about
these Chinese-funded companies that are operating in the United
States that are undermining these longstanding market-driven
U.S. companies? Mr. Wolf. Mr. Kennedy.
Mr. Wolf. Well, sure. The legislation you described I agree
with. When other areas such as CFIUS or export controls do not
address the problem you have described, then you need new
legislation, and the legislation that was described earlier
today is, I think, right on. So beyond your bill, I do not have
an answer.
Senator Smith. Thank you.
Mr. Kennedy.
Mr. Kennedy. If the fact pattern is as you describe and
they are receiving subsidies or other types of support that are
not permitted by the WTO, then it seems to me that is ripe for
a countervailing duty case that the Commerce Department would
bring, which would then put massive tariffs on their products.
And then perhaps the bill, the legislation, would be another
alternative approach to hold them to account in case that type
of case would not work.
But I also think that we need to also look at multilateral
rules related to how State-owned enterprises operate. So it is
not just us. It is others. Because these companies are selling
their vehicles all over Europe and everywhere else.
Senator Smith. Right.
Mr. Kennedy. And so we have to look at this as a global
problem, not just an American problem.
Senator Smith. Could you explain to me how a countervailing
duties case would work when these are U.S.-manufactured
products?
Mr. Kennedy. So if you could not apply it because they are
domiciled here and registered here, then you could use
antitrust legislation and you could basically have the Federal
Trade Commission or others bring a case against them for abuse
of that dominant position that allows them to sell at such
attractive prices that others cannot compete. So there are
potentially other existing rules that we might be able to use,
but, again, if they would not work, then your solution might be
the best way to go.
Senator Smith. I appreciate that. You know, what I am
concerned about with relying on antitrust is that we end up
having to be able to demonstrate significant market--you know,
significant damage to companies, including potentially being
completely forced out of the market in order to kind of win an
antitrust case. And so I would just suggest that that is why
there is a good reason to try to be more proactive about this
rather than just waiting for the damage to be done and then
trying to mop up the mess.
Any other comments on this?
[No response.]
Senator Smith. I just have a minute left. I want to just
touch on something, Mr. Kennedy. I was really struck in your
testimony about the point that you make about the importance of
maintaining U.S. economic competitiveness. This has been
something that I have been so concerned about as I think about
how the United States needs to be leading the charge and not
following the charge when it comes to a clean energy future.
And in your testimony, you talk specifically about DOE funding
for breakthrough battery technologies and how important this is
for us to be able to be leaders and not followers in this area.
I completely agree with you on this and have been working with
both Democrats and Republicans, especially on the battery
storage area, with bills that would fuel that kind of research
and development at DOE.
But just in the few seconds I have left, could you
elaborate any more on other ideas that you have for what the
United States should be doing to stay economically competitive
in this clean energy sector?
Mr. Kennedy. Well, part of it is Federal Government funding
for research that is tied to not just discovery but also to
manufacturing in the United States, because the technologies
are not just about making sure it works in the lab, but also
scaling up and creating additional incentives for the products
to be scaled up and used in the United States. So that is on
the producer side. But you are also going to need to have
policies that affect demand, that promote these technologies to
be used and commercialized in a way that is profitable for
industry and addresses those same type of concerns with regard
to the climate and pollution. So I think you are going to--
supply and demand.
Senator Smith. I agree with that. Thank you. I am out of
time, but I appreciate that, and I think especially in this
sector, in the clean energy sector, China is eating our lunch,
and we are going to be in a subservient position on this if we
do not get on the ball.
Thank you.
Senator Brown. Senator Jones.
Senator Jones. Thank you, Ranking Member Brown, and thanks
to the Chairman and you for having this really important
hearing.
I want to go back and focus on fentanyl because it is such
an important issue for my State in particular. You know, I
started my career, after working here in the Senate, as an
Assistant U.S. Attorney, and that was in the days when cocaine
was just really beginning to hit. And we have seen waves and
challenges with cocaine, with crack cocaine, with
methamphetamines, and now the CDC says we are in kind of the
third wave of the prescription opioid crisis with wave number
one being heroin, wave number two is synthetic opioids, and now
we are in fentanyl. And we have seen in Alabama double-digit
increases in opioid overdose deaths, and that starts with
fentanyl.
To show you just to demonstrate what I am talking about
here, two milligrams is essentially a lethal dose. This little
white speck next to this penny represents a lethal dose of
fentanyl. Recently, we had in Limestone County, Alabama, some
2.2 grams that were seized, 100 times this amount, and but it
is still a very small amount. I mean, we are still talking 100
times will still fit on a penny. And the challenges for local
law enforcement, that is the biggest concern I have, because it
is an incredible--our U.S. Attorney in the Northern District of
Alabama where I served during the Clinton administration, Jay
Town, made the comment that there is not a one-off solution.
There is not one area of law. Getting more drug dealers off the
street is not going to impact it. We have to go to China. We
have to use the State Department resources, Treasury Department
resources, the full weight of the White House, and anything
that the Justice Department can do. Clearly, this is a
transnational crisis, and I hope you can address this, and
maybe you do not have the experiences, but the unique
challenges facing local law enforcement with such a deadly
drug.
Can each of you, just for the record, briefly address what
you believe to be the unique challenges that our local--you
know, the cop on the street faces with this kind of challenge
with fentanyl?
Mr. Nephew. Well, Senator, I would say my experience has
been in the Federal Government level, so I do not have
experience at a local law enforcement level. But what I will
say is I do think that this is part of the reason why there
needs to be a whole-of-Government approach to address this
problem, why you do need to be able to identify illicit
traffickers abroad, why you then need to link that intelligence
to an active diplomatic campaign, with the threat of sanctions
potentially there as well, to give penalties and a disincentive
to continue with this trafficking, because as you noted, the
size differential and the value of what they are able to
transfer versus the costs and profit margins are substantial,
and that is a major challenge when it comes to interfering with
and denying access to the United States of these goods.
So to me, you absolutely have to deal with source issues.
You have to deal with the diplomatic strategy, and you have to
give some disincentives for China to look the other way with
respect to this.
But, also, you need to be forward-looking because China is
our problem today. There may one day be other suppliers, and
some scholars on this have pointed to India, Nigeria, South
Africa. So this is part of the reason why you need a very agile
and adaptive strategy that is looking at all the various
different threat factors.
Senator Jones. All right. And have you seen the bill that
Senator Toomey and I have that puts fentanyl on the same par
with cocaine and methamphetamine to try to stop this problem?
Mr. Nephew. Yes, Senator. Senator Toomey mentioned it
earlier, and I think that makes a lot of sense.
Senator Jones. Great. One of the issues that we are also
seeing now with this is the use of the post office. Again, you
know, history tends to repeat itself. You track shipments, you
do these things, but this is another one. You know, now we are
seeing purchases off the Dark Web. In Madison County, Alabama,
40 grams in a shipment. Forty grams of fentanyl was seized from
one guy. What can we do to help the post office? What can we
better do to try to stop the use of our United States postal
system for this deadly problem?
Mr. Nephew. Yes, Senator, in researching for this
testimony, I understand that there has already been legislation
passed that would give additional resources to the Postal
Service. I think at this point we need to see the regulations
and the implementation of that to see how effective it will be.
But, again, this is part of the reason why you have to address
the supply concerns as well because there is always going to be
a problem of how large the body of shipments are and how much
the inspector is able to actually go through with it. You need
to try and address the supply issues as well so you can head it
off before it comes here.
Senator Jones. Great. Well, thank you all. Thank you for
your testimony. I may have some additional questions for the
record.
Thank you.
Senator Brown. Senator Sinema.
Senator Sinema. Well, thank you, Mr. Chairman, and thank
you to our witnesses for being here today.
Too often Americans grapple with addiction in silence. In
2017, according to the Kaiser Foundation, 267 Arizonans died
from overdosing on synthetic opiates like fentanyl. That is
more than double the number of overdoses that were reported in
Arizona in 2016, and it is nearly four times that which was
reported in 2015. So it should not surprise us that fentanyl is
now the leading cause of overdose deaths in the United States.
But the Americans who grapple with addiction are our
brothers and sisters, and many of them also struggle with
mental health issues. Others sought relief from chronic pain
that sometimes accompanied a lifetime of hard and honest work,
and many of these individuals wore the uniform and defended our
freedom with dignity and honor. But when they returned home,
the challenges of acclimating to civilian life and the wounds
of war can open the door to self-medication and addiction.
So ending the epidemic requires more than just stopping
illicit fentanyl. This crisis shows that the addiction is
bigger than any one drug, and I want to ensure that all
Arizonans have quality, affordable health care so they are
equipped to fight addiction in all its forms.
Mr. Chairman, the health care system in Arizona known as
AHCCCS is our State's Medicaid program, and it plays a pivotal
role in ensuring that Arizonans get the treatment and support
they need to overcome addiction. That is why when some proposed
cutting Medicaid, our AHCCCS, and jeopardizing the drug
addiction treatment it provides to thousands of Arizonans, I
fought hard and voted no against that because Arizonans should
not be forced to fight this battle alone. So we also have to
combat drug trafficking and particularly the trafficking of
fentanyl.
At our Committee's last hearing, I spoke about our southern
border crisis and the millions of dollars of methamphetamine
and fentanyl that have poured over the border from Mexico into
Arizona, almost all through our ports of entry. But Arizonans
are seeing this, that just 2 weeks ago Border Patrol agents in
Nogales and in Tucson seized 143 pounds of meth and 220 grams
of fentanyl worth half a million dollars. So we need
comprehensive solutions to the border crisis and to our
Nation's opiate epidemic, which includes finding new ways to
improve our sanction regimes and export control policies.
So, Mr. Nephew, my first question for you is this: In
April, China announced it would ban all variants of fentanyl,
but it is my understanding that China's ban does not include
all the precursor chemicals used to make fentanyl and its
analogs. So China still has the ability to send these raw
chemicals to Mexico and elsewhere for production, and they can
ship them into the U.S. So your testimony emphasized the
importance of ensuring any new sanctions are considered in the
context of our current sanctions regime and are targeted in
scope and purpose.
As we consider additional sanctions in this space, what
advice would you offer to Congress to ensure sanctions remain
flexible enough to capture these precursor chemicals used to
make fentanyl but targeted enough to accomplish what we are
aiming to do?
Mr. Nephew. Thank you, Senator. I would say two things.
I think, first, this to me speaks to why just having the
Kingpin Act and the sanctions that come along with it is not
sufficient. We need to have more sanctions tools, and I think
the FSA gives us a much more flexible sanctions approach that
would allow us to target a broader range of companies and
entities that are potentially involved in the trafficking of
these goods, and especially to create disincentives for them to
continue doing so if they have other legitimate business that
potentially is at risk. And this to me speaks to the issue of
precursors in particular. If they have got other chemical
business interests, then to my mind putting those at risk as a
result of U.S. sanctions threats potentially could be very
effective way of addressing this.
But related to this, you need to also keep the Kingpin Act
in place to deal with countries--or, rather, entities in
countries that refuse to cooperate or entities that are fully
committed to engaging in this because they are just illicit
traffickers. That is their only business model, if you will.
And so I think having a variety of tools that are all
embedded in a diplomatic approach that is comprehensive and
whole of Government, to me that is the way in which you can
address all the various different components.
Senator Sinema. Thank you.
Mr. Kennedy, we have heard concerns that China's regulatory
agencies may not have the capacity to enforce the new fentanyl
ban, so what is your assessment of the Chinese Government's
capacity to effectively enforce the ban? And what steps can
Congress take to ensure that China keeps its promise?
Mr. Kennedy. They may not have the capacity now, but if
they decided it was a high priority, they could mobilize the
capacity. They have done that on so many different issues when
it has been shown to be in their self-interest or their
diplomatic interest that they have moved the needle on things.
So I think if this is a very high priority for the United
States and our relationship with China, we ought to explain
what it is and how we can help them build capacity, but also
give them foreign policy incentives to do so. They certainly
could address it if they want to.
I would engage with Chinese authorities, public health
figures in China, to increase communication. Right now the
communication between the U.S. Executive branch and China is
not smooth whatsoever because of the growing tensions in the
relationship. But it may be that this Committee or Congress
could be more of an honest broker than they--you know, usually
it is the executive that has done that, but maybe the Senate
could provide that kind of help.
Senator Sinema. Thank you.
Thank you, Mr. Chairman.
Senator Brown. Thank you.
I appreciate Senator Sinema's comments about Medicaid. This
hearing has been about law enforcement--I mean, not so much law
enforcement, but about exports from China and Mexico,
especially China, and we have all talked about law enforcement
and the important role of law enforcement. But her comments
about Medicaid--I was in a treatment center in Cincinnati
several months ago at a place called ``Talbot House'', and a
gentleman, a middle-aged man, put his hand on his daughter's
arm, and he said, ``Without Medicaid, my daughter would be
dead,'' and how important it is that as we do these issues and
as we help law enforcement and partner with law enforcement,
that we scale up treatment programs, and there is probably not
a community in America that has had the funds and the resources
to do that. So thank you, Senator Sinema, for bringing that up.
That concludes our questioning. For any Senators wishing to
submit questions for the record, those questions are due 1 week
from today, June 11th. As for the witnesses, we ask, if there
are submitted questions, that you please respond as promptly as
you can to those questions.
Thank you for being here today. The hearing is adjourned.
[Whereupon, at 11:47 a.m., the hearing was adjourned.]
[Prepared statements, responses to written questions, and
additional material supplied for the record follow:]
PREPARED STATEMENT OF CHAIRMAN MIKE CRAPO
Today, June 4, marks the 30th anniversary of China's brutal
Communist Government crackdown on unarmed, civilian protestors, in
Tiananmen Square, dashing a pro-democracy movement's highest hope for
reforms.
That image of a young man standing in front of a row of rolling
tanks is an indelible reminder of the true character and intentions of
a Government in China that today is pursuing Made in China 2025, the
most ambitious, unorthodox industrial policy program in the history of
the world.
The Made in 2025 program aims to shift China's economy into higher
value sectors such as those associated with robotics, aerospace, and
artificial intelligence, more generally.
In a very short span, Beijing has managed to transform itself from
the perennial hope of being a cooperative trade partner to an all-out
strategic competitor, in part, to confront China's industrial policy
program, which, among other things, includes subsidies for its domestic
companies developing advanced semiconductors, the bedrock of all
things, today.
Worse still, China is one of the United States' largest trading
partners and it is in part pursuing that policy through a concept known
as ``civil-military fusion,'' which is intended to provide the missing
link between China's technological and military rise.
While the United States pursued policies aimed to integrate China
into the global economic order, China persisted in predatory practices
at home: to force American companies to disgorge their technologies; to
subsidize its own firms domestically and their trade around the world;
and otherwise throw various roadblocks in front of foreign firms.
Today's escalating trade and technology tensions can be seen as
consequences of a Government that not only brutally rejected its own
people's hopes for reform 30 years ago, but has since exploited the
openness of a global economy, and embarked on its own brand of economic
nationalism and technological supremacy.
This path, if unchecked, advantages not only Chinese firms, but can
boost Chinese military strength at the same time.
More and more, U.S. national security grounds are called upon to
confront threats to America's dominance in high technology
manufacturing and other threats from China.
The work of the Banking Committee with its jurisdiction over banks,
markets, export promotion, export controls, and reviews of foreign
direct investment security and economic sanctions, sits at the
intersection of U.S. national security, U.S. economic prosperity and
the global economy.
Today, the Committee will focus on three threats from China.
The first two threats arise from emerging national security issues
associated with foreign investment in the United States and the export
of critical technologies, particularly in the semiconductor industry,
which is a primary target for illicit acquisition.
Last year, the Committee successfully negotiated and the President
signed into law The Foreign Investment Risk Review Modernization Act
(FIRRMA) and the Export Control Reform Act (ECRA). Together, this
bipartisan, bicameral legislation works to enhance the Federal
Government's authorities to protect America against illicit foreign
investments in, acquisitions of, and transfers of America's most
sensitive technologies.
Today, the Committee will hear from a variety of perspectives on
whether these new laws are sufficient to counter China's threats, or if
other measures must be considered.
Of particular interest is the question of how we separate and
protect U.S. cutting edge technology from the non-national security
related trade that finances America's greatest innovative achievements.
The third threat we will focus on involves the supply of fentanyl
to the United States, which is causing close to 38,000 American deaths
a year, now.
The question is if a set of sanctions tools can be effectively
leveraged to restrict the supply of illicit fentanyl into the United
States.
______
PREPARED STATEMENT OF SENATOR SHERROD BROWN
Thank you, Mr. Chairman, for calling this important hearing to
assess key questions before the Committee about our changing
relationship with China, on this 30th anniversary of Tiananmen Square,
as we remember those who fought for democracy and human rights as part
of that movement.
Today we will focus on whether to provide the Administration with
new sanctions tools to complement existing Foreign Narcotics Kingpin
sanctions, targeting traffickers in China, Mexico, and elsewhere who
are contributing to the rising tide of illicit opioids coming into the
U.S., including powerful new forms of fentanyl.
Last month, China took the long overdue step of controlling the
full range of fentanyl analogues. This should mean that all forms of
synthetic drugs which look and act like fentanyl will be subject to
China's drug control laws. I'm glad China's Government took that step.
Now we have to make sure they implement and enforce it. As Ohio's steel
industry knows, without strict enforcement, promises from China don't
mean very much.
But we can't wait to see whether China enforces its laws. Fentanyl
has become the leading cause of overdose deaths. On average, 14 Ohioans
die every day due to an opioid overdose, and those Ohio families can't
afford to wait and see whether China will enforce its rules this time.
A recent Washington Post study found that the Ohio Valley is
suffering the most from the surge in overdose deaths due to synthetic
opioids. I ask consent to include the Post article, entitled ``Fighting
Fentanyl'', into today's record.
We can bolster Chinese efforts by taking steps of our own to target
traffickers. Our bipartisan Fentanyl Sanctions Act led by Senator
Schumer would give the Administration new sanctions tools to help stem
the tide. And it would help provide intelligence and funding to keep
these dangerous drugs out of Ohio communities.
We will also address today the range of challenges posed by China
in export control, intellectual property theft, technology transfer,
and certain foreign investments--including through China's massive Belt
and Road Initiative, its Made in China 2025 initiative, and targeted
collaborative investments in U.S. firms with critical technologies that
China seeks to acquire.
We must respond forcefully when China's ambitious and sometimes
illegal acquisition strategies are deployed against U.S. firms, raising
critical national security or economic security questions here at home.
This is what we did last year when we passed the Foreign Investment
Risk Review Modernization Act--updating and expanding both the
Committee on Foreign Investment in the United States, and export
control laws.
Almost a year after enactment of these reforms, we'll hear
testimony that some foreign investors continue trying to capture the
intellectual property of leading edge U.S. technology companies for
their home country's military uses, or worse, to disrupt U.S. supply
chains.
Our current control systems attempt to prevent this type of
technology transfer through multilateral and unilateral export
controls. This system identifies dual-use products, technology, and
software that may not be exported, or is strictly limited. Is this
approach still sufficient, when coupled with new constraints on
emerging and foundational technologies and other reforms contained in
export control reforms enacted last year? Is the law being implemented
as written?
China continues to use nontariff barriers to block foreign
producers from entering its market. And Chinese State-owned
enterprises, such as those in steel and other sectors, receive
extensive subsidies that allow them to compete with no consideration of
market forces. That makes it harder for U.S. companies and workers to
compete--again, as our Ohio steel industry knows all too well.
I don't think CFIUS and its investment review process can or should
bear the burden of trying to bring about a fair trading relationship
with China. It has its hands full trying to police the national
security threats we face
But as we know, much foreign investment in the U.S. falls outside
of the scope of CFIUS, and we don't have a good way to review it to
make sure it's in our economic interests. And it's not always easy to
make the distinction between national security and economic security.
I have introduced legislation with Senator Grassley--the Foreign
Investment Review Act--that would require the Secretary of Commerce to
review certain foreign investments, particularly those made by State-
owned-enterprises, to make sure they are in the long-term, strategic
interests of American workers and American businesses.
Other issues in our Committee's jurisdiction also need attention.
Chairman Crapo and I have joined with Senators Cornyn, Baldwin, and 40
other cosponsors on a bill to prohibit Federal funds from being used by
transit agencies to purchase rail cars and buses manufactured by
Chinese State-subsidized companies. Federal dollars should not support
anticompetitive, heavily subsidized Chinese products that undermine
American workers and threaten the future of U.S. automotive and rail
manufacturing. The bill also addresses cybersecurity risks facing our
Nation's transit systems.
Finally, our Committee must move quickly to provide a long-term
reauthorization to the Export-Import Bank. Each year, China's export
credit agencies provide more medium- and long-term investment support
than the rest of the world's export credit agencies combined. American
manufacturers need a reliable Export-Import Bank that is authorized for
the long term to stay competitive as they pursue business abroad.
It is clear that on China there is still much work to do.
Thank you to our witnesses here today. I look forward to hearing
your views.
______
PREPARED STATEMENT OF KEVIN WOLF
Former Assistant Secretary of Commerce for Export Administration,
Bureau of Industry and Security, Department of Commerce
June 4, 2019
Chairman Crapo, Ranking Member Brown, and other Members of the
Committee. Thank you for asking me to testify about and otherwise
describe U.S. export controls pertaining to China. Although I am now a
partner in the international trade group at Akin Gump Strauss Hauer and
Feld LLP, the views I express today are my own. I am not advocating for
or against any potential changes to legislation or regulations on
behalf of another. Rather, as requested, I am providing you with my
thoughts on and understanding of such issues regarding the applicable
existing regulations and statutes. My views are influenced by my more
than 25 years of work in the area, which includes my service as the
Assistant Secretary of Commerce for Export Administration during the
Obama administration.
The topic is a serious one. The United States never wants to be in
a fair fight with an adversary. The appropriate, aggressively enforced,
clearly written, and well-funded export and related controls are a
critical part of maintaining that advantage. They are also a useful
tool in helping to achieve U.S. foreign policy, which include human
rights, objectives. I have never subscribed to the view that export
controls should ``balance'' national security or foreign policy
concerns with economic or trade concerns. National security and foreign
policy concerns exist in their own right and are not to be traded off
for something else in a particular transaction. The controls should,
however, be tailored to specific, identifiable national security
threats or foreign policy objectives to avoid collateral economic
costs, unnecessary regulatory burdens, and misallocation of Federal
resources. For the U.S. to be a global leader, our companies need to be
successful in the global marketplace. Thus, excessive and over-broad
controls--as a matter of law or perception--harm the U.S. industrial
and technology base, which results in harm to our national security.
Lax, out of date, or poorly enforced controls have the same effect.
Thus, as a practitioner and a former policymaker in this area, I am
pleased that you are holding this hearing and otherwise raising the
priority of this complex topic.
With respect to China, the issues pertaining to what the dual-use
export control rules and policies should be are the most complex and
significant of all export control issues. This has been the case for
decades. It is one of our largest trading partners while at the same
time being a long-standing country of concern with respect to internal
diversion of dual-use items for use in modernizing its military. On the
other hand, as I recently described to the U.S.-China Economic Security
Review Commission, decisions involving military items and commercial
space-related items destined to China are relatively easy to analyze
because of the strict statutory and regulatory embargoes pertaining to
such exports and the clear, widely accepted national security and
foreign policy reasons for them.
Deciding what the right national security controls should be over
commercial items that are not specific to military applications with
respect to China (or any other country) ultimately boils down to how
one defines ``national security.'' The traditional definition begins
with national security experts regularly identifying the commodities,
software, and technologies that could give an adversary a military or
intelligence advantage or cause us to lose ours. The process also
includes identifying the commercial items that are required for the
development, production, or use of weapons of mass destruction,
particularly missiles, chemical/biological weapons, and nuclear
explosive devices. Then, experts in each technology area work backwards
from the identified threat to describe the technical characteristics of
commercial items necessary for the development, production, or use of
such items. Regulators, in a well-established interagency process, then
work to add the items to the regulatory control lists of the United
States and its multilateral regime allies. This work is done in
coordination with industry--through both advisory committees and notice
and comment processes--to avoid unintended impacts and to ensure
clarity. Affected entities in the U.S. and abroad (because U.S.
controls are extraterritorial) then adjust their internal compliance
programs so that they know when authorization is needed to export such
items. When a company wants to ship a listed item (or release a
controlled technology to a foreign person), then regulators review its
request to do so in the form of a license application. The regulators,
as part of a well-tested interagency process, determine whether the
export or release would be consistent with our national security and
foreign policy objectives. That is, they assess, with the use of
intelligence community resources as necessary, whether the item is
destined for an acceptable end use or end user, or whether there is a
risk that it would be diverted to an unacceptable end use, end user, or
destination. They respond accordingly in the form of a license, a
denial, or a license with conditions. Enforcement officials investigate
and punish violations of the rules and to ensure or motivate
compliance. The process must constantly evolve because technologies and
threats are constantly evolving.
Another definition of ``national security'' includes trade policy
considerations and sees China's economic ambitions in a wide variety of
economic sectors, particularly those described in its Made in China
2025 plan, as a per se and long-term threat to the economic health of
the United States. Technologies that would support the development of
such efforts should therefore be controlled, even if they cannot be
tied to a specific military or intelligence application. Export
controls should be used to have an impact on the economic viability of
foreign companies that compete with U.S. companies. Demand in China for
the technologies grows more quickly than regulations and multilateral
controls can be updated, meaning that unilateral controls should be
used more often. These views, combined with the general and State-
supported effort within China to find military applications for dual-
use technologies, warrant broader than the traditional considerations
over the types of items that should be controlled for export to China
and what the licensing policies should be.
I am not here today to challenge or pick a fight over anyone's
particular world view or perspective on how global economics work.
Others are much more qualified than me to explain the benefits and
costs of industrial policy, comparative advantage, and barriers to
trade. I am not denying the extremely serious issues pertaining to
Chinese State-supported economic espionage, intellectual property
theft, diversion of civil items for military applications, and forced
technology transfer. I am also not denying that China's civil-military
fusion policies, among other things, make many end-use commitments
questionable and force more aggressive review of applications to export
controlled items to China. I agree that it is massively hard for
regulations to keep pace with the evolution of technology and to get
consensus with our allies with respect to matters involving China. What
I can do, however, is to describe what, based on decades of experience,
export controls can and cannot accomplish regardless of one's world
view on these issues or other China-specific concerns. In sum, my main
general point today is that the application of export controls in ways
that are unclear, unpredictable, or unilateral generally ends up
harming the very interests they were designed to protect.
I believe that a mature and sophisticated understanding of what
export controls can and should accomplish is codified in the recently
passed Export Control Reform Act of 2018 (ECRA), which I will also
describe. It is an excellent piece of bipartisan legislation that
probably can be the authority to address just about any problem that
export controls can address, including those involving China. It is a
modern, coherent, and permanent authorization for not only list-based
controls (i.e., over the export of identified items), but also end-
user-based, and end-use-based controls as part of a three-legged stool
approach to achieving national security and foreign policy objectives.
Congratulations to this Committee, its staff, its House counterparts,
and the Administration in getting it through along with related
improvements to the laws governing foreign direct investment.
ECRA is, however, quite new. Indeed, the regulators have not even
finished the process for drafting implementing regulations, such as
those with respect to possible new controls on exports to China
(section 4818) or on emerging and foundational technologies that are
not now controlled but should be given China-related concerns (section
4817). Thus, although it is not my job to tell members of Congress how
to do theirs, my suggestion and request for the greater good would be
for Congress to provide substantially more financial and other support
for and oversight of the agency responsible for shepherding all this
activity, the Commerce Department's Bureau of Industry and Security
(BIS). It is a terrific little agency with great people that punches
way above its weight. Never before though have the issues over which it
is responsible been more complex, fast-moving, and consequential--
particularly with respect to issues involving China. It, thus, needs
significantly more resources than it has now to do properly all the
jobs given to it by ECRA, other laws, new Executive Orders, and the
Administration. Also, BIS has not been for decades subject to as many
statutory standards for what it should and should not do with respect
to export controls as is now the case with ECRA. Thus, a vital
requirement for successful export control policy is for this Committee
and the House Foreign Affairs Committee to regularly ensure that ECRA
is being faithfully implemented.
Export Controls and the Primary Agencies That Administer Them
Before I dive into China-specific issues, it is important to level
set for everyone that export controls are the rules that govern
1. the export, reexport, and (in-country) transfer
2. by U.S. and foreign persons
3. of commodities, technology, software, and, in some cases,
services
4. to destinations, end users, and end uses
5. to accomplish various national security and foreign policy
objectives, including human rights objectives.
This one sentence summary is deceptively simple. As much as this
and previous Administrations try to make the rules easy to understand
and apply, they are inherently complex from an industry perspective.
From the policymakers' perspective, each export control decision
require multivariate policy and legal analyses involving statutes,
regulations, international commitments, intelligence and law
enforcement equities, intelligence community threat assessments,
industrial base implications, license administration, budgets,
available technical expertise, corporate compliance program
considerations, foreign availability, interagency dynamics, how global
production and supply chains work, congressional concerns, multilateral
and bilateral foreign policy issues, and, in the end, largely
subjective assessments of what constitutes a national security or a
foreign policy concern with imperfect information that can be addressed
through regulating the movement of commodities, technology, software,
and some types of activities.
The technologies are often evolving and wide ranging, including
everything from information about bird flu to machine tools to items
that are being invented today that most do not understand. Specific
commodities, such as certain types of microwave monolithic integrated
circuits, that are critical to advanced military radar are equally
critical to modern telecommunications applications. Technologies that
were once sensitive become ubiquitous, such as the GPS technology in
our cell phones. Generally nonsensitive commercial technologies can,
however, be applied to new uses or by end users of concern in ways that
are harmful to our interests. Most extraordinarily advanced
technologies, however, represent no threat whatsoever. Many simple, old
technologies, such as those unique to standard military equipment,
warrant controls for most of the world. Concerns about destinations,
end users, and end uses vary widely and change constantly. The mere
existence of a control, and the internal obligations that go with it,
can sometimes do more harm than good even if the regulators would
generally approve transactions under its authority.
The Export Control Reform Act of 2018
I described the U.S. export control system in more detail to the
House Foreign Affairs Committee during its consideration of what
eventually became ECRA. I incorporate those comments by reference. ECRA
is the new authority for the Export Administration Regulations (EAR),
which BIS administers. Although BIS leads the dual-use export control
system, ECRA, Executive Orders, and regulations require significant
interagency cooperation on licensing policies and decisions, primarily
with the Defense Department on national security issues and the State
Department on foreign policy issues.
Until ECRA, the statutory authority for the EAR--the Export
Administration Act of 1979--had lapsed decades ago. The EAR were kept
in effect through a series of Executive Orders and emergency
declarations issued under the authority of the International Emergency
Economic Powers Act. Thus, for decades, Congress had not expressed a
coherent vision for what export controls should be designed to
accomplish. Although there were certainly basic good Government reasons
motivating ECRA's introduction and passage, we basically have
bipartisan concerns regarding Chinese investment strategies and efforts
to acquire dual-use technologies for use in modernizing its military to
thank for bringing Congress together on this issue.
As you know, in late 2017 and the first half of 2018, there was a
nonpartisan effort to reform and expand the jurisdictional authority of
the Committee on Foreign Investment in the United States (CFIUS),
largely in response to national security concerns pertaining to
investments in the United States from China. One of provisions in the
Foreign Investment Risk Review and Modernization Act (FIRRMA) as
introduced would have given CFIUS jurisdiction over some types of
outbound investments by U.S. critical technology companies in foreign
countries in order to regulate the transfer of currently uncontrolled
emerging and foundational technologies that, with more analysis,
warranted controls. I and many others, including many on this
Committee, said that such concerns were warranted, but that addressing
them through CFIUS both under-controlled and over-controlled. It under-
controlled because the Government's review would only be triggered with
a covered transaction. If the U.S. Government should regulate the
transfer to China or elsewhere a newly identified sensitive technology
for national security reasons then it should regulate the transfer of
such technology regardless of the nature of the underlying investment.
I and many others pointed out that the U.S. Government already had a
regulatory system and an interagency process in place to identify and
control technologies of concern--the dual-use export control system BIS
administers.
That policy debate is what led to ECRA's being the legislative
vehicle for addressing the identification and control over transfers to
countries of concern such as China of emerging and foundational
technologies. This then led to an opportunity for Congress to finally
implement permanent statutory authority for the EAR, to articulate a
modern vision for export controls, enhance export control enforcement
authorities, and to codify in law decades of BIS practice, policies,
and regulatory reforms--including the Obama administration's Export
Control Reform accomplishments. The rules regarding foreign investment
in the United States and export controls are now connected and
overlapping to address, among other things, policy concerns over the
release to foreign persons in the U.S. and abroad of the technologies
to be identified. In sum, CFIUS uses its authority over inbound
investment to address concerns, inter alia, regarding transfers of
potentially sensitive uncontrolled technologies to foreign persons. The
EAR focus on outbound activities (and releases to foreign persons in
the United States of controlled technology) to address technology
transfer concerns regarding identified technologies. Emerging and
foundational technologies added to the EAR's list of controlled items--
the Commerce Control List (CCL)--will simultaneously expand CFIUS's
jurisdiction over foreign investments in the U.S. involving such
technologies.
As I and many others could describe separately, the Treasury
Department is leading the effort to draft the regulations to implement
FIRRMA, i.e., the new rules expanding CFIUS's authority to regulate
foreign investment in the United States that might create unresolved
national security issues. From conferences, I understand Treasury plans
to publish proposed rules later this year. Because Commerce has not yet
published proposed rules implementing ECRA provisions (such as those
pertaining to controls over emerging or foundational technologies) and
Treasury has not published new rules implementing FIRRMA provisions
(such as those pertaining to noncontrolling investments in critical
infrastructure), I cannot comment on them. With respect to ECRA, I can,
however, provide the context for the issues to help you and others
evaluate the proposed rules once they are published.
Emerging and Foundational Technologies--Identification and Control
Efforts Motivated Largely by Concerns Pertaining to China
Understanding that the bar for the imposition of unilateral
controls should be high, Congress set out in ECRA clear statutory
standards governing the effort to identify and control emerging and
foundational technologies--again, largely in response to concerns
raised by efforts by Chinese companies to acquire such technologies and
use them in ways contrary to U.S. national security interests.
Specifically, ECRA section 4817(a) requires the Administration to
conduct an interagency effort that reaches out to all available sources
of information--including academia, industry, and the intelligence
community--to identify emerging and foundational technologies that
``are essential to the national security of the United States'' and
that are not now subject to a multilateral control in the EAR's CCL or
described on one of the other lists of technologies the U.S. controls
for export. \1\ Once such technologies are identified, ECRA requires
BIS to get industry input on the controls in response to a proposed
rule. Such comments must then be considered, consistent with the
standards in ECRA, before BIS imposes any final controls on the newly
identified technologies.
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\1\ Even before ECRA, BIS had the authority to impose unilateral
controls over technologies that warranted control. We created a process
for doing so in 2012--the ``0y521'' process. ECRA's emerging and
foundational technology provisions are largely based on this process.
The difference, of course, is that ECRA section 4817 expresses the will
of Congress and made the effort mandatory as opposed to discretionary.
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Although ECRA does not define ``national security,'' a request for
comment BIS published in November 2018 described the national security
concerns to be addressed by the effort, i.e., to identify now
uncontrolled items that ``have potential conventional weapons,
intelligence collection, weapons of mass destruction, or terrorist
applications, or [that] could provide the United States with a
qualitative military or intelligence advantage.'' \2\ These examples
track ECRA's definition of a ``dual-use'' item, which is an item that
has ``civilian applications and military, terrorism, weapons of mass
destruction, or law-enforcement-related applications.'' Given the broad
controls that already exist in the EAR over items specially designed
for military applications that are not controlled by the International
Traffic in Arms Regulations, and all technology at any stage required
for their development or production, I am not certain what now-
uncontrolled items meet this definition. That is, however, what the
ECRA section 4817 process is designed to discover in a regular-order,
transparent fashion.
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\2\ BIS stated in its notice that it is not attempting to ``expand
jurisdiction over technologies that are not subject to the EAR.'' EAR
section 734.3(b)(3) states that the following types of information are
not ``subject to the EAR,'' regardless of their content: (i)
``published'' information; (ii) information that arises during, or
results from, ``fundamental research;'' (iii) information released by
instruction in academic institutions; (iv) information in patents and
published patent applications; (v) information that is a nonproprietary
system description; and (vi) certain types of telemetry. Each of these
elements of the regulatory exclusion is further defined in this and
related EAR provisions. BIS presumably made this point to allay
concerns by some, particularly in the academic and research
communities, that BIS's effort to identify and control emerging and
foundational technologies might somehow affect the long-standing
uncontrolled status of published information and fundamental research.
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In deciding whether to identify such a technology as ``emerging''
or ``foundational'' and impose unilateral controls on its export,
reexport, and in-country transfer, ECRA section 4817(a)(2)(B) requires
the Administration to take into account the:
1. development of the technologies in foreign countries;
2. effect export controls imposed pursuant to this section may have
on the development of such technologies in the United States;
and
3. effectiveness of export controls imposed pursuant to this section
on limiting the proliferation of emerging or foundational
technologies to foreign countries.
BIS has recently implemented multilateral controls on emerging
technologies that are essential the national security of the United
States. (The new controls pertain to discrete microwave transistors,
software operations, post-quantum cryptography, underwater transducers,
and air-launch platforms.) Licenses are required to export such items
to China and most other countries. BIS officials have said publicly
that it and its export control agency colleagues continue work on
identifying additional such technologies for consideration as either
unilateral or multilateral controls. This makes sense because ECRA
requires the effort to be an ``on-going'' one. That is, contrary to
many comments I have heard, ECRA does not contemplate a one-time
publication of new unilateral controls on emerging and foundational
technologies.
The technology areas BIS announced that it is studying dovetail
with those China announced in its Made in China 2025 plan as those of
strategic significance for the country. According to BIS, they include:
``Biotechnology''
``Artificial intelligence (AI) and machine learning
technology''
``Position, Navigation, and Timing (PNT) technology''
``Microprocessor technology''
``Advanced computing technology''
``Data analytics technology''
``Quantum information and sensing technology''
``Logistics technology''
``Additive manufacturing (e.g., 3D printing)''
``Robotics''
``Brain-computer interfaces''
``Hypersonics''
``Advanced Materials''
``Advanced surveillance technologies''
For each technology identified in a proposed rule to be controlled
as ``emerging'' or ``foundational,'' ECRA essentially imposes on BIS a
burden of justifying why the proposed control meets several statutory
standards. Thus, for example, ECRA essentially requires BIS to
demonstrate:
1. Why the technology proposed to be controlled is ``essential'' to
U.S. national security;
2. What the specific weapons-, military-, or intelligence-related
application the control is designed to address that is not now
being addressed by a control;
3. Why the unilateral control would not harm domestic research in
the technology;
4. Why the rule would be effective at stemming the proliferation of
the identified technology to countries of concern such as China
(taking into account any foreign availability of the same
technology); and
5. The results of BIS's full consideration of the impact on the U.S.
economy that would result from the unilateral control.
Without such information, industry and this Committee would not be
able to provide useful comments or oversight consistent with the
standards and goals of ECRA.
If BIS imposes controls on such technologies, or subsets thereof,
ECRA requires the Administration to work to get a multilateral regime
to agree to the same control so that the United States is not alone in
the control. This effectively means that any proposed control should be
of a type that is consistent with, and would likely be accepted by, the
relevant multilateral regime. Proposing a control over an item
inconsistent with what a regime would accept would defeat the point of
this ECRA provision and the high bar ECRA places on the use of
unilateral controls for emerging or foundational technologies. In any
event, as evidenced by industry comments, such multilateral efforts are
vital to ensuring that the controls are effective and that U.S.
companies are not put at an unfair competitive disadvantage relative to
its competitors in allied countries.
Industry comments on the process were due on January 10, 2019. They
seem to be largely concerned that unilateral controls on commercial
technology available outside the United States would harm U.S.
industry. That is, such controls would merely drive demand for such
commercial technologies to non-U.S. countries. This would harm the
ability for companies in the United States to invest in the R&D
necessary to advance such technologies while enhancing the ability of
companies outside the United States to do so. Another concern was that
unilateral controls over such technologies would be ineffective
because, given the international development of the broad categories of
technologies identified, they would not deprive China of the ability to
develop or acquire the same capability from elsewhere. Many commenters,
therefore, asked BIS not to adopt any new controls on such technologies
until and unless they were agreed to by one of the relevant
multilateral regimes.
Industry also largely did not know how to respond to BIS's requests
for comments regarding what industry thought were now uncontrolled
technologies essential the national security of the United States.
Industry essentially offered information on foreign availability, asked
BIS to abide by the ECRA standards, and asked to be included in the
drafting efforts to ensure clarity and precision. Many comments,
however, said that it was the Government's job to identify the national
security threats that were not now being addressed but should be, not
industry's. BIS has not responded to the comments, probably because it
is still working through the issues with its interagency colleagues. It
also has not yet issued a notice asking for similar industry comments
on which ``foundational'' technologies should and should not be
controlled.
Going back to my polite request for more resources for BIS, this
effort is vastly more difficult and resource-intensive than anything we
did during the Export Control Reform effort. It was relatively easy to
comprehend technology to develop a military aircraft's landing gear
(and hundreds of thousands of other similar components), for example,
and change its jurisdictional status to enhance military
interoperability with our NATO-plus allies. It is radically harder to
comprehend technology related to quantum computing, for example--and
even harder to sort out the subsets thereof essential to U.S. national
security that are even capable of being controlled given its cross-
border development. It was also much easier for us to assess the
economic impacts of changing the jurisdictional status of less
sensitive military items than it will be for BIS to gather the ECRA-
required information from industry to assess the economic impact of a
unilateral control, even a short-term unilateral control that might
later be submitted to a multilateral regime. Such assessments must take
into account not only the loss of actual sales but also the long-term
impact on foreign customers and whether they will consider U.S.
companies to be unreliable suppliers and thus move their business to
non-U.S. manufacturers.
If the Trump and subsequent Administrations strictly follow the
ECRA standards, then any new controls will only be over a small list of
nonmature specific technologies that are essentially unique to the
United States, not currently export-controlled, and truly essential to
the national security (and thus should have been controlled under any
Administration even without the section 4817 effort). I do not know
what will happen with respect the first group of proposed new controls
under ECRA, but I do know that industry in potentially affected
industries is extremely interested in whether their commercial
technologies will become subject to unilateral controls or a tool of
trade policy. Companies are or will be making decisions on whether to
invest or not invest in the United States based upon a belief or fear,
rational or otherwise, that technologies in various commercial sectors
will or will not be able to be shared, jointly developed, and sold.
ECRA States That Export Controls Exist To Accomplish National Security
and Foreign Policy Objectives
Industry's concern, at least in my experience, that export controls
not become a tool of trade policy is echoed by ECRA's statement of
policy for why U.S. export controls exist. Specifically, section
4811(1) states that the United States should ``use export controls only
after full consideration of the impact on the economy of the United
States and only to the extent necessary--(A) to restrict the export of
items which would make a significant contribution to the military
potential of any other country or combination of countries which would
prove detrimental to the national security of the United States; and
(B) to restrict the export of items if necessary to further
significantly the foreign policy of the United States or to fulfill its
declared international obligations.''
ECRA's second statement of policy for why U.S. export controls
exist is additionally limited in scope to addressing specific,
tailored, identifiable national security and foreign policy objectives
that do not include trade policy concerns.
The national security and foreign policy of the United States
require that the export, reexport, and in-country transfer of
items, and specific activities of United States persons,
wherever located, be controlled for the following purposes:
A. To control the release of items for use in--
1. The proliferation of weapons of mass destruction or of
conventional weapons;
2. The acquisition of destabilizing numbers or types of
conventional weapons;
3. Acts of terrorism;
4. Military programs that could pose a threat to the security of
the United States or its allies; or
5. Activities undertaken specifically to cause significant
interference with or disruption of critical infrastructure.
B. To preserve the qualitative military superiority of the United
States.
C. To strengthen the United States defense industrial base.
D. To carry out the foreign policy of the United States, including
the protection of human rights and the promotion of democracy.
E. To carry out obligations and commitments under international
agreements and arrangements, including multilateral export
control regimes.
F. To facilitate military interoperability between the United States
and its North Atlantic Treaty Organization (NATO) and other
close allies.
G. To ensure national security controls are tailored to focus on
those core technologies and other items that are capable of
being used to pose a serious national security threat to the
United States.''
Thus, with respect to any new proposed control, ECRA effectively
requires BIS to assess and identify to this Committee and the public
what the impact on U.S. industry would be as a result of a new control;
how it furthers one of the listed objectives; and how it is
``tailored'' to ``focus'' on ``core'' technologies that pose a specific
and ``serious'' national security threat. Nothing about these standards
changes because the destination of an item would be China or another
country.
Although ECRA does not require specific national security concerns
to be compromised to achieve economic objectives, it does state in
paragraph 3 of its policy statement that the ``national security of the
United States requires that the United States maintain its leadership
in the science, technology, engineering, and manufacturing sectors,
including foundational technology that is essential to innovation. Such
leadership requires that United States persons are competitive in
global markets. The impact of the implementation of [ECRA] on such
leadership and competitiveness must be evaluated on an ongoing basis
and applied in imposing controls under [ECRA] to avoid negatively
affecting such leadership.'' Of course, Government is the one
responsible for making national security determinations, but industry
is generally in a better position to assess how or whether a specific
export control would negatively affect its global leadership in an
area. Thus, their views in response to this statutory requirement of an
ongoing evaluation of the impact of export controls should be solicited
and given great weight--again, understanding that the Government must
make the final call on what is in the national security or foreign
policy interests of the United States.
This is one area where issues involving China-specific export
controls become massively complex and sometimes counterintuitive. For
many U.S. industries, China is one of the largest customers. The
companies use the income from such sales to benign end uses and end
users to fund their R&D efforts in the United States to advance the
next generation of their products. This allows them to remain
economically competitive internationally, which thus enhances the U.S.
industrial base. Without such sales, the income will go to their
competitors outside the United States, which results in companies in
the United States becoming less economically competitive relative to
foreign competitors and indigenous development in China. This is why I
am a firm believer in ECRA's requirement that controls be tailored to
specific, identifiable national security threats so that a loss of
trade in less sensitive items where risk of diversion is low does not
end up harming the U.S. industrial base, which thus harms our national
security in more fundamental ways.
ECRA Strongly Favors Multilateral Controls Over Unilateral Controls
As discussed earlier, a major concern of industry in response to
BIS's request for information about emerging technologies is that BIS
would impose unilateral controls--i.e., those that only the United
States imposes. Congress had the same general concern when it wrote in
section 4811(5) that ``[e]xport controls should be coordinated with the
multilateral export control regimes. Export controls that are
multilateral are most effective, and should be tailored to focus on
those core technologies and other items that are capable of being used
to pose a serious national security threat to the United States and its
allies.'' ECRA subsection (6) goes on to state that ``[e]xport controls
applied unilaterally to items widely available from foreign sources
generally are less effective in preventing end-users from acquiring
those items. Application of unilateral export controls should be
limited for purposes of protecting specific United States national
security and foreign policy interests.'' Thus, I am not saying that
ECRA prohibits unilateral controls, only that they should be rare and
narrowly tailored to address specific national security or foreign
policy issues, and imposed consistent with the ECRA standards described
earlier.
I realize that one of the motives for the outbound investment
provision of FIRRMA as introduced was that the multilateral control
process is slow. It requires consensus among between 30 and 40 or so
regime partners with many different types of industries and local
concerns. Most of the allies do not have the same concerns with respect
to China that the United States does. There are language barriers and
other agendas that get in the way. Other countries' enforcement systems
for violations are not as robust as ours. I get that. I dealt with it
regularly. Process is hard. Short-cut alternatives of easy feel-good
unilateral controls, except in extraordinarily narrow and specific
circumstances, however, will always end up doing more harm than good
for the very industry or technology the control is designed to protect.
That is the lesson learned from decades of export control efforts and
is true regardless of one's view of global economics or definition of
national security. The work and the investments (and thus U.S. jobs)
will simply be driven off-shore to allied countries without such
controls. Foreign buyers will design-out U.S.-origin content because of
the unilateral regulatory burdens that go with it. It's like squeezing
a handful of sand too hard; eventually you have none. So, if the
multilateral process is too slow, come with other ideas with close
allies to speed it up, such as by working with smaller groups of truly
interested countries. If they do not have the same concerns regarding
China, provide the evidence to convince them. If their enforcement
systems are lax, help them build capacity. All such tasks require
massive additional funding for BIS and the other export control
agencies to implement properly.
China-Specific Licensing Policies in ECRA and the EAR
ECRA did not change any policies regarding exports to China.
Section 4818, however, required a review of the licensing requirements
pertaining to China and other countries subject to U.S. arms embargoes.
Section 4818(b) required the results of the review to be implemented by
May 10, 2019. I do not know the results of the effort. I know that
industry is curious about what the changes will be though. I am not
saying that any particular new control is or is not warranted. Rather,
I am just reporting that many are wondering what the impact on their
businesses will be and how BIS will justify any new controls based on
the ECRA standards described above.
ECRA requires that licensing requirements be imposed on exports of
emerging and foundational technologies if destined to China or other
countries subject to arms embargoes. ECRA leaves to BIS the decision to
impose licensing requirements involving other countries. Also, unless
BIS changes a core element of the EAR, these licensing requirements
will also apply to ``deemed exports,'' i.e., releases of technology in
the United States to nationals of countries that have a license
requirement, such as China.
In thinking about possible changes in licensing policy with respect
to China, it is important to remember that almost all multilaterally
controlled items already require a license for export to China and the
Executive Branch has wide latitude in deciding whether and when to
approve, condition, or deny such licenses. BIS does not make such
decisions alone, by the way. They are made in coordination with its
colleagues in the departments of Defense, State, and Energy. If there
is a disagreement among the agencies, there are formal appeal
procedures that have, in the main, worked well for decades. Reports of
Defense or State officials being routinely ``overruled'' by Commerce
officials in final determinations during such procedures are untrue.
The following are additional already-existing China-specific export
controls and licensing policies in the EAR. BIS has the authority to
impose individual licensing requirements on the export of specific
types of otherwise uncontrolled items in a transaction merely by
informing the exporter that a national security concern exists with
respect to the transaction. The EAR contain absolute and complete
embargoes on the export of military and commercial space-related items
to China, directly or indirectly. The EAR contain ``zero de minimis''
rules with respect to foreign-made military items, of any significance,
and commercial space-related items. This essentially means that a
foreign-made item containing any amount of U.S.-origin content
specially designed for a military or space-related item requires a
license for export from outside the United States, which will be
presumptively denied. Wholly foreign-origin items controlled for
national security reasons that are the direct product of U.S.-origin
technology controlled for national security reasons also require a
license from BIS to export to China and other countries of concern. BIS
has a process for conducting preshipment checks and postshipment
verifications with respect to exports to China and other countries. If
the foreign companies do not cooperate, BIS has a process for exerting
leverage over the foreign companies to cooperate, which is the
Unverified List.
China-Specific Controls Based on End Users
As I mentioned earlier, the EAR can achieve their national security
and foreign policy objectives through controls over lists of identified
items, specific end-users, or specific end-uses. It is not a one-size-
fits all regulation. The EAR essentially have three end-user-based
tools, which have often been used against entities in China and other
countries. They are (i) the Unverified List (to impose obligations on
exports to determine the bona fides of a foreign entity or to allow for
an end use check), (ii) the Denied Persons List (to impose punishment
for those that have violated the EAR); and (iii) the Entity List. The
Entity List is a hot topic these days. It has, however, been a tool for
BIS to use for decades. It is just getting much more attention because
of the size and scale of the recent listings of Huawei and affiliated
entities.
The list has hundreds of entities on it, many of which were added
by me in coordination with my interagency colleagues. Obviously, as the
one who added ZTE to the Entity List in March of 2016, I believe that
it can be an effective tool for accomplishing national security
objectives and supporting law enforcement efforts by motivating changes
in the behavior of foreign parties engaged in acts contrary to our
national security or foreign policy interests--if there is a plan for
what is to be achieved with the listing. Indeed, the standard in the
EAR for when an entity is to be removed from the list is ``if it is no
longer engaged in [such activities] and is unlikely to engage in such
activities in the future.''
Being added to the Entity List is thus not an assessment of a civil
or criminal penalty against the listed entity. The burden of proof for
listing is lower than even that for a standard civil penalty. The EAR
requires only that there be a ``reasonable cause to believe, based on
specific and articulable facts,'' that a foreign entity has been
involved, is involved in, or poses a significant risk of being or
becoming involved in, ``activities that are contrary to the national
security or foreign policy interests of the United States.'' Neither
ECRA nor the EAR define or limit what constitutes a ``national
security'' or ``foreign policy'' interest with respect to the Entity
List. The EAR contains an ``illustrative list'' of ``examples'' of such
activities, such as supporting persons engaged in acts of terror;
enhancing the military capability of State sponsor of terrorism;
transferring, developing, servicing, repairing, or producing weapons;
preventing BIS from conducting an end-use check; and posing a risk of
violating the EAR, such by transferring items to proscribed
destinations, end uses, and end users. The decision, however, is up to
whoever is in charge and the interagency clearance process as described
in the EAR.
My view, based on the structure of the EAR and my experience, is
that the Entity List tool should be used to change the behavior of
foreign entities and not just as a low burden-of-proof tool of
punishment. Otherwise, the risk of its being over-used, and thus
provoking uncertainty about which entities it might be used against,
provokes concerns by foreign buyers that U.S. exporters are not
reliable and predictable suppliers. Remember, in international trade,
perception is as important as reality and must be managed accordingly.
With these comments, I am not challenging any of the recent Entity List
actions or saying that a foreign company can be too big to list. Also,
I, of course, no longer have access to the same nonpublic information
my successors at BIS have, thus making it hard for me to judge many
issues. Rather, I am reporting that, given the recent notoriety of the
tool, it is having an impact on otherwise authorized trade with China
involving unaffiliated and benign end uses and end users. This effect
warrants study so that the mere existence of the otherwise effective
tool does not end up doing more harm than good for U.S. industry.
Of course, if a foreign entity has violated the EAR, then it should
absolutely be charged and punished consistent with the standards,
procedures, and due process set out in the EAR and the relevant
criminal code provisions. Moreover, I advocate for more enforcement
resources for BIS's Office of Export Enforcement (OEE). OEE is unique
among law enforcement agencies in that it is dedicated solely to
investigating and assisting in the prosecution of export control cases.
Investigating exports and other activities involving China has always
been among its top priorities given the diversion risk concerns
described earlier. I know that advocacy for more enforcement resources
may seem to be a counterintuitive suggestion from someone now in
industry, but robust enforcement helps keep the playing field level for
those companies that do the hard work to establish procedures to ensure
compliance with the controls.
The EAR prohibit exports of a list of otherwise uncontrolled items
to Russia or Venezuela if for a ``military end user.'' Such a
``military end user'' control with respect to China was not adopted
during the Bush administration because, as a I recall, of the
difficulty in identifying such end users when they are engaged in
purely civilian activities, such as running hospitals and airports. I,
too, was not able to come up with a clear definition of the term that
exporters could comply with, but suspect BIS is now working on the
issue given the requirements of ECRA to review China licensing
policies.
China-Specific Controls on End Uses
The EAR, however, contain a China military end use rule. In
essence, it requires an exporter, reexporter, or transferor to apply
for a license when it knows that an item on a list of 32 types of items
that do not ordinarily require a license for export to China are for a
military end use in China. Such items include civilian aircraft
engines, navigation systems, certain composite materials, and
telecommunications equipment. Applications for such exports will be
presumptively denied. BIS also has the authority to inform an exporter
that there is an unacceptable risk that an item will be diverted for a
military end use in China and that, as a result, the item may not be
shipped without a license.
ECRA permits other end use controls. This makes sense because, as
previous technology control identification efforts have demonstrated,
detailed technical descriptions of specific new technologies for
inclusion on control lists can sometimes end up doing more harm than
good. If, for example, a technology is the same as that which is used
to commit a bad act as is used to defend against the bad act, then a
list-based control and all the regulatory complexity that goes with it
will harm the defenders far more than the attackers. The solution for
when list-based controls would be ineffective, or would do more harm
than good, is to focus on the end uses of concern. When someone in
Government or civil society identifies concerns with such widely
available items, the concern is generally more about how they are being
used and who is using them than something inherently threatening in the
commodity, software, or technology.
Although not exclusive to China, the EAR contain a series of
controls on exports, reexports, and transfers related to nuclear,
missile, and chemical/biological end uses. As referenced in ECRA and as
implemented in EAR section 744.6, the EAR also already control a range
of services performed by U.S. persons if with respect to missiles,
nuclear explosive devices, or chemical/biological weapons--regardless
of whether the items involved in the service are subject to the
jurisdiction of the EAR. Although there are no China-specific end-use
controls in the EAR or ECRA, ECRA section 4812(a)(2)(F) requires the
President to ``control the activities of United States persons,
wherever located, relating to specific . . . foreign military
intelligence services.'' Congress presumably added this requirement to
narrow a gap between the ITAR's controls on defense services and
services that do not involve defense articles but still warrant control
for national security reasons. BIS has not yet implemented this control
in the EAR. When it does, the addition may address some of the China-
specific policy concerns I am aware of. I would thus encourage the
Committee to study and track the provision's implementation. When I
considered implementing a similar idea in the EAR, I was unable to
develop a definition of foreign intelligence services that accomplished
the policy objectives of the control and that also would be
understandable to those who would need to comply with it.
Hong Kong
The United States-Hong Kong Policy Act of 1992 effectively requires
the U.S. Government to treat Hong Kong and mainland China as two
separate destinations for export control purposes. In addition, section
103(8) of the Act states that the ``United States should continue to
support access by Hong Kong to sensitive technologies controlled under
[the then existing multilateral export control regime that is the
predecessor to the Wassenaar Arrangement] for so long as the United
States is satisfied that such technologies are protected from improper
use or export.'' Because the United States has not made a determination
to the contrary, the statutory and regulatory prohibitions pertaining
to the export and reexport of controlled items subject to U.S.
jurisdiction that are applicable to mainland China do not apply if the
destination is Hong Kong. The export control regulations, however,
still require licenses to export and reexport controlled items to Hong
Kong. Applications for such exports and reexports are reviewed by U.S.
Government export control authorities to determine, for example,
whether Hong Kong is indeed the ultimate destination and whether the
export or reexport otherwise presents any national security or foreign
policy concerns.
I was asked to comment on whether items subject to U.S. export
controls are being illegally exported out of Hong Kong to mainland
China or other countries of concern. I left the Government on January
20, 2017, and thus no longer have access to such information, whether
positive or negative. I can, however, say that on January 19, 2017, a
rule that I signed expressing concerns about the issue remains in
effect. The rule imposes additional support document requirements on
exports and reexports to Hong Kong. In essence, the rule leveraged the
EAR to effectively compel compliance with Hong Kong export and import
permit requirements by requiring proof of compliance with Hong Kong law
as a support document necessary for shipping under an EAR license or
license exception. As stated in the preamble, BIS took ``this action to
provide greater assurance that U.S.-origin items that are subject to
multilateral control regimes . . . will be properly authorized by the
United States to the final destination [such as mainland China], even
when those items first pass through Hong Kong.'' My thought at the time
was that if we had regular, robust assurances and intelligence that
diversions of U.S.-origin items were not occurring, then the additional
requirements would remain in effect as is or be removed. If not, then
the stricter licensing policies, including policies of presumptive
denials, would need to be imposed. I would encourage you to ask this
question of current BIS officials.
ECRA Authorizes the Tools in the EAR To Be Used To Further U.S. Foreign
Policy, Including Human Rights, Objectives
Most of my comments pertain to national security issues. ECRA,
however, specifically authorizes the EAR to be used as a tool to
``carry out the foreign policy of the United States, including the
protection of human rights and the promotion of democracy.'' The EAR
also contains an extensive list of foreign policy controls. Items
controlled under such policies include crime control and detection
equipment, restraints, stun guns, instruments of torture, equipment for
executions, and shotguns. Following the 1989 military assault on
demonstrators by the Chinese Government in Tiananmen Square--30 years
ago today--the U.S. Government imposed controls on many such items.
All license applications BIS receives to export such and other
types of items are reviewed by BIS foreign policy experts and also
referred to the State Department for its assessment of the foreign
policy and human rights implications. (With one exception involving a
complex, atypical fact pattern with national security implications, I
am confident that the State Department's assessment that a license
should be denied for human rights-related reasons has never been
rejected by BIS and the other agencies.) Because, however, the nature
of most items involved in acts contrary to this ECRA provision are
common or do not lend themselves to technical descriptions on control
lists, a combination of the EAR's other end-use- and end-user-based
tools could be effective in furthering its objectives. I recognize that
the Entity List is not commonly used to further such objectives, but it
could be. I make this point only to respond to a likely request to
explain the tools in the EAR available to address various human rights
concerns.
The Need for Certainty, Clarity, and Multilateralism in Export Control
Policy--And How Perception Is Sometimes More Important Than
Reality
As someone who now hears concerns of U.S. industry on a billable
hour-by-hour basis, I can report that there is considerable concern
that the United States will begin imposing broad controls on the large
categories of commercial emerging technologies identified in BIS's
November request for information for nontraditional national security
reasons. I am not saying controls consistent with ECRA's standards and
requirements should not be imposed. Rather, I am just reporting that
most companies do not appreciate that BIS's notice was a request for
public input and information about broad categories of technologies in
order for BIS to use in considering how to develop narrowly tailored
controls essential to national security. They also generally do not
appreciate that there are specific statutory standards governing the
effort and what technologies may and may not be added to the control
lists. Because perception can, however, become reality with respect to
economic decisions involving U.S. companies, my recommendation is that
BIS describe its plans for new China-specific controls publicly with
clarity, certainty, and with as much ECRA-consistent emphasis on
multilateral solutions as possible. This is vital to reducing
uncertainty, and thus unnecessarily lost business opportunities for
U.S. companies involving benign items, among those who do not follow
the nuances of the EAR, ECRA, and the regulatory process.
I acknowledge this will be difficult even when BIS is ready to
publish proposed rules. However, ECRA essentially requires BIS to
demonstrate, for example, why any new proposed unilateral emerging
technology control is ``essential'' to national security, why it would
not harm domestic research, and why it would be effective at stemming
the proliferation of such controls to China and other countries of
concern. BIS now, per ECRA, also must fully consider the impact on the
U.S. economy that would result from any new unilateral control, an
effort that it will need industry's help in doing. These are high
standards, but Congress created them because, as stated several times
in ECRA, unilateral controls should be rare and only respond to
specific or emergency situations essential to our national security.
All other list-based controls are better addressed through the regular
order and the well-tested process of working with our multilateral
regime partners to develop and implement multilateral controls to
enhance their effectiveness and keep the United States on a level
playing field with such countries, particularly with respect to
commercial technologies.
Conclusion
The United States has always pursued two complementary objectives--
protecting our national security and promoting U.S. technology
leadership. While they both make us stronger, they have very different
tools and purposes. We have spent 50 years building a global trading
system with clear rules and tools for remedying unfair trade practices.
Export controls are not one of them. If we use export control-related
national security justifications for purely trade policy purposes, we
will undermine the system we have built and even further encourage the
Chinese Government to do so even more. Export controls should be used
to their fullest possible extent, however, when a specific national
security or foreign policy issue pertains to the export, reexport, or
transfer of commodities, technologies, software, or services to
destinations, end users, or end uses. If the issue pertains to an
activity, an investment, or a concern separate from such events or
concerns, then one must look to other areas of law, such as sanctions,
trade remedies, foreign direct investment controls, intellectual
property theft remedies, or counterespionage laws. In addition, a trade
agreement among Pacific allies surrounding China could be a useful tool
in motivating, through collective multilateral action, changes in
unfair Chinese trade activities--while, at the same time, benefiting
U.S. industry's access to such markets and projecting American labor
and environmental protection values.
Returning to the title of the hearing--assessing controls on
investments and technology relevant to threats involving China--the key
to doing so properly is more funding for more people in BIS and the
other export control agencies to regularly and aggressively conduct and
implement such assessments. In light of broad grants of authority in
ECRA and FIRRMA, I do not yet believe more law is needed to do so. The
issues and technologies involving China are more complex than ever and
the need for multilateral cooperation, which is time intensive,
continues to remain extremely important to the controls' effectiveness.
I believe that each agency is understaffed when compared to its
mission. Among other things, this leads to increased burdens and delays
for industry, reduced time needed for internal training, insufficient
time to study all the issues; and the inability to keep the regulations
current. Failure to keep the regulations current to novel threats does
not advance our national security interests and harms our economic
security.
A renewed attention to supporting these organizations should
include efforts to educate the next generation of export control
professionals and to motivate them to join the Federal Government.
Decades of wisdom and collective memory will walk out the door when
current senior career staff retire or otherwise leave the Government.
In addition, I would advocate that the export control agencies have
easier hiring authority, more staff to conduct reviews of open source
and intelligence community data, more intel analysts, more licensing
officers with advanced technical skills, and more staff with foreign
language skills, particularly Chinese. Congress was helpful in
substantially increasing our budget when I was at BIS, for which I am
grateful, but more is needed.
As with all export control topics, I have a 3-minute, a 30-minute,
a 3-hour, and a 3-day version. So, with this, I'll stop here and be
happy to answer whatever questions you have.
______
PREPARED STATEMENT OF SCOTT KENNEDY
Senior Adviser, Freeman Chair in China Studies, and Director, Project
on Chinese Business and Political Economy, Center for Strategic and
International Studies
June 4, 2019
Introduction
Today's hearing is about issues of technology, economics, public
health, and national security, but it is occurring against the backdrop
of the 30th anniversary of the Beijing massacre. This is a solemn day
not just in Chinese history, but in world history. I was a 4th-year
undergraduate student at the University of Virginia when the protests
broke out and was preparing for language study in Taiwan when the
events of June 3rd and 4th unfolded. China confounded expectations
then, and it has since. Few expected a regime to take such actions, and
few expected it to survive and become the major power that it is today.
In so many ways, big and small, China continues to defy expectations.
As someone who cares deeply about China, the United States, and the
globe, one of the largest lessons I take from my years of working on
China and U.S.-China relations is our need to adopt a posture of
principled pragmatism: we need to be guided by our values, but we also
need to be smart in how we pursue them. A clear purpose needs to be
married to well-reasoned and effective policy. Our purpose should be to
encourage and press for humane governance in China domestically and its
responsible behavior internationally. Pursuing these goals requires a
combination of engagement with China, deterrence and opposition to some
of its policies and actions, and collaboration with friends and allies
in the Asia-Pacific and beyond. But most importantly, success requires
making America the best it can be. Our direct effect on China will
always be limited. We have a much greater ability to make our own
economic, social and political systems stronger, serve as a model for
others, and have them recognize how their national interests are best
served by having a good relationship with the United States.
I elaborate on these principles in my statement as they apply to
advanced technology. I first briefly describe China's ambitious policy
goals in promoting high technology and the array of policies it is
deploying toward these ends. I then summarize the results to date and
likely future trajectory. The main point is that although China has
made progress and is likely to continue to do so, there is wide
variation across industries in the level of success and the effect on
the United States and global economy. On this foundation, I turn to
discuss America's current policy approach in responding to China's
high-tech drive. Presently, the United States is only utilizing a
single policy tool--bilateral brinksmanship--and this approach has
limited utility. To be more effective, the United States will need an
``all-of-the-above'' approach that involves greater coordination with
friends and allies and much more attention to strengthening the
foundations of our own technology ecosystem.
China's High-Tech Drive: Ambitions and Tools
China's technology goals are amazingly ambitious. Its leaders are
no longer satisfied being a low-cost assembly point along the global
supply chain and only utilizing Western technology. \1\ China wants to
be a major high-tech leader. Although the Made-in-China 2025 (MC2025)
technology plan focuses on a small handful of technologies, MC2025 is
part of China's 13th Five-Year Plan, and this plan includes dozens of
industrial policies and hundreds of advanced technology sectors, from
artificial intelligence and information and communications technologies
(ICT) to commercial aircraft, and from materials to new-energy vehicles
and pharmaceuticals. Beijing's motivation is multifold; it has a clear
economic logic, seeking to move from low-valued added segments of
industries to higher-value added parts of industries, spur consumption
and improve the lives of its people, all of which together should raise
China's long-term growth prospects.
---------------------------------------------------------------------------
\1\ Scott Kennedy ``The Beijing Playbook: Chinese Industrial
Policy and Its Implications for the United States'', in James Andrew
Lewis, ed., Meeting the China Challenge (Washington, DC: CSIS, January
2018), pp. 1-9.
---------------------------------------------------------------------------
But the leadership also views advanced technologies in political
and international terms. China wants to use technology to improve
domestic governance, for example, by making traffic move more
efficiently, reducing crime, and improving coordination across
Government agencies. It also wants to reduce domestic security risks,
people and movements that could threaten the Chinese Communist Party's
(CCP) hold on power. Developing and acquiring advanced technologies
also serves China's national security goals, making China's military
better able to defend its borders and near-abroad and have power
projection capabilities. This gives China the ability to deter
potential foes, including the United States, in times of peace, as well
as better prepare for potential conflicts along its perimeter,
including the border with India, the Korean peninsula, Taiwan Strait,
and South China Sea.
Just as the motivations behind China's high-tech drive are
multifold, it is drawing on all the powers of the State and society to
achieve them. Most importantly, although Beijing employs markets to
carry out research and development (R&D), promote industries, and
create consumer services, the Chinese State--the Government and CCP, at
the national and local levels--is deeply involved in every aspect of
this drive.
There are five important principles guiding the Chinese State's
role: (1) The State has the right to intervene at any time for any
reason; (2) State officials have discretion to adopt discrete policies
to promote or hinder any industry, company or region as necessary; (3)
Funding and investment for priority sectors often occurs in the
expectation of future demand, not existing demand already reveal by
market signals; (4) The State would prefer to direct support to firms
that are both politically safe and economically competent, but special
support goes to State-owned enterprises (SOEs) even when they do not
perform well; and (5) Strategically use globalization to China's
advantage, not as an end in itself. \2\ The Chinese State does
encourage business competition, even internationally, and in some
industries it is extremely fierce, but competition occurs within this
larger political economy, and so it is controlled with the explicit
hope of achieving specific economic and political goals.
---------------------------------------------------------------------------
\2\ Barry Naughton, ``China's Distinctive System: Can It Be a
Model for Others?'' Journal of Contemporary China, no. 65 (2010), pp.
437-460.
---------------------------------------------------------------------------
On the basis of these motivations and guiding principles, the
Chinese State mobilizes every tool at its disposal to achieve these
ends. Funding is at the heart of the system, including Government
spending, subsidies, and State-directed bank credit. China's securities
markets as well as private equity and venture capital are a growing
part of the equation, particularly with regard to advanced
technologies. High-tech firms receive tax benefits, access to low-cost
land and other incentives. China now spends over 2 percent of gross
domestic product (GDP) on R&D, equal to the average of advanced
industrialized countries. In absolute terms, it has the world's second
large R&D budget, only behind the United States. In some industries,
its investment outpaces that of everyone else. Although over 75 percent
of R&D is by companies, the State is still able to incentivize and
direct spending in its priority areas. For example, in the case of
semiconductors, national and local governments have created a series of
investment funds that total at least $150 billion. They are supporting
the creation of dozens of fabrication facilities around the country
even though a straightforward market analysis would suggest this scale
of investment is wasteful.
Beyond finances, there is a rich panoply of interwoven policy tools
available to promote advanced technology: extensive support for
universities and vocational schools to develop more talent, active
participation in setting technical standards, Government procurement
that encourages or mandates buying Chinese products, and high
environmental performance standards. China has a love-love approach to
intellectual property (IP). On the one hand, it would love Chinese to
develop their own IP. It has developed world-class IP laws and
regulations, encouraged the filing of patents and copyrights at
unprecedented levels, developed regulatory systems and markets for
licensing IP, and developed courts to adjudicate IPR disputes, most of
which occur between domestic litigants. On the other hand, if it runs
into obstacles creating IP domestically, it would love to obtain this
IP from abroad, legally if possible, illegally if necessary. Most
independent analysts believe China is the largest source of commercial
IP theft globally, no longer focused on toys and CDs, but instead on
everything from advanced materials to commercial aircraft components,
drug formulas, and telecom systems.
A key element of China's high-tech drive is its strategic use of
globalization. In addition to sending millions of students abroad over
the last few decades to obtain advanced degrees in engineering and
science, Chinese financial institutions and companies have ramped up
outward investment and acquisition of overseas companies. Cumulative
Chinese investment in the United States from 1990 to 2018 was $145.14
billion. Of this amount, 92 percent were acquisitions of existing
American companies, and 75 percent of investment was by private Chinese
companies. High-tech is a huge part of Chinese investment; energy and
ICT have received a great deal of attention, but in the last 2 years,
because of restrictions in those sectors, a higher proportion of
funding has flowed into pharmaceuticals, biotech, and health care. \3\
Beyond investment abroad, Chinese companies also are opening R&D
centers in Silicon Valley and other high-tech hubs around the world.
---------------------------------------------------------------------------
\3\ Rhodium Group, ``U.S.-China Investment Hub'', https://www.us-
china-investment.org/us-china-foreign-direct-investments/data; and
Thilo Hanemann, et al., ``Two-Way Street: 2019 Update'', May 2019,
https://arraysproduction-0dot22.s3.amazonaws.com/rhodiumgroup/assets/
icon/RHG-TWS-2019-Full-Report-8May2019.pdf.
---------------------------------------------------------------------------
Domestically, China has increased efforts to attract foreign talent
to work for Chinese industry and uses the leverage of its large
domestic market to persuade foreign companies to share their technology
with local partners. As a consequence, China has been able to
ameliorate the weaknesses of its own top-down innovation system by
utilizing innovation nurtured in more hospitable environments. And
finally, China has stepped up its efforts to shape global rules to
legitimate its current system of economic governance and make decisions
consistent with its own interests. China is deeply active in the G20,
WTO, IMF, standards-setting bodies, and other existing institutions. It
is also building alternative or parallel institutions, such as the
Asian Infrastructure Investment Bank (AIIB), and advocating competing
norms, such as Internet sovereignty, that better fit with its less
liberal worldview.
Although China certainly has regulations and policies that
contravene its commitments to the WTO and the United States, it makes
greater use of discriminatory policies and behaviors that less
obviously violate international rules. Chinese officials and companies
have learned (in part from Western practice) how to ``game'' the
system. The WTO covers many areas, but is far from comprehensive, and
the global standards for finance, currency, antitrust, the digital
economy, and elsewhere are either too vague or lack ``teeth'' to ensure
compliance. Moreover, even in areas covered by the WTO, China can mask
industrial policy as private commercial activity. For example, beyond
official subsidies the State can decisively shape the decisions of
creditors, investors, and borrowers in ways that fit its interests and
create an entirely uneven playing field. Masking industrial policy
makes it much harder to identify and constrain.
China's ambitions, motivations, policy tools, and approach toward
globalization all come together particularly tightly in the context of
information and communications technologies, the Internet and
cybersecurity. Developing the Internet and related technologies serves
economic, domestic security, and national security goals
simultaneously. Chinese President and Communist Party chief Xi Jinping
has repeatedly emphasized the multiple roles of the Internet and the
importance of cybersecurity. For example, in a major 2016 speech, he
said: ``We have to take the initiative in the Internet development in
our country. In order to protect cyber security and national security,
we have to overcome the bottleneck of core technology. (We should)
strive to leapfrog in certain areas and aspects.'' \4\
---------------------------------------------------------------------------
\4\ ``Speech to Cyber Security and Informatization Work Seminar'',
People's Daily, April 20, 2016, http://cpc.people.com.cn/n1/2016/0420/
c64094-28289000.html.
---------------------------------------------------------------------------
China's famed ``social credit system'' as well as its smart-cities
and safe-cities programs serve multiple purposes. Collecting data about
your finances and acquaintances may uncover unpaid bills that make you
a high-risk borrower or genuine criminal behavior, but could also be
used to determine your political leanings and if you are likely to take
to the streets. Developing telecom hardware and mobile technologies
makes economic activity far more efficient and connects businesses and
consumers, but it also gives the CCP and China's intelligence agencies
greater understanding of potential opponents, at home and abroad. China
has developed a complex and multifaceted policy and regulatory
scaffolding for managing every aspect of the Internet and
cybersecurity. While much of this would be needed in any circumstance,
American industry and independent observers view much of this effort as
overly burdensome and discriminatory. \5\
---------------------------------------------------------------------------
\5\ Samm Sacks and Manyi Kathy Li, ``How Chinese Cybersecurity
Standards Impact Doing Business in China'', CSIS Briefs, August 2018,
https://www.csis.org/analysis/how-chinese-cybersecurity-standards-
impact-doing-business-china.
---------------------------------------------------------------------------
The Mixed Results of China's High-Tech Drive
China's ambitions are one thing, the actual results another. In
general, China has made substantial progress in developing advanced
technologies. In the most recent data provided by the Global Innovation
Index, China has moved up to rank 17th among the 126 countries it
tracks. \6\ This index includes over 100 metrics related to both inputs
(such as financing and education) as well as outputs (scientific
publications, patents, and new products). China has separated itself
from other developing countries, such as Brazil and Russia, and has
moved closer to the United States (6th), Germany (9th), South Korea
(12th), and Japan (13th). \7\ China is now the world's largest source
of patents, granting over 2.44 million patents in 2018. \8\ Even if a
large percentage are not reflective of truly innovative activity, a
growing proportion are. It is no longer accurate to see the Chinese
simply as a bunch of copycats. \9\
---------------------------------------------------------------------------
\6\ ``Global Innovation Index'', https://
www.globalinnovationindex.org/Home.
\7\ Scott Kennedy, ``The Fat Tech Dragon: Benchmarking China's
Innovation Drive'' (Center for Strategic and International Studies,
August 2017), https://www.csis.org/analysis/fat-tech-dragon.
\8\ ``China's National Intellectual Property Administration'',
Monthly Report December 2018, http://www.sipo.gov.cn/docs/2019-01/
20190129105822724812.pdf.
\9\ Shaun Rein, ``The End of Copycat China: The Rise of
Creativity, Innovation and Individualism in Asia'' (Wiley, 2014); and
Kai-Fu Lee, ``AI Superpowers: China, Silicon Valley and the New World
Order'' (Houghton Mifflin Harcourt, 2018).
---------------------------------------------------------------------------
That said, there is a great deal of variation across sectors. In
some industries, Chinese firms are doing exceptionally, creating
innovations at an impressive rate. This is particularly true in ICT,
from telecom equipment and handsets to Internet applications. This is
in part because the technology barriers to entry in the Internet are
lower than other sectors--you need a laptop and some coding skills--but
it also a product of this sector being dominated by private companies.
We know of larger firms such as Alibaba, Tencent, and Baidu, but there
are hundreds of thousands, if not millions, of ICT start-ups, and they
are part of a rich ecosystem of money, talent, and services that span
the country and beyond.
China's pharmaceutical sector has been far less successful, but its
prospects are relatively robust compared to many other industries
because of the kinds of talent and firms entering the sector. Pharma is
the most globalized of any Chinese industry. Most company founders and
top researchers have studied in the United States and Europe and are
deeply familiar with the pharma industry, the entire drug development
process, and the regulatory systems developed by the Food and Drug
Administration (FDA). Many of these firms have raised funds from
American venture capital firms and have deep relationships with one or
more of the leading Western pharma firms.
In contrast to sectors such as these, there are another group of
high-tech industries in China that have seen some success, but at a
tremendous cost. In these sectors, China has developed technology at
home or acquired it from abroad, and then pushed massive investments to
scale-up the industries. But in the process, they have attracted far
too many firms and investment, with the result being mediocre
technological progress but outrageous levels of overcapacity. This kind
of problem originally emerged in industries such as steel, aluminum,
glass, and paper, but in the last decade have spread to several high-
tech sectors. Solar, wind, electric vehicles, and robotics are the most
obvious, but overcapacity affect those industries where products are
easily standardized, and funding is easily available. The results are
fast-growing industries, but ones where the vast majority of producers
are nowhere near the cutting edge, and supply outstrips likely demand.
These industries are ripe for consolidation, but to avoid being stuck
with unsold inventories, there is a huge incentive for companies to
dump their products abroad. The result of such competition
unconstrained by the penalty of losing is to put companies that face
tighter budget constraints at a huge disadvantage. These circumstances
threaten the vitality of supply chains and business models built on
assumptions of a more competitive market environment.
The last group of high-tech sectors in China are those that have
yet to succeed and do not show much promise, at least in the next
decade or so. These tend to be industries closer to the cutting edge,
with very high technology barriers to entry. But the Chinese compound
these difficulties by bringing the heavy hand of the State into play,
in some instances dictating that State-owned firms must dominate or
that commercial activity must closely follow State guidelines.
The best example is commercial aircraft. China has developed a
regional jet, the ARJ21, to compete with Bombardier and Embraer. The
plane has been a bust. It was launched far behind schedule, and only
one airline currently has it in its fleet. Industry experts tell me
that the plane is extremely loud, and so passengers are given earplugs.
Individual aircraft are often grounded for maintenance. China has a
somewhat more promising narrow-body larger aircraft, the C919, in
development. Aimed to compete against Boeing's 737 and the Airbus A320,
the C919 is technically an improvement over the ARJ21, but almost all
of the critical technologies on the plane, from the avionics to the
engines, are from the United States and Europe. Moreover, the plane is
far behind schedule, and even once the plane can go into commercial
operation, it will take a long time for the Chinese to be able to fully
service an entire fleet. China also has a wide-body aircraft on the
drawing board, the CR929, but this plane is really just notional, and
there is a large chance it will never actually be developed. Wide-body
aircraft are far more complicated than single-aisle planes, and the
market is already well developed. Moreover, by the time the CR929 might
be ready, the entire commercial aircraft industry may have moved on to
new technologies and business models. In short, particularly compared
to other sectors, it feels as if in commercial aircraft, the Chinese
are far behind and not making up ground quickly.
Why? To some extent, it is because of the inherent difficulty of
the industry. Planes have hundreds of thousands of parts, and they have
to work together seamlessly and perfectly on every flight--in the air,
with no tolerance for mistakes. Moreover, fleets have to be serviced on
an ongoing basis at amazingly high standards. But China has tackled
other high-tech challenges of this complexity. What matters here is the
weaknesses of the company China has assigned with this task, the
Commercial Aircraft Corporation of China (COMAC). COMAC is a subsidiary
of the Aviation Industry Corporation of China (AVIC), which is
primarily a defense contractor. AVIC and its subsidiaries work in a
very closed environment with little international engagement and few
market signals. Like its parent, COMAC is hierarchical and internally
organized in a way to inhibit information sharing and learning. COMAC
has hired a couple hundred international experts from leading companies
and regulators, but they have little voice in company management and
decisions. As a result, China's prospects in commercial aircraft are
particularly dim. Eventually the C919 will likely be launched, and
China can require its domestic airlines to put the C919 into service,
and this will provide a chance for learning and improvement. But it is
just as likely that the C919 will run into substantial problems and be
a highly costly flop. \10\
---------------------------------------------------------------------------
\10\ Amanda Lee, ``China's Aviation Industry Has a Steep Climb to
`Made in China 2025' Goals'', South China Morning Post, October 29,
2018, https://www.scmp.com/business/article/2170746/chinas-aviation-
industry-has-steep-climb-made-china-2025-goals; David Fickling, ``China
Inc.'s Boeing Rival Just Won't Fly'', Washington Post, March 21, 2019,
https://www.washingtonpost.com/business/china-incs-boeing-rival-just-
wont-fly/2019/03/21/565b9bf6-4bad-11e9-8cfc-2c5d0999c21e-
story.html?utm-term=.91e7db913869.
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There are a variety of high-tech industries that have similar
prospects in China. The other most obvious one is semiconductors. There
has been progress in some segments of the industry, but failure is far
more common than success, and China shows little likelihood of
achieving leadership in the industry any time soon. \11\
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\11\ James A. Lewis, ``Learning the Superior Techniques of the
Barbarians: China's Pursuit of Semiconductor Independence'' (Center for
Strategic and International Studies, January 2019), https://csis-
prod.s3.amazonaws.com/s3fs-public/publication/190115-Lewis-
Semiconductor-v6.pdf.
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Given this variation, it is inappropriate to see China as a high-
tech superpower, but rather as an aggressive competitor with both
sizeable strengths and substantial deficiencies. Hence, it does not
make sense to be either overly alarmist or comfortably dismissive of
China's high-tech ambitions. The truth is somewhere in the middle, and
it requires taking an empirical approach and examining industries one-
by-one.
American Policy
In a narrow sense, current American policy appears to overestimate
China's high-tech prowess, but it probably makes sense to err on the
side of caution and prepare for a China that once again defies
expectations to overcome many of the challenges described above. That
said, the Trump administration's approach to responding to China's
high-tech challenge is overly focused on a single approach: pressure.
This stance is understandable given China's highly aggressive approach
that threatens the health of individual companies as well as entire
industry supply chains and business models. Under Xi Jinping China has
made some modest adjustments to market access in some industries, for
example, gradually reducing joint-venture requirements for automobiles
and liberalizing access to its financial markets, but the overall
trajectory is one of greater control and discrimination against foreign
industry.
The United States is utilizing several tactics to put an immense
amount of pressure on China and try to leave it isolated. The first is
raising tariffs across a wide range of industries in order to hurt the
economy's growth prospects. The U.S. has raised tariffs on three
separate occasions, with tariffs of 25 percent now covering half of
America's imports. The U.S. is now poised to place tariffs on the
remainder of China's exports to the United States. The second component
of this pressure strategy is to more directly deny China access to
American technology and markets. The U.S. passed reforms in 2018 to our
laws related to foreign investment and export controls, and these
efforts are largely driven by concerns about China. The Committee for
Foreign Investment in the United States (CFIUS) is expanding the range
of industries and lowering the scale of investment that triggers a
national security review. The Commerce Department is developing broader
rules to limit exports of foundational and emerging technologies. These
restrictions will include both physical technologies as well as
individual human talent, what is called ``deemed exports.'' Finally,
the U.S. has modestly adjusted its visa policies, making it harder for
Chinese graduate students in the sciences and engineering to gain
access to American universities, and also limiting people-to-people
exchanges amongst working scientists and other experts. Overall numbers
of students and professionals engaging in travel has not fallen much,
but the marginal effect has been quite noticeable.
This pressure approach has in the last few months been turned on
specific Chinese companies, the most important of which is Huawei.
Huawei is by far China's most successful company, but it is still
highly dependent on suppliers from the United States and elsewhere for
many of its components. In August 2018 and January 2019 the Trump
administration issued two indictments against Huawei for violating
sanctions against Iran and stealing American IP. In mid-May 2019 the
Administration issued an Executive Order banning any American entity
from purchasing Huawei equipment (an expansion of the late-2018 step to
ban purchases by U.S. Government entities). At the same time it also
placed Huawei on an ``Entity List,'' denying it access to American-
based components. \12\
---------------------------------------------------------------------------
\12\ The White House, ``Executive Order on Securing the
Information and Communications Technology and Services Supply Chain'',
May 15, 2019, https://www.whitehouse.gov/presidential-actions/
executive-order-securing-information-communications-technology-
services-supply-chain/; ``Addition of Entities to the Entity List,''
Federal Register, May 21, 2019, https://www.federalregister.gov/
documents/2019/05/21/2019-10616/addition-of-entities-to-the-entity-
list; and U.S. Department of Commerce Bureau of Industry and Security,
Supplement No. 4 to Part 744--Entity List, https://www.bis.doc.gov/
index.php/documents/regulations-docs/2326-supplement-no-4-to-part-744-
entity-list-4/file.
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It is understandable for the United States to have lost patience
with China and utilize pressure as a way to force China to the
negotiating table as well as simply better protect American technology
central to our national security. In fact, I grudgingly supported the
Administration's use of tariffs to capture China's attention and let it
know that the United States was willing to use its power to protect its
national interests and accelerate negotiations that would result in
China putting substantial constraints on its industrial policies to
reduce the damage caused to individual companies, entire industries,
and our national security.
However, this approach has now gone too far and is in danger of
backfiring to the detriment of the American economy, U.S. national
security, and the global economy. Trade tariffs have already created a
great deal of ``collateral damage,'' including a large number of
American farmers and companies who have lost export markets, and
American consumers who are paying higher prices for goods. If the
tariffs on all Chinese goods go into effect, it may be the highest
increase in taxes on Americans since the early 1990s. Import tariffs
are also highly regressive, disproportionately affecting low-income
populations. But as long as there was a chance China could be brought
to the negotiating table to reach a good deal, these costs may have
been worth the risk. But the line between risky and a huge mistake was
crossed when the U.S. placed Huawei on the ``Entities List.'' Huawei is
no saint of a company, and the U.S. intelligence community has signaled
reasonable alarm about the threat of having Huawei's 5G technology in
American networks and those of our allies. But the Entity List order
was drafted far too broadly. It is costing American companies billions
of dollars in business in nonsensitive areas such as consumer
electronics. Equally important, the networks which are run on Huawei
equipment are likely to become increasingly degraded and unstable in a
matter of months if not weeks. Huawei operates in 170 countries, with
networks for mobile communications, health care, finance, and other
industries.
The U.S. does not so much as need to put aside an approach of
pressure so much as dial it back modestly and complement it with two
other initiatives. The first would be to reduce tensions with other
countries who face the exact same challenges as the United States in
China. Our allies in Europe, Asia, and Latin America face the same
problems with IP theft and discriminatory policies from China. Instead
of closely working together, the Trump administration has threatened or
used tariffs against many of them. The global economy's largest
challenge is from China, not everyone that has a trade surplus with the
United States. Greater coordination, formally and informally, would
make the choice for China far much clearer; the chances of it agreeing
to serious reforms and engaging less in IP theft and other harmful
practices would increase.
Finally, the U.S. needs to strengthen its own ecosystem for
advanced technologies. Not only does the United States need to invest
more in R&D for basic sciences and applied technologies, there needs to
be greater investment in all levels of STEM education and physical
infrastructure. Equally important, in some instances the United States
Federal and local governments need to do more to spur demand for
leading technologies. In some sectors, American experts have created
new technologies only to find limited market interest at home. As a
result, some of them are lured to sell their technologies to Chinese
investors, who have a market ready to scale-up these ideas. Electric-
car battery technology is an excellent example. The Department of
Energy's ARPA-E Program has supported such research, but some of the
successful results have been sold to or commercialized in China, not
the United States. This trajectory needs to be changed, not by
mandating where technology can be used, but by creating commercial
incentives for them in the United States. In 2018, China's electric car
market was over 1.2 million vehicles; the American market was one-fifth
the size, and the gap will likely be larger in 2019 and beyond--unless
the U.S. Government helps modify incentives for both auto producers and
consumers.
I am not calling for an all-out industrial policy. As Congressman
Rick Larsen (D-WA) recently declared, ``The United States does not need
to `out-China' China; it needs to `out-U.S.' the U.S.'' That said, if
done carefully and humbly, the U.S. Government can promote new
technologies with limited Government resources in a market-friendly
way. And a more successful American high-tech sector is the best
bulwark against the challenge from China.
______
PREPARED STATEMENT OF RICHARD NEPHEW
Former Principal Deputy Coordinator for Sanctions Policy, Department of
State
June 4, 2019
Thank you, Chairman Crapo, Ranking Member Brown, and other
distinguished Members of this Committee for inviting me to speak here
today. It is a privilege to offer my thoughts with respect to an issue
that is so important to the United States, namely the use of U.S.
sanctions policy to address the problem of fentanyl abuse in the United
States and how those sanctions might affect U.S. relations with China.
The scope of the Committee's inquiry today is much broader than the
Fentanyl Sanctions Act (FSA) or, for that matter, the use of sanctions
in general in addressing policy differences with the People's Republic
of China. But, it may be an important part of this larger whole and I
appreciate the opportunity to discuss these issues with you today. I am
also honored to join my fellow panelists here today who have long
experience in issues germane to this Committee's consideration.
I'm particularly grateful that the Committee has decided to study
and debate the issue of fentanyl sanctions rather than leap immediately
into the business of applying sanctions against entities in China or,
for that matter, any other country in which there are entities involved
in fentanyl trafficking. I think the decision to explore sanctions as a
possible means of securing additional leverage to manage the supply of
fentanyl to the United States--and sanctions' active use in other
foreign policy contexts with China--is fitting given the established
utility of sanctions in managing other policy problems. However, as I
have written about extensively since I left Government in 2015,
sanctions should neither be the only nor the dominant tool in managing
every foreign policy problem. There are real dangers in the overuse of
sanctions and in the reduction of U.S. policy interests with key
countries--China foremost among them--to a sanctions management
exercise.
That concern notwithstanding, I do think that the Fentanyl
Sanctions Act is an appropriate step forward in the redress of our
concerns with China in this regard. It has sound, clearly articulated
objectives. It offers a flexible approach that provides substantial
discretion to the Executive Branch. It provides for proportional and
limited sanctions, and in a manner that is distinct from the existing
sanctions structure, including the Kingpin Act. It can facilitate a
diplomatic approach, especially in that it is not limited solely to
China as a target. And, it is complemented by other steps--including
the creation of a commission, establishment of an intelligence program
dedicated to the problem, and the provision of funding--that can help
to create a ``whole of Government'' approach to the problem.
In this written testimony, I will outline further the key tests for
the development of a sanctions campaign that I believe the FSA passes
as well as some legitimate concerns and challenges that exist for its
successful use and placement within the broader range of U.S.-China
relations.
Sanctions Tests
The FSA passes several tests for what I deem necessary in the
development of a sanctions program. I should emphasize that my
assessment is as a matter of sanctions design and implementation. I am
not an expert in synthetic opioids or their trafficking, about which I
would defer to others. I have found the community writing about this
problem to be insightful and want to acknowledge, in particular, the
writings of Liana Rosen and Susan Lawrence of the Congressional
Research Service, \1\ J. Stephen Morrison and Emily Foecke Munden of
CSIS, \2\ and Vanda Felbab-Brown of Brookings \3\ \4\. Of course, the
conclusions I reach regarding FSA are my own.
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\1\ https://fas.org/sgp/crs/row/IF10890.pdf
\2\ https://www.csis.org/analysis/fentanyl-opens-grave-new-health-
security-threat-synthetic-opioids
\3\ https://www.brookings.edu/blog/order-from-chaos/2018/04/30/
how-synthetic-opioids-can-radically-change-global-illegal-drug-markets-
and-foreign-policy/
\4\ https://www.brookings.edu/wp-content/uploads/2019/03/
FP_20190322_mexico_crime-2.pdf
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First and foremost, the FSA has a specific objective in mind that
it states clearly in Section 2's findings on the scourge of synthetic
opioid use in the United States. In paragraph two, FSA states that
``the objective of preventing the proliferation of synthetic opioids
though [sic] existing multilateral and bilateral initiatives requires
additional efforts to deny illicit actors the financial means to
sustain their markets and distribution networks.'' In paragraphs 5-7,
the FSA acknowledges the ``important strides'' made by the United
States, China, Mexico, and Canada in combating the illicit flow of
opioids but also that these efforts have been insufficient. It
concludes with a call for ``precision economic and financial sanctions
policy tools'' to complement these efforts as well as other sanctions
tools presently on the books.
By establishing a clear predicate as well as a sense of purpose,
the text of the FSA offers a rationale for sanctions as well as their
limited use. Sanctions provided in the FSA are, by extrapolation, not
intended to address non-opioid foreign policy problems nor are they
intended to be used in the pursuit of broader political, economic, or
social interests with respect to China, Mexico, or any other country
for that matter. As a consequence, were the FSA to pass and become law,
the United States would be able to offer exceptionally clear guidance
as to why sanctions may become necessary, their rationale and their
purpose.
Second, the FSA is also clear in identifying the targets of the
sanctions--the companies, financial institutions, other entities, and
individuals involved in illicit trafficking of synthetic opioids--and
the steps that the Governments responsible for those companies can take
to avoid the imposition of sanctions. In this way, the Act would grant
substantial flexibility to the Executive Branch to undertake a
diplomatic campaign that is both multilateral in scope (the U.N., G7
and other bodies are explicitly identified) as well as bilateral. The
Act's explicit authorization of a broad, 12-month waiver of sanctions
with respect to financial institutions in countries identified as
closely cooperating with multilateral efforts to prevent trafficking is
valuable, as is the ability of the Executive Branch to invoke U.S.
national security, humanitarian or U.S. pharmaceutical needs in order
to waive sanctions. This waiver is proportional and useful for
sanctions implementation purpose, especially as it serves to
incentivize cooperation at the highest multinational level. A similar
waiver for companies--in addition to financial institutions--that are
operating in closely cooperating countries would also be useful and
would help harmonize implementation.
Third, the FSA permits the Executive Branch to decide which
sanctions would be most appropriate in which contexts rather than be
limited to a specific, prechosen menu. This may allow the President to
decide to tailor implementation to be comparatively lighter--as part of
an inducement for cooperation--or comparatively harsher, in egregious
cases. Either way, taken in combination with the waivers, the Executive
Branch will be able to ensure that the use of sanctions matches the
policy objective of preventing the trade rather than seeking punishment
for punishment's sake.
I should note in this context the important role that the Kingpin
Act can play in managing this crisis but also the distinction that I
see between it and the FSA. The Kingpin Act is a very aggressive
sanctions tool in that its one penalty is the blocking of assets and
thereby the complete denial of economic access to the United States of
any entity or individual designated under it. For many narcotics
traffickers, this may be an entirely appropriate tool: many such
individuals or entities are involved in widespread narcotics
trafficking and may be unlikely to moderate their behavior if presented
with a more modest sanctions threat. Moreover, the method of removing
sanctions is likewise stark: designations can be rescinded but,
otherwise, sanctions imposed are usually sanctions that remain.
Licenses can be granted to facilitate any necessary transactions but,
otherwise, the application of the Kingpin Act is blanket and
comprehensive in its effect.
The FSA, by contrast, is a far more flexible tool in both the
sanctions that can be applied and in their method of relief. As noted,
the FSA offers many different paths for sanctions to be set aside,
including for countries that demonstrate a serious and dedicated effort
to address our fundamental concerns regarding the behavior of their
entities. Additionally, though a formal designation and inclusion on
the U.S. Specially Designated Nationals and Blocked Persons (SDN) list
remains an option for sanctions under the FSA, there are also more
discrete tools that can be employed, including prohibitions on imports,
denial of investment, and sanctions on the principal officers of
companies involved. The FSA, therefore, gives the U.S. Government a
wider, deeper toolbox to apply in addressing this problem that, when
coupled with a diplomatic strategy, may be more effective than simple
reliance on the Kingpin Act. And, of course, Kingpin is not going away:
it can still be used in the most egregious cases as well.
Fourth, and perhaps most important, though there is a heavy
emphasis on China and Mexico in the findings, as well as in the context
of our discussions here today (at least with regard to China), the bill
itself does not focus on those two countries to the exclusion of the
rest of the world. In this way, though China is an obvious country of
attention, the sanctions proposed would have utility in addressing
similar problems that either have or may emerge with other countries.
This is important in the context of potentially changing supply
circumstances, especially if China makes good on its commitments to
reduce the illicit trade in fentanyl. Traffickers may adapt to Chinese
implementation by sourcing their wares elsewhere and, in my research
for this hearing, experts in fentanyl trafficking believe this may soon
occur. The FSA wisely avoids being overly prescriptive in its selection
of targets in this context. Moreover, by not explicitly singling out
China for sanctions, at least some of the diplomatic blow that might
otherwise be felt by the Chinese can be reduced, thereby preserving
space for negotiations on the topic itself.
Last, the bill also provides a path away from sanctions. As noted
previously, the diplomatic route is explicitly marked for countries
that may find themselves the target of these sanctions. Implementation
of the measures outlined in the bill will itself take time, enabling
diplomacy and avoiding the necessity for sanctions enforcement in
theory and, ideally, in practice. In this context, it would be helpful
if the bill included explicit terms for the termination of sanctions
against designated individuals and entities. As written, the bill would
allow for designations to be removed every 180 days, with the
submission of new reports on entities and individuals of concern. This
may be sufficient, but additional flexibility could be useful in a
negotiation. The FSA's invocation of IEEPA sections 203 and 205 (which
include licensing and regulatory authorities) can help address this
need, if amendment of the bill itself is not desirable.
Sanctions in Context
Of course, sanctions should not merely be evaluated on the basis of
their nuts and bolts but also in their proper policy context. A
sanctions bill that is well designed and executed may still not be
desirable, if used in a context that is otherwise disadvantageous to
the United States in some fashion. The question needs to be not whether
``sanctions work'' but rather whether sanctions are the right tool for
the job at hand.
In my view, there are three considerations or challenges that need
to be addressed in deciding whether to proceed with the FSA and the
diplomatic strategy that it would intend to support. (As this hearing
is primarily focused on China and U.S.-China relations, I will
concentrate on this relationship specifically.) The three
considerations and challenges are:
1. How FSA sanctions should be placed in the broader U.S.-China
relationship;
2. How FSA sanctions would be calibrated with other U.S. sanctions
priorities; and,
3. Whether FSA contributes to the problem of sanctions overuse.
Bilateral Relations
One critique of the FSA is that it is adding to an already full
roster of policy priorities with respect to China and that it would be
unwise to create new problems in the relationship. In my opinion, this
would be fair if the FSA was picking up an issue with China that had
either been resolved satisfactorily or was sufficiently distant so as
not to be a source of immediate concern. It would also be fair if the
FSA's sanctions demands were so onerous as to make it practically
impossible for progress to be reached on the broader priority while
sanctions were pending in this area.
In my view, neither of these factors is present today. The FSA is
seeking to address a current problem for the United States that,
according to a variety of sources, is affecting the lives of millions
of Americans. Though I am not an expert in fentanyl, the materials I
consulted prior to this testimony underscore the degree to which
overdoses and the complications that are created in the families and
communities of fentanyl's users are a crucial problem for the United
States. Moreover, this is a problem that has already been the subject
of intense diplomacy between the United States and China and where
progress has been made even in the context of a tense relationship.
Chinese officials are already aware of U.S. concerns in this regard and
have taken steps to address some core U.S. demands, such as scheduling
the various fentanyl analogues that might have similar characteristics.
True, if U.S. sanctions were to be eventually imposed on a variety
of large Chinese financial or pharmaceutical firms, then the FSA could
exacerbate existing tensions and difficulties. However, this is not the
intent of the legislation, as I understand it. The intent is instead to
convince China of U.S. seriousness and to persuade Chinese officials,
as well as the Chinese private sector, to take steps to address U.S.
concerns in this regard and to ensure that Chinese regulations on the
same are fully enforced. In fact, it is arguable that our sanctions
approach is complementary to China's own efforts to crack down on this
trade given recent changes in how China schedules and controls opioids.
It is for this reason that I believe the flexibility and discretion
provided in the FSA is essential, but also why I believe sanctions in
this area can be accommodated with broader U.S. interests in China.
Calibrating With Other Sanctions
A slightly different issue is where the FSA fits in the broader
scheme of U.S. sanctions involving China.
To put things mildly, the sanctions picture with regard to China is
congested. The United States has a wide range of sanctions in place
that affect Chinese interests, significantly so in some cases. A short
list includes:
North Korea sanctions;
Iran sanctions, particularly with respect to oil exports;
Human rights sanctions, including Global Magnitsky
measures;
Technology sanctions, including the newly announced
Executive Order measures against Huawei;
Russia sanctions, particularly with respect to energy trade
and financing;
Nonproliferation sanctions; and,
Syria sanctions.
To put things in some context, there are 152 individuals or
entities identified as being ``Chinese'' for purposes of U.S. sanctions
on the Specially Designated Nationals and Blocked Persons (SDN) list.
There are 174 North Korean entries. Another way of looking at the
issue: in 2018, China was the number one trading partner of the United
States according to the U.S. Census Bureau. \5\ Canada, Mexico, Japan,
and Germany round out the top five. With the exception of Mexico--which
has a very large number of resident narcotics traffickers subject to
U.S. sanctions--U.S. designations of Chinese persons are nearly double
the total number of designations from the rest of the top five. This is
a relatively weak way to assess the volume and impact of U.S. sanctions
decisions, particularly as some measures imposed against China have not
included an SDN designation. But, between the number of programs
touching upon China and the number of explicit designations, the
picture is still one of a country that is subject to a diverse range
and fairly robust scale of U.S. sanctions.
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\5\ https://www.census.gov/foreign-trade/statistics/highlights/
top/top1812yr.html
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The point is simple: for such a significant trading partner of the
United States as well as a significant economy internationally, the
United States has imposed a lot of sanctions against China and
certainly plans to do more. For example, in this context, I take note
of the recent bill introduced by Senators Rubio and Cardin--with a
number of cosponsors--that would threaten sanctions against Chinese
entities for their involvement in China's activities in the South China
Sea. \6\
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\6\ https://www.rubio.senate.gov/public/_cache/files/80e0c63e-
b521-4929-a48c-db042c096d6a/26BE75C8B05BC1ECB3636E0C2AA42902.south-
china-sea.pdf
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I recognize that it is beyond the scope of this hearing to debate
the wisdom of some of the sanctions decisions that we have already made
with respect to Chinese interests or what may be planned (or, indeed,
not planned as the case may be). That said, it is necessary to step
back and consider whether, in the broader sanctions policy context, we
would be over-burdening the sanctions agenda with respect to China if
the FSA were to become law.
As I have written extensively about since I left the U.S.
Government in 2015, there are reasons to be concerned about the use of
sanctions against China in particular (as well as overuse, in general,
as I discuss below) \7\ beyond the overall foreign policy context. For
instance, at the most elementary level, the more the United States
imposes sanctions against China and Chinese entities or individuals
(for whatever reason), the greater the likelihood that China will
itself elect to impose sanctions against U.S. interests. For better or
worse, we have shown China that it is possible to maintain a trading
relationship with a country while still imposing targeted sanctions
against particular entities and individuals located within it. The Iran
case is particularly salient, as the United States has designated
dozens of entities and individuals in countries that range from U.S.
allies like Germany to close partners like Israel and the UAE. China
has applied this lesson itself, though usually involving discrete
issues and obviously smaller economies than the United States, and
using different means (e.g., with respect to the soft sanctions with
respect to South Korea's Lotte Group and Chinese citizen travel to
South Korea after the THAAD deployment in 2016 \8\). Adding more
sanctions to this saturated space will do nothing to convince China
that it should not develop similar capacities and continue to apply its
economic muscle.
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\7\ https://energypolicy.columbia.edu/research/report/future-
economic-sanctions-global-economy
\8\ https://www.reuters.com/article/us-lotte-china-analysis/with-
china-dream-shattered-over-missile-land-deal-lotte-faces-costly-
overhaul-idUSKBN1CT35Y
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The tit-for-tat nature of the trade war may already be reinforcing
this dynamic. A senior academic in China, Associate Dean Jin Canrong of
the School of International Studies at Renmin University, published an
editorial on 15 May that explicitly encourages China to impose specific
sanctions against the United States in response to the tariff decision
made by the President in mid May 2019. \9\ They echo measures
previously employed by China, such as a reduction on the export of rare
earths to the United States, as well as suggest restrictions on U.S.
companies' access to China. Regardless of what happens in trade talks,
the fact that Chinese academics are beginning to discuss more seriously
the idea of sanctions against the United States underscores the degree
to which we ought to be careful when considering measures against China
ourselves.
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\9\ http://www.globaltimes.cn/content/1150061.shtml
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That said, there are sanctions and then there are sanctions. The
measures proposed by the FSA are, as I've noted, proportional, modest
and flexible. They are of a very different character than, for example,
a broad prohibition on the import of Iranian oil or on providing
banking services to Russian oligarchs. The ramifications for China are
different from these types of sanctions than what is envisioned under
the FSA. Moreover, as noted previously, there are enough off-ramps to
sanctions that, if implemented alongside a patient, deliberate, and
concerted diplomatic strategy, the actual imposition of measures can
and should be avoided.
Furthermore, the acknowledgement of other sanctions priorities that
exist should not and need not be an argument against having the ability
to impose measures against illicit traffickers of fentanyl. Instead,
this is a reason for the United States to be more diligent and careful
in its consideration of sanctions priorities more generally. I do
believe that we cannot impose sanctions against Chinese entities on a
constant basis and expect to avoid repercussions that can affect our
broader interests. But, this is as much an argument for not imposing
sanctions in those other areas as it is for denying the development of
sanctions tools to deal with fentanyl; indeed, I could suggest a few
sanctions choices made by this Administration that I would suggest that
they reconsider if needed to provide space for fentanyl-related
measures.
Sanctions Overuse
Beyond China specifically, there is a broader issue about whether
the United States is overusing the tool of sanctions more generally. I
have been outspoken in my concern that we are turning the U.S. economy
into an increasingly difficult operating environment given the
complexity of U.S. compliance demands and the ever-changing nature of
our sanctions policies. A quick count of U.S. sanctions programs
available of OFAC's website underscores how many different sanctions
regimes exist--30 \10\--and this does not include programs administered
by the State or Commerce Departments, much less the requirements of
U.S. export controls. As I wrote with former Secretary Jack Lew in
Foreign Affairs last year, the United States is not in imminent danger
of losing its economic primacy or becoming too difficult to do business
with, but the over-use of sanctions can contribute to the development
of mechanisms that avoid the United States and its rules to the extent
possible. \11\ That is not good for the U.S. economy or the power of
U.S. sanctions.
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\10\ https://www.treasury.gov/resource-center/sanctions/Programs/
Pages/Programs.aspx
\11\ https://www.foreignaffairs.com/articles/world/2018-10-15/use-
and-misuse-economic-statecraft?cid=soc-tw-rdr
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Moreover, this is no mere theory: in the case of Iran sanctions, we
are seeing today a concerted attempt by U.S. allies in Europe to deal
with U.S. sanctions they oppose by setting up structures that seek to
avoid conventional banking methods and thereby dilute the impact of
U.S. secondary sanctions. Regardless of how one feels about this
development (or its likely efficacy), this is a problem if institutions
eventually develop that have this as their central mission. The value
of U.S. sanctions--particularly those involving financial means--is
that it is too hard to avoid U.S. institutions and too profitable to
use them. This is not a static situation and commercial decisions could
be different if the cost/benefit equation were to shift. If other
options exist, then--in time--U.S. sanctions will lose their potency.
It is not in our interest for such instruments to exist or to get
practice in operations.
Notwithstanding this point, the sanctions outlined in the FSA are
unlikely to serve as the trigger for construction of such mechanisms.
As an abstract matter, the FSA will contribute to an unhelpful
trendline by being yet another complication for companies operating in
the United States and with potentially targeted firms. But, the
discrete nature of the sanctions envisioned and, importantly, the
desire to avoid their use by instead prioritizing diplomatic efforts
with China (and others) can help to minimize this danger. There are
sanctions regimes currently in place that will likely prove far more
consequential in steering foreign behavior with respect to sanctions
over-use concerns, not least being U.S. sanctions against Iran. That
said, the broader issue merits study and examination, especially by the
U.S. Congress. I understand there are proposals under consideration by
various members and committees on Capitol Hill that would examine U.S.
sanctions policy writ large and encourage assessment of sanctions' use,
misuse, overuse, and best practices. In my opinion, these proposals
have considerable merit.
Conclusion
Altogether, though I believe that there are legitimate questions of
both efficacy and broader policy focus surrounding the FSA, I believe
that it is a reasonable next step to take in our efforts to redress our
concerns regarding the supply of fentanyl to this country. The
sanctions proposed are proportional, reasonable, subject to executive
discretion, consistent with a diplomatic approach, and manageable in
the overall policy context. In an ideal world, no sanctions measures
included in the FSA would ever need to be used, as their mere existence
would contribute momentum to ongoing diplomatic efforts to confront the
challenge of illicit fentanyl trade. Even if sanctions had to be
imposed, I believe there are mechanisms in the FSA to manage their
deleterious impacts as well as to provide relief in the context of
future diplomatic progress. There are some modest changes to the text
that would be advisable--specifically, with respect to an explicit
termination clause as well as expanding the scope of ``cooperating
country'' waivers to cover companies--but as written, these issues can
be accommodated regardless.
I appreciate the opportunity to speak with you today and to offer
my testimony. I look forward to your questions. Thank you.
RESPONSES TO WRITTEN QUESTIONS OF SENATOR SASSE
FROM KEVIN WOLF
Q.1. The U.S. Government has primarily relied on the Kingpin
Act to combat international drug trafficking but this
legislation is over 19 years old. In your opinion how has the
trafficking business--whether it's fentanyl, heroine, other
hard drugs, or human trafficking--evolved in the last 19 years
and have our authorities been able to keep up with how these
networks operate in practice?
A.1. I am not an expert in such topics, \1\ so I will not
respond because it would not be of use to the Senator. From
what I learned during the hearing, however, I applaud the
Senator's and the Committee's efforts to address aggressively
the topic. There seems to be bipartisan consensus on spending
the time and resources necessary to address the serious issue.
---------------------------------------------------------------------------
\1\ https://www.banking.senate.gov/imo/media/doc/
Wolf%20Testimony%206-4-19.pdf
---------------------------------------------------------------------------
------
RESPONSES TO WRITTEN QUESTIONS OF SENATOR MORAN
FROM KEVIN WOLF
Q.1. This Committee shepherded the passage the Export Control
Reform Act (ECRA), which enjoyed a strong bipartisan consensus
due to its careful approach toward pursuing important U.S.
national security objectives while preserving U.S. leadership
in technological innovation. The Commerce Department is now
leading implementation of export control reforms for emerging
and foundational technologies called for in the legislation.
What steps does the Commerce Department need to take in order
to ensure that new export controls do not undermine the ability
of U.S. companies to innovate and compete on at the frontiers
of technology?
A.1. First, I agree with the characterization of ECRA and its
status. Second, my thoughts on the steps needed to fully
implement the new law are set out in detail in my prepared
remarks. \1\ From the testimony, the following is a summary of
my suggested steps to respond to your question:
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\1\ https://www.banking.senate.gov/imo/media/doc/
Wolf%20Testimony%206-4-19.pdf
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The Committee and HFAC need to engage in regular and
significant oversight of BIS and the other export control
agencies to ensure that ECRA is implemented faithfully and any
new controls are consistent with the requirements and standards
in ECRA. In particular, this Committee and HFAC should ensure
that BIS:
a. Reaches out to all available Government, industry, and
academic resources for information as part of its
technology identification effort;
b. Publishes new controls as proposed rules to get industry
input on their clarity and ECRA consistency before
imposing them as final, except in truly emergency
situations;
c. Not propose unilateral controls on technologies that are
widely available outside the United States;
d. Solicit and take seriously industry input on whether any
proposed new unilateral controls would harm domestic
research into affected technologies;
e. Confirm that any new controls would actually stem their
flow to China and other countries of concern (rather
than merely harming U.S. companies to the benefit of
their foreign competition);
f. Justify why the technology proposed to be controlled is
``essential'' to U.S. national security;
g. Identify what the specific weapons-, military-, or
intelligence-related application the control is
designed to address that is not now being addressed by
a control;
h. Explain the results of BIS's full consideration of the
impact on the U.S. economy that would result from the
unilateral control and BIS's responses to industry
views on the question; and
i. Explain why any new proposed control is of a type that
would be accepted by the multilateral export control
regimes (or why a unilateral control would be justified
and effective).
The Committee and HFAC should ensure that ECRA does not
become a tool of trade policy and the economic impact of any
proposed new controls is fully studied based on Government and
affected industry data. Indeed, ECRA section 4811(1) states
that the United States should ``use export controls only after
full consideration of the impact on the economy of the United
States and only to the extent necessary--(A) to restrict the
export of items which would make a significant contribution to
the military potential of any other country or combination of
countries which would prove detrimental to the national
security of the United States; and (B) to restrict the export
of items if necessary to further significantly the foreign
policy of the United States or to fulfill its declared
international obligations.''
The Committee and HFAC should ensure that any new controls
are as multilateral as possible given that ECRA section 4811(5)
states that ``[e]xport controls should be coordinated with the
multilateral export control regimes. Export controls that are
multilateral are most effective, and should be tailored to
focus on those core technologies and other items that are
capable of being used to pose a serious national security
threat to the United States and its allies.''
The Committee and HFAC should be open to BIS's addressing
concerns regarding China and other countries through controls
on specific end uses and end users rather than only through
lists of controlled technologies.
Because perception can become reality with respect to
economic decisions involving U.S. companies, the Committee and
HFAC should ensure that BIS describe its plans for new China-
specific controls publicly with clarity, certainty, and with as
much ECRA-consistent emphasis on multilateral solutions as
possible. This is vital to reducing uncertainty, and thus
unnecessarily lost business opportunities for U.S. companies
involving benign items, among those who do not follow the
nuances of the EAR, ECRA, and the regulatory process.
This Committee and HFAC should do what they can to provide
the Bureau of Industry and Security and the other export
control agencies substantially more financial and other support
for it to do its work. As described in my testimony, the issues
are far more complex than they ever have been and more people
are needed to fully implement ECRA.
------
RESPONSES TO WRITTEN QUESTIONS OF
SENATOR MENENDEZ FROM KEVIN WOLF
Q.1. One of the provisions that I authored in FIRRMA requires
CFIUS to develop regulations to ensure that State-owned
entities are declaring their transactions with CFIUS and not
using complex financial structures to conceal their ownership
or evade CFIUS review. We saw this situation at work in
December, when the Wall Street Journal reported that a firm
owned by China's Ministry of Finance was able to use offshore
subsidiaries to purchase a U.S. satellite firm and was thereby
allegedly able to access information that may be restricted
under U.S. export controls.
What is your assessment of CFIUS's ability to evaluate the
extent of foreign Government control or influence over foreign
firms seeking to invest in the U.S.?
A.1. They are good. The relevant regulations impose significant
disclosure requirements regarding direct and indirect owners of
the parties to the transactions. CFIUS staff routinely go back
to the parties to ask for more such information and detail.
More importantly, from my experience on CFIUS, the Intelligence
Community performs a robust review of the parties to the
transaction in order to spot red flags regarding other parties
that might have the ability to influence the activities of the
target U.S. business contrary to national security interests.
In my 7 years as a representative to CFIUS, I do not believe
that we lacked sufficient information in reviewing a
transaction to determine whether there was an unresolved
national security concern associated with an indirect owner.
The real issue, in my view, is resources, particularly
since such issues are becoming far more complicated. The
statute and the regulations are sufficient to require the
collection and review of such information. Although I have been
out of Government for over 2 years, my sense is that, with the
change in investment strategies that have been much discussed,
there needs to be more CFIUS staff dedicated to researching and
reviewing complex ownership structures of notified and non-
notified transactions. My sense is that the Intelligence
Community risk assessments could be improved with more IC
analysts--particularly those who are fluent in Chinese--to
review SIGINT and public information to provide even more
refined assessments of when indirect ownership or controls
could create concerns.
With respect to the satellite-specific aspect of the
question, I refer the Senator and his staff to Senator Bennet's
amendment to the NDAA that is now section 6207 (Report on
Export of Certain Satellites to Entities With Certain
Beneficial Ownership Structures) of S. 1790. I believe that it
would address many of the issues motivating the question. I
personally would endorse the addition of resource (as suggested
in section 6207(c)(6)) to the Bureau of Industry and Security
so that it can better study such ownership issues during the
license application process.
With respect to other space-related technology transfer
issues pertaining to China, please see my testimony at: https:/
/www.uscc.gov/sites/default/files/Kevin%20Wolf%20USCC%2025
%20April.pdf.
Q.2. Are there additional disclosure requirements--on
beneficial ownership, for example--that are necessary for
Chinese entities that want to invest in the U.S. or access our
financial markets?
A.2. I am not an expert \1\ on the existing disclosure
requirements with respect to access to financial markets, so I
will pass on responding to this question in detail. From the
congressional commentary and media coverage, however, it
appears to clearly be an area worthy of study. I agree with the
general theme from the hearing that the U.S. financial system
should not have built-in incentives for U.S. investors--
deliberately or subconsciously--to make decisions or take
actions that would be in their financial interests but would
simultaneously be contrary to our national security interests.
---------------------------------------------------------------------------
\1\ https://www.banking.senate.gov/imo/media/doc/
Wolf%20Testimony%206-4-19.pdf
Q.3. More broadly, how should we think about how to best
compete with Chinese State-owned enterprises that often make
decisions based on strategic or political considerations as
---------------------------------------------------------------------------
opposed to market forces?
A.3. At the macro and extremely general level, we do not want
to move in the direction of becoming a State-planned economy
outside the global dispute resolution systems similar to the
Chinese economy in order to compete with China. I understand
the temptation to do so because it is difficult to fight unfair
trade and economic behavior with principled and fair economic
behavior. Although I am not an economist, my instincts and
experience tell me that the way for the United States to
prevail economically is to not try to pick winners and losers
in the U.S. economy, particularly through protectionist
measures that are inconsistent with the world trading system
that the U.S. helped build after World War II and that has, in
the main, served us and the world well ever since. This system
already contains a suite of well-tested tools, such as those
designed to address dumping, State-subsidies, and intellectual
property theft. Of course, none is perfect, but working within
the existing system is better than the alternative.
One of the Government's other roles in responding to this
issue is to support in every way possible domestic innovation,
fundamental research, and creativity in an open, low regulatory
burden capitalist economy so that U.S. companies and research
institutions have the opportunity to out-innovate their foreign
competition, particularly in high-value services and technology
sectors that are needed to support and drive much of the rest
of the economy.
Another of the Government's roles in this topic must be to
work with our allies, each of which face similar issues with
respect to China. No one country's actions alone can respond to
the Chinese policies and practices that are motivating the
question. For example, if the U.S. and most of the non-China
Pacific Nations were to align together in a trade partnership
to reduce barriers to trade among such countries, they could
act collectively to respond to unfair Chinese trade practices
far more effectively--while at the same time benefiting U.S.
companies and advancing U.S. environmental and labor standards.
(This is why I believe the U.S. withdrawal from even a TPP--
modified to address various labor, human rights, and
environmental issues--was a mistake on a variety of levels.)
At the individual transaction level, one of CFIUS's
important roles is to evaluate foreign direct investments to
ensure that there is a legitimate economic reason for the
investment. If the investment is (or appears to be) motivated
for foreign policy reasons of a foreign country (rather than
expected economic gain for the parties), then CFIUS should
aggressively mitigate the transaction or recommend a block.
From my experience on CFIUS, we would periodically see
transactions that were ``too good to be true,'' suggesting that
there was another motive. This is why I was pleased to see the
additional authority FIRRMA gave to CFIUS to require mandatory
filings of investments by foreign Governments or by those for
which a foreign Government had a substantial interest. I look
forward to reading (and potentially commenting on) the proposed
implementing regulations CFIUS will publish this fall to
addresses the concern motivating the question.
On the technology transfer side, the export control rules
and interagency review process are designed to identify
proposed exports that may be motivated for reasons that are not
exclusively economic in their motivation. That is, if based on
the license application and the follow-on questions, it appears
that the proposed export to China would not be in connection
with a purely civil end use and end user that was motivated by
economic considerations, then Commerce has denied and should
continue denying such applications.
Q.4. Are there particular sectors of regions, like Latin
America, where we need to be smarter and more agile in
responding to and getting ahead of this challenge?
A.4. The Intelligence Community is the one to answer such
questions. In my experience in Government, however, the primary
source of investments (or proposed exports) that did not appear
to be based on clearly economic motives was China. Most such
transactions were motivated for financial reasons, but there
were certainly cases where there was an apparent Chinese
foreign policy or other noneconomic motive behind the
investment.
Q.5. What is your assessment of the risk posed by the current
treatment of Hong Kong as a separate and favorable customs
entity for the export of dual-use and other sensitive U.S.
technologies which can then be reexported to the PRC? Given the
continued erosion of Hong Kong's autonomy and Beijing's ever-
greater control, has the time come to treat Hong Kong and the
mainland the same for purposes of these sensitive technology
exports under U.S. law?
A.5. I do not know. The United States-Hong Kong Policy Act of
1992 effectively requires the U.S. Government to treat Hong
Kong and mainland China as two separate destinations for export
control purposes. In addition, section 103(8) of the Act states
that the ``United States should continue to support access by
Hong Kong to sensitive technologies controlled under [the then
existing multilateral export control regime that is the
predecessor to the Wassenaar Arrangement] for so long as the
United States is satisfied that such technologies are protected
from improper use or export.'' Because the United States has
not made a determination to the contrary, the statutory and
regulatory prohibitions pertaining to the export and reexport
of space-related (and other controlled) items subject to U.S.
jurisdiction that are applicable to mainland China do not apply
if the destination is Hong Kong. The export control
regulations, however, still require licenses to export and
reexport space-related and other controlled items to Hong Kong.
Applications for such exports and reexports are reviewed by
U.S. Government export control authorities to determine, for
example, whether Hong Kong is indeed the ultimate destination
and whether the export or reexport otherwise presents any
national security or foreign policy concerns.
Before the hearing, I was asked to comment on whether
items, particularly space-related items, subject to U.S. export
controls are being illegally exported out of Hong Kong to China
or other countries of concern. I left the Government on January
20, 2017, and thus no longer have access to such information,
whether positive or negative. I can, however, say that on
January 19, 2017, a rule that I signed expressing concerns
about the issue remains in effect. The rule imposes additional
support document requirements on exports and reexports to Hong
Kong. In essence, the rule leveraged the EAR to effectively
compel compliance with Hong Kong export and import permit
requirements by requiring proof of compliance with Hong Kong
law as a support document necessary for shipping under an EAR
license or license exception. As stated in the preamble, BIS
took ``this action to provide greater assurance that U.S.-
origin items that are subject to multilateral control regimes .
. . will be properly authorized by the United States to the
final destination [such as Mainland China], even when those
items first pass through Hong Kong.'' My thought at the time
was that if we had regular, robust assurances and intelligence
that diversions of U.S.-origin items were not occurring, then
the additional requirements would remain in effect as is or be
removed. If not, then the stricter licensing policies,
including policies of presumptive denials, would need to be
imposed. I would encourage you to ask this question of current
BIS officials. In addition, I would encourage you to ask
current BIS officials whether there is an advantage in treating
Hong Kong differently, notwithstanding the issues referenced in
the question, because it allows for more access to information
and cooperation on nonproliferation objectives than would
otherwise be the case.
Q.6. I was shocked when the Administration rolled back
penalties for ZTE last year in the rush to get a trade deal.
And I'm still concerned with the President's recent comments
suggesting that loosening restrictions on Huawei could again be
part of some transactional give-and-take in the broader trade
dispute. Do you believe the Administration's approach with
respect to ZTE and Huawei will achieve our goals of protecting
our national security and communications infrastructure?
A.6. As the former Assistant Secretary who was responsible for
the use of the Entity List for 7 years and who also was the one
who helped shepherd the interagency effort to add ZTE to the
Entity List, I have thought a lot about this question and the
proper use of the list. It is a valuable tool for advancing our
national security and foreign policy interests, but it must be
used carefully in order to not provoke responses that are more
harmful than helpful to the same interests. Putting all my
thoughts on the topic in writing would be a significant effort,
however. One day I will. In the meantime, Members of the
Committee or any of its staff should feel free to call me to
come up to the Hill discuss the topic. Without advocating for
or against any particular listing, I would be happy to discuss
what the tool is and is not, its history, its effect, and how I
think it should best be used. \2\ As part of the Committee's
oversight responsibilities, it should have such background
given the prominence the Entity List is taking in export
control, law enforcement, and bilateral activities. A lot of
nuance and detail is lost in the current discussions, which is
understandable because it has historically been a rather
esoteric tool known generally only to trade practitioners and
those affected by a listing.
---------------------------------------------------------------------------
\2\ Eric Hirschhorn, my former boss and the former Under Secretary
for Industry and Security has also thought a lot about such issues and
I would encourage the Committee to reach out to him as well.
---------------------------------------------------------------------------
For example, the President's ZTE-related tweet was actually
with respect to a Denial Order imposed after I left Government
service rather than the Entity List action I was involved in.
The two tools are substantially similar (and limited only to
the export, reexport, or transfer of items ``subject to the
Export Administration Regulations''), but a denial order is the
result of a civil or a criminal enforcement settlement. The
Entity List tool is generally used before a civil or criminal
investigation and, as was the case with ZTE, can be useful as
leverage in addressing the national security or foreign policy
concerns that would later be addressed through law enforcement
efforts.
In any event, I agree with the premise of the question,
which is that the Entity List should never be used as a tool of
trade policy or as a negotiating chip for anything other than
achieving actual national security (as opposed to economic or
political) or foreign policy objectives. It devalues both and
could lead to the tool's becoming less effective if foreign
companies and Governments see it, in reality or perception, as
a transactional or political tool to be negotiated against on
issues unrelated to the bad acts that caused the foreign entity
to be added to the list. Successive Administrations have
forcefully (and truthfully) emphasized to foreign Governments
and foreign companies that U.S. export controls in general, and
the Entity List in particular, were not used for political or
economic purposes. (Indeed, this is why we published ZTE's
internal documents describing its plans to violate U.S. law
when we added ZTE to the Entity List in March 2016. We wanted
the company and the Chinese Government to see that our actions
were motivated exclusively by national security and law
enforcement concerns, rather than political objectives.)
With respect to the Huawei matter, it is hard for me to
answer the question because neither I nor anyone I know knows
(or can say) what the Administration's objective is with
respect to the listing. That is part of the problem. I've read
the transcript of the President's press conference, heard the
speeches by Commerce officials, and have read the press reports
of the topic. From the outside, I cannot tell whether (i) the
Administration plans to forever list Huawei as part of an
effort to significantly harm the company financially for
broader ``disentangling'' objectives, (ii) trade away the
listing for more agricultural purchases from China, (iii) focus
the effort on Huawei's 5G capabilities, or (iv) remove Huawei
from the list once it can confirm that it is no longer engaged
in the sanctions-related activities the notice stated was the
basis for the listing. Given that I am no longer in the
Government and know that most information on such issues cannot
be made public, I am willing to give the Administration the
benefit of the doubt that there is a plan that will achieve its
national security objectives without unnecessarily harming U.S.
industry, such as through the issuance of some types of
licenses. By the way, the issues involving the Huawei are
indeed extremely serious and I am not in any way challenging
the Administration's desire to take action against it. Rather,
I am merely puzzled by the process to achieve the goal.
Even if, however, there is a clear, interagency-cleared and
agreed-upon plan on how to handle the matter, the perception of
unrelated Chinese companies, based on their comments to the
U.S. companies I work with, is that the Entity List has become
a political and a trade policy tool. This view, whether
justified or not, and the resulting general uncertainty are
motivating Chinese buyers of benign, commercial U.S.-origin
items to begin dual-sourcing with non-U.S. alternate suppliers
or moving away from U.S. sellers completely. This, of course,
harms U.S. companies economically, helps their foreign
competition, and has no impact on the Chinese economy. Without
the income from sales of benign commercial items to Huawei and
other Chinese companies, U.S. companies have less to invest in
R&D, which reduces their ability to advance their technologies
to stay competitive. This ultimately harms the U.S. defense
industrial base and our national security because the Defense
Department depends upon advances in the commercial technologies
generated by such R&D to be able to acquire more advanced
items, particularly in the microelectronics sector, and at low
per-unit costs.
To avoid such responses or beliefs from developing when I
was the Assistant Secretary, I tried to ensure that the
addition of an entity to the list was a means to an end rather
than an end in itself. Being added to the list is not imposing
denial order. It is not settling a civil or a criminal
enforcement action. It is not a sanction imposed by the
Treasury Department, which is much broader in scope than the
Entity List prohibitions. Rather, the addition uses the EAR's
leverage over exports, reexports, and transfers of items
subject to the regulations to motivate foreign parties to stop
engaging in the acts contrary to foreign policy and national
security interests that led to the listing. Historically, once
(and if) the listed foreign party could confirm with confidence
that it has stopped engaging in the bad act that led to the
listing, then BIS would remove it from the list. If it could
not, then it would stay on the list. Without such a possibility
being understood, then its effectiveness as a tool of leverage
is lost.
Finally, the Entity List tool is, as is the whole EAR,
focused on the export, reexport, and transfer of commodities,
software, and technology ``subject to the Export Administration
Regulations.'' Such items are primarily U.S.-origin items and
all items that are in the United States. A small number of
foreign-made items outside the United States are ``subject to
the EAR'' if they contain specific amounts of U.S.-origin
content controlled for national security reasons. (The exact
rule is more complicated and can be found in EAR Part 734.)
Contrary to many media reports, the list does not prohibit U.S.
companies from shipping to listed entities from outside the
United States foreign-made items that are not subject to the
EAR. Unlike Treasury's sanctions (which are vastly broader in
scope), the EAR's Entity List prohibitions are not based on the
nationality or ownership of the shipper, only the nature of the
underlying item being shipped. My point in listing these
differences is that such limitations should be understood
before deciding to use the list to take action against a
foreign company. That is, if the entity does not need a
significant amount of U.S.-origin items, for example, to
function, then the listing will not be that effective and other
regulatory tools need to be considered.
Another implication of the Entity List's structure is that
it is not a tool that can be used to control the import into
the United States of Chinese-made or equipment into the United
States, such as with respect to that which would be used in the
5G infrastructure. President Trump has recently issued a supply
chain-related Executive Order that requires BIS to publish
regulations implementing inbound and other transaction controls
related to information and communications technology. \3\ I
understand that BIS will be publishing regulations on this
topic this summer or fall. This Committee will want to study
such regulations to see how well or not they address some of
the concerns implicit in the question.
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\3\ https://www.akingump.com/en/news-insights/international-trade-
alert-executive-order-and-huawei-entity.html
Q.7. I have made the point to the Administration that if we are
going to compete with Huawei on 5G architecture it's not enough
to confront China on predatory economic practices or security
risk--both of which are real--but that we must also be at the
forefront of constructing public-private partnerships, with our
allies and partners, to assure that there is an alternative
architecture--economically viable, secure, and with appropriate
privacy safeguards. What is your assessment of this sort of
---------------------------------------------------------------------------
approach?
A.7. Absolutely. As mentioned above, multilateral cooperation
with common objectives with respect to China is vital to the
success of any such plan. Industry must be involved in the
solution. And the imposition of export controls, sanctions, and
tariffs can only be one part of what must be a broader whole-
of-Government effort to address the issues in the question. Let
me know how I can help.
Q.8. Are there particular sectors--AI, machine learning,
genomics, biometrics, quantum computing--where you see
particular U.S. vulnerabilities? How do we best safeguard our
edge in those areas?
A.8. The regulations are already quite broad and capture any
type of commodity of any sensitivity and all stages of its
development that is in any way specially designed for military
applications, and the technologies and software related to
them. There also has been a robust interagency and
international process for decades to identify commercial items
that have proliferation-related or significant military
applications. Thus, I do not know the delta between what is not
now controlled and what should be. I do, however, have complete
confidence in the process and standards for what should be
controlled that are set out in the Export Control Reform Act.
My prepared remarks set out the standards and my views on the
topic in detail. \4\ The technologies in the question are all
certainly worthy of study to see if there are subsets of such
technologies that meet the ECRA standards for control. From the
outside, it appears as if the Administration has a regular
order process for analyzing such questions. This Committee
should follow that process closely to ensure that it and any
amendments to the EAR that result are consistent with the
standards of ECRA.
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\4\ https://www.banking.senate.gov/imo/media/doc/
Wolf%20Testimony%206-4-19.pdf
---------------------------------------------------------------------------
Identifying emerging and foundational technologies to be
added to control lists is only one part of what is needed to
keep our edge, as noted in the question. The agencies that
administer and study such technologies need significantly more
resources in order to properly conduct an ever-more complicated
task. The enforcement agencies need more resources to
investigate and prosecute violations, which motivates more
internal compliance. The agencies need more resources to
conduct outreach and training so that companies can be on the
front line of compliance.
The other key to keeping the edge is that list-based
controls cannot do it alone. There are many other types of
Government support that are needed. Funding for fundamental
research, for example, is critical to maintaining the edge.
Keeping open markets with allies and others for less sensitive
technologies in a low regulatory burden environment is also key
for the companies that develop such technologies. I'm not an
expert in all the other ways to help. I just want to note that
export controls are only a part of the solution to the issue
identified in the question.
------
RESPONSES TO WRITTEN QUESTIONS OF SENATOR WARREN
FROM KEVIN WOLF
Q.1. What steps should the United States be taking, that it is
currently not taking, to counter the influence of China's Belt
and Road Initiative (BRI) in countries that have a demand for
infrastructure and other public projects, so that those
countries have a viable alternative to surrendering their
strategic infrastructure to China?
A.1. I am an expert in the law, policy, practice, and
administration of export and foreign direct investment controls
to achieve national security and foreign policy objectives. \1\
I am only an amateur in topics involving the best way to
respond to the BRI issues.
---------------------------------------------------------------------------
\1\ https://www.banking.senate.gov/imo/media/doc/
Wolf%20Testimony%206-4-19.pdf
Q.2. Does the successful penetration of China's Belt and Road
Initiative (BRI) into economies in Europe, Latin America, and
Africa increase the likelihood that authoritarianism and
corruption will corrode the political systems of countries in
---------------------------------------------------------------------------
those parts of the world? Please give a brief assessment.
A.2. Again, I'm not an expert in such areas, but my general
sense of the issue is that the answer to your question is
clearly ``yes.''
Q.3. Aside from using tariffs, sanctions, export controls, and
other tools of economic statecraft to punish China for
anticompetitive and coercive economic practices, what domestic
policy tools should the United States be using to strengthen
our competitiveness and reduce wealth inequality here at home--
regarding basic and applied research, public education,
infrastructure, and other investments?
A.3. Again, I'm not an expert outside the export control and
foreign direct investment areas, but I absolutely agree with
the essence of the question, which is that tariffs, sanctions,
and export controls are not the solution to all the problems
before us, particularly those involving China. It is relatively
easy to sanction a company, impose a control over a technology,
or impose a tariff. It is, however, relatively hard to help
U.S. companies, and their employees, ``run faster'' and stay
internationally competitive through the types of investments
identified in the question. A proper answer to the question
would essentially require the preparation of an entire economic
agenda for an Administration. There are others far more
qualified than me to set out such an agenda.
------
RESPONSES TO WRITTEN QUESTIONS OF SENATOR SINEMA
FROM KEVIN WOLF
Q.1. Many experts say a multilateral approach will ultimately
be needed to hold China accountable for its role in the
production and distribution of illicit fentanyl. Do you share
that view?
A.1. I am not an expert in such topics, \1\ so I will not
respond because it would not be of use to the Senator. From
what I learned during the hearing, however, I applaud the
Senator's and the Committee's efforts to address aggressively
the topic. There seems to be bipartisan consensus on spending
the time and resources necessary to address the serious issue.
---------------------------------------------------------------------------
\1\ https://www.banking.senate.gov/imo/media/doc/
Wolf%20Testimony%206-4-19.pdf
Q.2. Do you feel that the Administration's policies and
rhetoric on trade could undermine the necessary goodwill to
work collaboratively with our trading partners to hold China
---------------------------------------------------------------------------
accountable and stop the flow of fentanyl?
A.2. Again, although I am not an expert in the area, as
discussed during the hearing in detail, solutions to such
issues clearly require multilateral cooperation.
------
RESPONSES TO WRITTEN QUESTIONS OF SENATOR SASSE
FROM SCOTT KENNEDY
Q.1. The U.S. Government has primarily relied on the Kingpin
Act to combat international drug trafficking but this
legislation is over 19 years old. In your opinion how has the
trafficking business--whether it's fentanyl, heroine, other
hard drugs, or human trafficking--evolved in the last 19 years
and have our authorities been able to keep up with how these
networks operate in practice?
If not, where should improvements be considered?
Do we have any good data driven evaluations of the
effectiveness of the Kingpin Act and its utilization almost 20
years after enactment?
Are there other related tools, perhaps the Transnational
Criminal Organization (TCO) designation, that we could utilize
in a more effective manner to combat these trafficking
networks?
Fentanyl trafficking is particularly concerning because of
its potency, addictiveness, and lethality but also because of
its Chinese origin. Last year, the U.S. Government used the
Kingpin Act to designate Chinese fentanyl traffickers for
sanctions. That action represents an evolution in utilization
of the Act. How do you assess this development, especially
given the large amount of fentanyl production in China from
pseudo-State entities?
Given the blurring of the lines between the Chinese
Communist Party and private sector entities in China, how would
you suggest we adjust our thinking and utilization of these and
other sanctions authorities to combat fentanyl trafficking from
China?
Are there any adjustments we need to be making to address
financial flows related to fentanyl trafficking?
If so, what adjustments would you recommend?
Are there any recommendations you would make that are
unique to fentanyl trafficking as opposed to things we should
be doing to strengthen our anti- money-laundering (AML) regime?
If not, why not?
A.1. I am not an expert on fentanyl, so cannot comment.
Q.2. Some of our hearing touched on the implications 5, 10, 20
years down the road for U.S. preeminence in the international
financial system. China and Russia have both developed an
alternative to SWIFT and some in Europe have called for
alternative payment systems that do not touch the United
States. How viable are these Chinese and Russian alternatives
at the moment?
A.2. In the short term, those Chinese and Russian alternatives
are not viable.
Q.3. How viable are they over the long run?
A.3. In the long term, if the U.S. is perceived to exploit
SWIFT for its own interests and therefore undercut SWIFT as an
independent platform for interbank transactions, that will
increase the incentive for Chinese and Russian alternatives.
The U.S. needs to reassure everyone that SWIFT is a public good
that serves global interests, not its own.
Q.4. What are the metrics we should look at to evaluate whether
these alternative systems are becoming viable and could
potentially displace U.S. preeminence?
A.4. We should look at the number of financial institutions,
the number of transactions that go through the system, and
other key financial institutions' media coverage that looks to
other alternatives.
------
RESPONSES TO WRITTEN QUESTIONS OF
SENATOR MENENDEZ FROM SCOTT KENNEDY
Q.1. One of the provisions that I authored in FIRRMA requires
CFIUS to develop regulations to ensure that State-owned
entities are declaring their transactions with CFIUS and not
using complex financial structures to conceal their ownership
or evade CFIUS review. We saw this situation at work in
December, when the Wall Street Journal reported that a firm
owned by China's Ministry of Finance was able to use offshore
subsidiaries to purchase a U.S. satellite firm and was thereby
allegedly able to access information that may be restricted
under U.S. export controls.
What is your assessment of CFIUS's ability to evaluate the
extent of foreign Government control or influence over foreign
firms seeking to invest in the U.S.?
A.1. Historically, CFIUS has done a good job in determining
ultimate control of company due to the fact that the number of
cases have been low enough that the Members of the Committee
have been able to get information about the foreign acquirer.
Additionally, if CFIUS increases its examination of American
subsidiaries abroad, that will increase the challenge of
understanding the true ownership of Chinese companies.
Q.2. Are there additional disclosure requirements--on
beneficial ownership, for example--that are necessary for
Chinese entities that want to invest in the U.S. or access our
financial markets?
A.2. I do not know.
Q.3. More broadly, how should we think about how to best
compete with Chinese State-owned enterprises that often make
decisions based on strategic or political considerations as
opposed to market forces?
A.3. Outside of China, American companies have been able to
successfully compete with Chinese SOEs in many industries. The
main challenge is sectors that have complex financing and
institutions which provide financing for the customers. Chinese
SOEs and large private companies receive export support by the
involvement of the China Development Bank and China Export-
Import Bank. The U.S. Export-Import Bank operates at a much
smaller scale, which puts U.S. firms at a disadvantage when it
comes to financing terms. In the Chinese market, the key is to
level the playing field and open more sectors to foreign
investment. One particularly helpful step would be to have
China join the WTO's Government Procurement Agreement; they
pledged to join the agreement as soon as possible after joining
the WTO, but 18 years later, they are still not signatories.
Q.4. Are there particular sectors of regions, like Latin
America, where we need to be smarter and more agile in
responding to and getting ahead of this challenge?
A.4. The U.S. needs global policies to monitor the activity of
Chinese SOEs, and increase cooperation in Latin America in
order for them to understand the challenges of doing business
with Chinese SOEs and the political obligations and security
risks that come with it. The U.S. and the West also need to
provide good alternatives to this region in terms of proper
financing options. The U.S. can actively take part in setting
international norms in international development, foreign aid,
and the development of multilateral institutions.
Q.5. What is your assessment of the risk posed by the current
treatment of Hong Kong as a separate and favorable customs
entity for the export of dual-use and other sensitive U.S.
technologies which can then be reexported to the PRC? Given the
continued erosion of Hong Kong's autonomy and Beijing's ever-
greater control, has the time come to treat Hong Kong and the
mainland the same for purposes of these sensitive technology
exports under U.S. law?
A.5. For the time being, Hong Kong is being treated as separate
from mainland China in terms of tariffs and export controls,
but the situation should be closely monitored. It would be
helpful for the U.S. Congress to hold public hearings on this
subject. Beijing should not take Hong Kong's external
commercial status for granted.
Q.6. I was shocked when the Administration rolled back
penalties for ZTE last year in the rush to get a trade deal.
And I'm still concerned with the President's recent comments
suggesting that loosening restrictions on Huawei could again be
part of some transactional give-and-take in the broader trade
dispute. Do you believe the Administration's approach with
respect to ZTE and Huawei will achieve our goals of protecting
our national security and communications infrastructure?
A.6. No, the Administration's approach will not protect our
national security infrastructure. The biggest challenge from
ZTE and Huawei is whether having their equipment in U.S. and
Western networks increases national security vulnerabilities.
There is general consensus that this is the case for core parts
of a country's network, but there is not consensus about
whether this applies beyond the core and with regard to
handsets. The Administration's May 2019 Executive Order
addresses this risk, and the Administration is engaging with
other Governments to come to decisions about Chinese telecom
equipment.
A separate issue is whether the operation of these
companies themselves or their activities in non-Western
countries poses a threat to the United States. That is the
logic behind placing Huawei on the Commerce Department's
Entities List in May 2019. There are potential multiple
rationales for taking this action: it could slow Huawei's
growth, reduce Huawei's progress in 5G, or even lead to the
company's demise. It also could give the U.S. Government more
information about what U.S. technology is being sold to the
company (since companies have to receive approval for such
sales). The Administration has yet to articulate which of these
rationales undergirds its policy. This is made more confusing
by the creation and extension of the Temporary General License,
as well as the President's comments that U.S. could potentially
remove Huawei from the Entities List if the U.S. and China
reach a major trade deal. All of these complexities aside, my
own view is that the Entities List action is not serving
American national security interests effectively, and that the
U.S. can take a wide variety of other steps to respond to
national security challenges posed by any individual company.
Beyond all of this, the U.S. needs to operate on the
assumption that international telecommunication networks are
not 100 percent clean, and as a result, put primary energy on
mitigating risks instead of decoupling from China entirely.
Q.7. I have made the point to the Administration that if we are
going to compete with Huawei on 5G architecture it's not enough
to confront China on predatory economic practices or security
risk--both of which are real--but that we must also be at the
forefront of constructing public-private partnerships, with our
allies and partners, to assure that there is an alternative
architecture--economically viable, secure, and with appropriate
privacy safeguards. What is your assessment of this sort of
approach?
A.7. It is not reasonable to expect the U.S. and the West can
create an entirely alternative architecture that does not
include any Chinese participation. We do not have the
technology, the funding or the companies for this. No private-
public partnership can fill this gap. Instead, global
architecture risks should be mitigated, which is a more cost-
effective approach and addresses national security concerns.
The United States has been successful in the last 100 years
not only because it is powerful but because it is seen as a
more stable, mutually beneficial, and ultimately beneficent
partner.
It remains in our interest to not only use our strength for
our needs of the moment, but also to reinforce these views so
that we can harness these strengths in the long term. A long-
term approach that builds in the partnership of private sector
entities and foreign Governments to create a stable, durable
architecture would be far more effective.
Q.8. Are there particular sectors--AI, machine learning,
genomics, biometrics, quantum computing--where you see
particular U.S. vulnerabilities? How do we best safeguard our
edge in those areas?
A.8. There are areas in which the Chinese are doing well, some
of which are beneficial to the U.S. and some of which are
concerning to the U.S., particularly in areas where
applications serve Chinese military interests or surveillance
technologies. The U.S. already has in place regulatory systems
to monitor China and protect U.S. national security, but the
U.S. needs to improve their technology and improve the market
for it, including commercialization, which would be the best
way to protect itself.
Q.9. In your testimony, you stated that ``the U.S. needs to
strengthen its own ecosystem for advanced technologies'' and
that ``a more successful American high-tech sector is the best
bulwark against the challenge from China.'' I wholeheartedly
share those views and am working on legislation to address
shortfalls in our own education, infrastructure, and research
and development investments. What do you think are the most
efficient ways for Congress to promote a vibrant high-tech
sector and assure that the U.S. remains on the cutting-edge in
developing the technologies that will drive the next century?
Are there specific programs or commercial incentives Congress
should look to create, change, or augment?
A.9. There are a few ways Congress can promote a vibrant high-
tech sector and assure that the U.S. remains on the cutting-
edge in developing the technologies that will drive the next
century. First, greater funding for basic research in science
and technology. Second, a more targeted support for projects
identified by the Pentagon and the Department of Energy that
are new emerging technologies and overseen by DARPA and ARPA-E.
Third, greater funding for America's national science labs.
Finally, the use of tax incentives to increase the demand for
emerging technology by consumers in the private and Government
sectors. For example, this should include greater rebates for
NEVs in order to create a better market for them in the U.S.
------
RESPONSES TO WRITTEN QUESTIONS OF SENATOR WARREN
FROM SCOTT KENNEDY
Q.1. What steps should the United States be taking, that it is
currently not taking, to counter the influence of China's Belt
and Road Initiative (BRI) in countries that have a demand for
infrastructure and other public projects, so that those
countries have a viable alternative to surrendering their
strategic infrastructure to China?
A.1. The U.S. Government and private sector needs to provide
greater financial support for infrastructure-related projects
for developing countries. This shouldn't be viewed as corporate
welfare (as all of the funds are usually paid back to the U.S.
Treasury, with interest), but rather as a way to promote
American export of goods and services and strengthen the
development process of these countries.
Q.2. Does the successful penetration of China's Belt and Road
Initiative (BRI) into economies in Europe, Latin America, and
Africa increase the likelihood that authoritarianism and
corruption will corrode the political systems of countries in
those parts of the world? Please give a brief assessment.
A.2. We should not worry about BRI's effect on the political
systems in those regions. The U.S. and the West need to
increase their activity in those regions, not only the Chinese.
We need to increase best practices in lending and in auditing
projects afterward. Also, promoting a healthy civil society in
these countries and increasing their knowledge about China is
important so that those regions are able to independently make
judgements on deals and Chinese motives.
Q.3. Aside from using tariffs, sanctions, export controls, and
other tools of economic statecraft to punish China for
anticompetitive and coercive economic practices, what domestic
policy tools should the United States be using to strengthen
our competitiveness and reduce wealth inequality here at home--
regarding basic and applied research, public education,
infrastructure, and other investments?
A.3. There are a few ways the U.S. can strengthen its
competitiveness and reduce wealthy inequality. First, increase
support for basic research. Second, develop tax and rebate
incentives for the consumption of American technologies. Third,
examine the pros and cons of limiting intellectual property
licensing rates for technology that is clearly meant to serve
as public goods. Fourth, increase the opportunities to advance
STEM education and employment opportunities for people from
lower-income communities and minorities. There should be more
diversity amongst scientists. Fifth, increase the opportunities
to study abroad and study a foreign language. With greater
diversity amongst scientists and engineers and the tech sector
generally, it will more likely its benefits will be more widely
diffused across society.
Q.4. Fentanyl--In Massachusetts, health providers, first
responders, and public officials have worked together in their
communities in an effort to tackle the opioid crisis that has
affected families across my State. While there are signs that
many of these efforts are having an impact in reducing the
number of opioid overdose deaths, the illicit use of fentanyl,
an extremely dangerous synthetic opioid, continues to fuel this
epidemic. In 2018, for opioid-related overdose deaths in which
a toxicology screen was available, fentanyl was present in 89
percent of them.
The State Department's most recent annual International
Narcotics Control Strategy Report (INCSR) observes, ``In
December 2018, China committed to control fentanyl compounds as
a class. Once implemented, this move should help thwart illicit
chemists and manufacturers who quickly change their illicit
formulations to nonregulated analogues to evade law
enforcement.'' Has China's commitment produced this outcome?
Referring to China, the State Department's INCSR observes,
``U.S. law enforcement reports that the most common diversion
tactic used by traffickers is the intentional mislabeling of
shipments containing precursors. Perpetrators caught
mislabeling precursor shipments often face only civil penalties
and small fines rather than criminal charges. The challenge of
preventing precursor diversion is further exacerbated by
China's ineffective enforcement of land, air, and sea transport
regulations.'' Aside from revising its laws and regulations,
working with U.S. law enforcement partners and the Postal
Service, and cooperating with international regulatory efforts
like the International Narcotics Control Board (INCB), what
additional steps should the Chinese Government be taking to
ensure that its relevant authorities are properly scheduling
fentanyl analogues, tracking trends in the illicit fentanyl
market, and holding traffickers and their affiliates
accountable?
Do you believe that Justice Department indictments of, and
Treasury Department sanctions against, alleged Chinese fentanyl
manufacturers and distributors have a meaningful deterrent
effect on Chinese fentanyl trafficking networks?
A.4. I'm not an expert on fentanyl, so not able to comment.
------
RESPONSES TO WRITTEN QUESTIONS OF
SENATOR CORTEZ MASTO FROM SCOTT KENNEDY
Q.1. I have heard repeatedly from U.S. companies that are
concerned about forced technology transfer as a precondition
for doing business in China. The Chinese Government passed a
new Foreign Investment Law earlier this year, which the
Government claims will address some of those issues.
Since the passage of China's Foreign Investment Law earlier
this year, have you seen any indications that the Chinese
Government may actually curtail forced technology transfer, and
other tactics used to steal intellectual property?
A.1. The Trump administration's 301 investigation, launched in
August 2017, identified four ways in which the Chinese engaged
in forced technology transfer. There has been mixed progress
across these areas:
1. Unreasonable licensing terms: Recent changes in China's
regulations may modestly improve the situation in terms
of licensing fees. Data from the U.S. Department of
Commerce shows that China's payment of licensing fees
has increased over the last 2 years: https://www.csis-
cips.org/news/2019/8/19/show-me-the-receipts.
2. Preconditions for technology sharing in exchange for
approving American investment. China new Foreign
Investment Law bans this practice, but 20-25 percent of
American companies in China, according to an AmCham
China survey, say they still feel some sort of
pressure.
3. Chinese State-led investment abroad, with a focus on tech
acquisition. Chinese outward investment has plummeted
in the last 2 years, including in advanced technology.
This is a product of greater restrictions of outward
flows of funds due to Chinese internal financial
weakness and external barriers created by the U.S. and
others. China's financial situation will improve and
more funds will be permitted to be invested externally,
but recipients' walls are not likely to be lowered
until there is greater strategic trust between China
and others.
4. Cybertheft: Cybertheft by China apparently improved in
the period directly after the Xi-Obama meeting in
September 2015, but the latest reports show a return to
pre-agreement levels in cybertheft emanating from
China.
------
RESPONSES TO WRITTEN QUESTIONS OF SENATOR SINEMA
FROM SCOTT KENNEDY
Q.1. Many experts say a multilateral approach will ultimately
be needed to hold China accountable for its role in the
production and distribution of illicit fentanyl. Do you share
that view?
Do you feel that the Administration's policies and rhetoric
on trade could undermine the necessary goodwill to work
collaboratively with our trading partners to hold China
accountable and stop the flow of fentanyl?
A.1. I'm not an expert on fentanyl, so cannot comment.
------
RESPONSES TO WRITTEN QUESTIONS OF SENATOR SASSE
FROM RICHARD NEPHEW
Q.1. The U.S. Government has primarily relied on the Kingpin
Act to combat international drug trafficking but this
legislation is over 19 years old. In your opinion how has the
trafficking business--whether it's fentanyl, heroine, other
hard drugs, or human trafficking--evolved in the last 19 years
and have our authorities been able to keep up with how these
networks operate in practice?
A.1. My field of expertise is in sanctions design, rather than
in international narcotics trafficking. I would therefore
submit that experts in narcotics trafficking would be better
positioned to answer questions about how trafficking has
evolved.
From a purely sanctions design perspective, however, it is
important to note that the increased use of chemical precursors
and prescription medications as illicit drugs has broadened the
scale of the problem and brought new potential suppliers into
the mix.
Now, companies that make medicine or the chemicals that can
be used in it are potential contributors to the drug epidemic.
Given this, in my view, it is appropriate to expand the tools
available to the United States to respond, including via
sanctions.
The Fentanyl Sanctions Act would give the United States
such tools, including scalable penalties for those who engage
in illicit fentanyl trafficking. The presence of such options
is--in my view--helpful as the U.S. Government adopts a
flexible, adaptive, and resourceful approach to preventing such
trafficking.
Q.2. If not, where should improvements be considered?
A.2. In my view, the passage of the Fentanyl Sanctions Act
would improve the U.S. ability to respond to incidents of
trafficking of synthetic opioids, which I understand represents
a serious new threat to the United States.
Q.3. Do we have any good data driven evaluations of the
effectiveness of the Kingpin Act and its utilization almost 20
years after enactment?
A.3. I am not aware of any particular study of the Kingpin Act
as a stand-alone piece of legislation. I do believe, though,
that as part of a multifaceted strategy for addressing
narcotics trafficking, it is useful to have sanctions tools,
just as it is useful to have diplomatic, law enforcement,
customs, and other tools to prevent trafficking.
I am aware of a hearing on this subject in 2017 that
includes testimony that both acknowledges the value and the
deficiencies of the Kingpin Act. \1\
---------------------------------------------------------------------------
\1\ https://docs.house.gov/meetings/FA/FA07/20171108/106606/HHRG-
115-FA07-Transcript-20171108.pdf
Q.4. Are there other related tools, perhaps the Transnational
Criminal Organization (TCO) designation, that we could utilize
in a more effective manner to combat these trafficking
---------------------------------------------------------------------------
networks?
A.4. A TCO designation could also be employed alongside a
Kingpin designation, though practically they would have the
same legal effect: both require an asset freeze and property
block on the designated individuals or entities.
Given this, a TCO designation would not provide any greater
flexibility or utility than a Kingpin designation. For these
reasons, I continue to believe that the tools provided by the
Fentanyl Sanctions Act merit consideration.
Q.5. Fentanyl trafficking is particularly concerning because of
its potency, addictiveness, and lethality but also because of
its Chinese origin. Last year, the U.S. Government used the
Kingpin Act to designate Chinese fentanyl traffickers for
sanctions. That action represents an evolution in utilization
of the Act. How do you assess this development, especially
given the large amount of fentanyl production in China from
pseudo-State entities?
A.5. I believe that the designation of those particular
traffickers was merited on the basis of the information
provided by the Treasury Department.
But, the fact that the fentanyl problem continued after the
designation suggests that other traffickers remain active in
the business and that either due to an absence of appropriate
intelligence or concerns about the implications to otherwise
legitimate trade, the Treasury Department did not believe it
had grounds to impose further sanctions.
Given this, I believe that there remains utility in
adopting new authorities that may improve the overall
effectiveness of our sanctions component to the
countertrafficking strategy.
I also believe that the Chinese authorities themselves have
committed to addressing this problem. The Fentanyl Sanctions
Act would contribute to these efforts by encouraging further
diplomatic work with China in this regard.
Q.6. Given the blurring of the lines between the Chinese
Communist Party and private sector entities in China, how would
you suggest we adjust our thinking and utilization of these and
other sanctions authorities to combat fentanyl trafficking from
China?
A.6. I believe that the Chinese authorities are motivated at
present to address this problem, as has been demonstrated by
their readiness to work with the United States on this matter
notwithstanding other bilateral problems.
It is vital that we continue to encourage Chinese
Government improvement on this matter, especially by
reinforcing that our intention is to address this problem with
foreign Governments through diplomacy first.
I believe that the most important next step that we should
take is to further incentivize Chinese cooperation with our
efforts to prevent illicit fentanyl trafficking through the
passage of the Fentanyl Sanctions Act. It has off-ramps for the
imposition of sanctions that China can use and it incentivizes
cooperation with international efforts to prevent this
trafficking.
Q.7. Are there any adjustments we need to be making to address
financial flows related to fentanyl trafficking?
A.7. The most important element in addressing financial flows
is to create disincentives for banks to look the other way for
transactions that are suspicious. Banks need to be motivated to
ensure their compliance programs are capable of identifying and
denying such transactions.
Q.8. If so, what adjustments would you recommend?
A.8. The creation of penalties and disincentives in the
Fentanyl Sanctions Act would be a good first step. In my
experience, most banks and other institutions are prepared to
cooperate with enforcement efforts if they are shown what is
required and given information to support these requirements.
But, for other institutions, they need to be motivated by
the risk of consequences if caught engaging in illicit conduct.
It is here that sanctions are useful but also structures to
avoid them, as provided in the Fentanyl Sanctions Act that
would allow for the waiver of penalties in circumstances where
Governments are addressing the problem.
Q.9. Are there any recommendations you would make that are
unique to fentanyl trafficking as opposed to things we should
be doing to strengthen our anti- money-laundering (AML) regime?
A.9. I do not believe there are any unique solutions to the
financial problem attached to fentanyl trafficking. The issue
now is helping banks identify transactions of concern and know
how to handle them when so identified.
More generally, programs for training in sanctions
compliance--for foreign Governments, foreign banks, and foreign
companies--would be a welcome addition to the U.S. policy
toolkit in strengthening the AML/counter- illicit-finance
regime internationally.
Q.10. If not, why not?
A.10. In my opinion, the fentanyl-related financial issues are
less about fentanyl and more about the kinds of companies and
entities that may be implicated. For this reason, it is more
important--in my view--to strengthen the overall system than it
is to specifically call out fentanyl.
Q.11. Some of our hearing touched on the implications 5, 10, 20
years down the road for U.S. preeminence in the international
financial system. China and Russia have both developed an
alternative to SWIFT and some in Europe have called for
alternative payment systems that do not touch the United
States. How viable are these Chinese and Russian alternatives
at the moment?
A.11. At this point, there are no viable alternatives to the
payment systems that presently exist.
Q.12. How viable are they over the long run?
A.12. I believe that alternative systems are viable in the long
run.
These systems will not necessarily displace the role of the
United States altogether. The United States remains a crucial
part of the international financial system and the convenience
and other advantages of operating in the United States will
remain powerful for the foreseeable future.
However, it is possible that there will be complementary
systems that will be usable by those who seek to avoid the
U.S.-led financial system. The creation of such systems will be
a boon to U.S. adversaries and those who wish to evade U.S.
sanctions enforcement.
It is worth noting, in this context, that the Shanghai
Cooperation Organization (SCO) issued a statement on 14 June
that said: ``Serious attention will be given to increasing the
share of national currencies in mutual financial transactions
and settlements.'' \2\ This effectively means: ``bypass the
U.S. dollar where possible.''
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\2\ http://eng.sectsco.org/news/20190614/550955.html
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A major element in U.S. sanctions effectiveness is that the
U.S. financial system remains too attractive to sidestep. It is
precisely this dynamic that is at risk in such a scenario.
Q.13. What are the metrics we should look at to evaluate
whether these alternative systems are becoming viable and could
potentially displace U.S. preeminence?
A.13. I believe there are several metrics of merit, including:
1. Number of countries involved--obviously, the greater the
number of jurisdictions involved, the greater the
utility of an alternative
2. Size/value of the countries involved--numbers of
countries may not matter nearly as much as the scale of
their economies. If a substantial part of international
financial transactions can be facilitated via an
alternative (e.g., 20 percent or greater), then the
alternative system may be viable. Imagine, for example,
a system involving most of Africa, Latin America,
China, and Russia. Such a system may not be the same
size as the United States and European-dominated
system, but it still will present opportunities and
advantages for the countries involved.
3. Number of financial institutions de-risking from the
United States--the United States is at greatest risk
where companies and banks refuse to conduct
transactions in the United States that have
international components. Banks and companies that have
solely ``U.S. subsidiaries'' that are kept at a remove
from other business operations would dramatically lower
the costs of sanctions imposition for violating U.S.
sanctions rules.
4. Currency composition in trade--at present, the United
States is able to perform an invaluable service
internationally and profit from the use of the U.S.
dollar as an intermediary currency. If you wish to
conduct transactions between many countries in the
world, then you will likely convert currencies by using
the dollar (e.g., you will trade your pesos for dollars
and then the dollars into francs in order to move goods
from Mexico to Switzerland). If we see foreign
countries choosing to transact directly--despite the
costs and complexities--then this would suggest a
decision to avoid the United States, particularly if as
part of an alternative system.
5. Invoicing/trading commodities outside of the U.S.
dollar--as with the currency composition of trade, many
commodities are traded in dollars for ease of use and
the stability the dollar affords. Choosing to avoid the
dollar would be an important part of a viable
alternative system.
6. Speed/convenience of the alternative--a simple, but
important, factor is the speed and convenience of an
alternative system. If it becomes easy to use and with
quick processing and clearing times, then an
alternative system is viable.
------
RESPONSES TO WRITTEN QUESTIONS OF
SENATOR MENENDEZ FROM RICHARD NEPHEW
Q.1. One of the provisions that I authored in FIRRMA requires
CFIUS to develop regulations to ensure that State-owned
entities are declaring their transactions with CFIUS and not
using complex financial structures to conceal their ownership
or evade CFIUS review. We saw this situation at work in
December, when the Wall Street Journal reported that a firm
owned by China's Ministry of Finance was able to use offshore
subsidiaries to purchase a U.S. satellite firm and was thereby
allegedly able to access information that may be restricted
under U.S. export controls.
What is your assessment of CFIUS's ability to evaluate the
extent of foreign Government control or influence over foreign
firms seeking to invest in the U.S.?
A.1. I believe that CFIUS has considerable ability to evaluate
foreign Government control or influence over foreign firms
seeking to invest in the United States.
Prior to FIRRMA, however, CFIUS lacked the ability--in my
opinion--to reject transactions where such suspicions were
unproven or more amorphous. The issue was less one of
evaluation and more legal mandate to act.
I participated in CFIUS decisions while at the State
Department and while confidentiality requirements prohibit me
from discussing specific cases, there were several instances in
which I believed that a transaction was inappropriate or
dangerous, but was informed that the legal mandate that we had
to reject investment decisions was so narrow as to preclude
taking action in those cases.
The changes introduced via FIRRMA should--in my view--avoid
many of these problems in the future.
Q.2. Are there additional disclosure requirements--on
beneficial ownership, for example--that are necessary for
Chinese entities that want to invest in the U.S. or access our
financial markets?
A.2. Yes, I believe that additional disclosure requirements
(such as beneficial ownership) would be useful in helping the
United States to evaluate investment decisions.
Ultimately, though, disclosures are only as good as the
Executive Branch has the ability to evaluate their veracity and
to act to deny investments or access to U.S. markets. For this
reason, I also believe that additional investigatory
resources--including intelligence gathering--would be useful.
Q.3. More broadly, how should we think about how to best
compete with Chinese State-owned enterprises that often make
decisions based on strategic or political considerations as
opposed to market forces?
A.3. From my perspective, I believe there should be three
overall elements of our approach:
Vigilance/awareness as to what Chinese State-owned
enterprises are doing. We cannot prevent that of which
we are unaware and we do ourselves no favors by failing
to look. This is a problem that exists beyond China. In
our interest to pursue market opportunities, we
sometimes lose sight of the competing interest
perspectives that other countries have. We need to be
far more mindful of the different Government approaches
that exist and structure our domestic regulations and
enforcement approaches to manage these competing
approaches.
Play to our strengths. The United States is
unlikely to ever approach economic decisions as China
does. We do not structure our economy as the Chinese do
nor is there any real interest in doing so.
Consequently, direct competition with China on the same
terms is both unlikely and ill-suited to our approach
to economics. We do have considerable strengths,
however, starting with the competitive nature of our
economy, its openness to external investment and
adaptability. As we look to counter what China (and
other countries) are doing, we need to ensure that we
do not stymie these forces unnecessarily. We should be
strategic in how we police investment and technology
transfer activities, maintaining our competitive edge
along the way.
Build coalitions. It remains unfortunate, in my
view, that the Trump administration exited the Trans-
Pacific Partnership (TPP) agreement. For its
imperfections, it--and other trade agreements--plays to
our strengths, including setting regulatory standards
and creating open spaces in which our market actors can
operate. China is forced to compete on a national level
because it does not have the diversity of partners and
allies (trade and otherwise) that we do. We have
partners and allies for a reason: they amplify U.S.
strengths and help us to operate more successfully in
the international economy. We should be broadening and
deepening these relationships to take advantage of what
has been built over the last 70 years.
Q.4. Are there particular sectors of regions, like Latin
America, where we need to be smarter and more agile in
responding to and getting ahead of this challenge?
A.4. I believe that, in Latin America and in Africa, there are
opportunities for us to be far more effective in our economic
diplomacy. The United States should be identifying
opportunities for U.S. economic activity as well as development
support, and should make the investments necessary to take
advantage of these opportunities.
In my research, I have seen clear frustration with China in
Latin America and Africa. The Chinese model of operations is
not popular. We can and should provide an alternative that
empowers local populations, invests in them and creates deep,
sustainable relationships.
Q.5. What is your assessment of the risk posed by the current
treatment of Hong Kong as a separate and favorable customs
entity for the export of dual-use and other sensitive U.S.
technologies which can then be reexported to the PRC? Given the
continued erosion of Hong Kong's autonomy and Beijing's ever-
greater control, has the time come to treat Hong Kong and the
mainland the same for purposes of these sensitive technology
exports under U.S. law?
A.5. I would defer to others on the specifics of how Hong Kong
is treated for export control purposes, but I would agree that
treating Hong Kong as a completely separable entity is
inconsistent with realities on the ground. It does make sense
to me to harmonize our approaches with respect to Hong Kong and
China, though I would be reluctant to do so if it helped the
Chinese Government assert in legal terms its ability to
dominate the Hong Kong Government.
Q.6. I was shocked when the Administration rolled back
penalties for ZTE last year in the rush to get a trade deal.
And I'm still concerned with the President's recent comments
suggesting that loosening restrictions on Huawei could again be
part of some transactional give-and-take in the broader trade
dispute. Do you believe the Administration's approach with
respect to ZTE and Huawei will achieve our goals of protecting
our national security and communications infrastructure?
A.6. No, I do not believe the Administration's approach is in
our national security interest vis-a-vis ZTE and Huawei, nor in
our overall messaging to China.
Trade is a crucial national interest and resolving the
trade dispute with China is important.
However, in my view, it is vital to maintain distinctions
between instruments that we use to address trade disputes--such
as tariffs--and instruments we use to address national security
problems, such as sanctions and export controls.
In my view, the president's conflation of these sets of
tools and interests creates dangerous perceptions in China and
precedents more generally. It suggests that we do not use
sanctions as a means of securing our national security
interests, but rather as a cudgel to receive trade benefits.
This undermines our credibility when we argue that sanctions
against third parties--such as Iran--are entirely separate from
our domestic economic priorities. It also creates a sense that
we are prepared to discount our national security interest for
improved trade access.
In this way, the Trump administration has implicitly argued
that it is worth compromising our Iran sanctions (with ZTE, for
example) in order to improve our trade balance. I do not
believe this is necessary or sound.
Q.7. I have made the point to the Administration that if we are
going to compete with Huawei on 5G architecture it's not enough
to confront China on predatory economic practices or security
risk--both of which are real--but that we must also be at the
forefront of constructing public-private partnerships, with our
allies and partners, to assure that there is an alternative
architecture--economically viable, secure, and with appropriate
privacy safeguards. What is your assessment of this sort of
approach?
A.7. I agree with this approach.
The United States has been successful in the last 100 years
not only because it is powerful but because it is seen as a
more stable, mutually beneficial, and ultimately beneficent
partner.
It remains in our interest to not only use our strength for
our needs of the moment, but also to reinforce these views so
that we can harness these strengths in the long term. A long-
term approach that builds in the partnership of private sector
entities and foreign Governments to create a stable, durable
architecture would be far more effective.
Q.8. Are there particular sectors--AI, machine learning,
genomics, biometrics, quantum computing--where you see
particular U.S. vulnerabilities? How do we best safeguard our
edge in those areas?
A.8. I would defer to others with respect to particular
sectors, but believe that the systemic vulnerability that we
face is lost confidence in the durability of trade and
investment relationships with the United States.
The United States faces a credibility issue right now
internationally that is making it harder for foreign partners
to want to invest here, conduct R&D here, and to trust that
their interests will be respected in the long term. A drift
toward mercantilism is, in my view, our greatest vulnerability,
as well as a sense of a persistent zero sum game with partners
as well as adversaries.
This, in many ways, can affect each one of those
technological subsectors.
------
RESPONSES TO WRITTEN QUESTIONS OF SENATOR WARREN
FROM RICHARD NEPHEW
Q.1. What steps should the United States be taking, that it is
currently not taking, to counter the influence of China's Belt
and Road Initiative (BRI) in countries that have a demand for
infrastructure and other public projects, so that those
countries have a viable alternative to surrendering their
strategic infrastructure to China?
A.1. In my opinion, BRI is an attractive proposition for many
countries because of the absence of alternatives. These
countries may not be interested in supporting the Chinese
political agenda but they have a natural and strong desire to
advance their own national interests, and may not be concerned
about the geostrategic implications of their actions.
The United States has three sets of options, which are not
mutually exclusive but would involve somewhat different tools.
First and foremost, the United States can and should work
with countries considering participation in BRI to ensure that
projects are undertaken with the greatest possible
transparency. BRI is creating real risks of corruption in
countries that participate as well as unsustainable debt
problems. The United States can and should shine a light on
these projects so that national business communities and
populations understand what is involved and, where necessary,
encourage more appropriate and sustainable terms.
The Sri Lanka case demonstrates clearly what can happen
when debt problems as well as unfavorable terms combine. \1\
The United States should use its diplomatic presence to advise
Governments against entering into such arrangements and to
offer advice as how to manage the opportunities created by BRI.
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\1\ https://www.france24.com/en/20190324-sri-lanka-new-chinese-
silk-road-disappointment-economy-debt-italy-france-investment
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Second, the United States should encourage China to
reconsider its approach to debtor States. Through the Paris
Club and other mechanisms, the United States has been a
beneficent lender, offering debt relief and cancellation when
necessary and appropriate. China should be encouraged to do the
same, with political pressure applied on a multilateral basis
to offer weight to this encouragement. Here, cooperation with
States that intend to participate in BRI is essential to avoid
this becoming another in a long line of U.S.-China disputes.
Third, the United States should consider carefully whether
it wishes to compete on similar terms with the Chinese in
advancing development projects through the BRI-targeted areas.
Financially, this would be difficult and costly. However,
the United States continues to have advantages that China does
not, including the support of a large network of partner and
allied States that may be willing to work with the United
States to develop and execute infrastructure projects in the
same areas. The United States can utilize the multilateral
development banks, including the World Bank, in order to
develop and execute these projects.
I do not believe that a more aggressive approach--including
the threat of U.S. sanctions and other pressure mechanisms--
will be effective. Threats of consequences and punishment are
likely to be counterproductive politically and do not address
the sorts of interests that make BRI attractive to these
countries.
Q.2. Does the successful penetration of China's Belt and Road
Initiative (BRI) into economies in Europe, Latin America, and
Africa increase the likelihood that authoritarianism and
corruption will corrode the political systems of countries in
those parts of the world? Please give a brief assessment.
A.2. I do have some concerns about the possibilities of
corruption being attached to BRI projects. Large-scale
development projects do come along with a substantial risk of
graft due to the sums of money involved as well as the absence
of appropriate controls to manage these risks. It is not clear
to me that BRI has been appropriately structured to avoid these
risks, though certainly Chinese officials have underscored
their own concerns about corruption (which is also an important
issue at home as well).
Authoritarianism is a somewhat different issue. My
assessment is that some of the countries involved are already
under authoritarian regimes and that BRI projects may reduce
pressures that might otherwise undermine these regimes. By
granting these Governments economic opportunities for
development, BRI may help them burnish their domestic
credentials and help manage domestic constituencies that
otherwise could push for political change.
At the same time, I do not think that BRI in and of itself
will create these dynamics. Rather, it may reinforce these
dynamics that do exist because of an absence of interest on the
part of Chinese officials on political modernization and
change.
Q.3. Aside from using tariffs, sanctions, export controls, and
other tools of economic statecraft to punish China for
anticompetitive and coercive economic practices, what domestic
policy tools should the United States be using to strengthen
our competitiveness and reduce wealth inequality here at home--
regarding basic and applied research, public education,
infrastructure, and other investments?
A.3. As a scholar of economic statecraft, it is apparent that
the absence of investment in U.S. domestic projects (from R&D
to education to infrastructure) is a long-term threat to U.S.
economic viability and national power.
The United States has obtained a privileged international
position economically and politically because of the
attractiveness of business opportunities here, the stability of
our Government and economic structures, the rule of law, and
our relatively well-educated and capable population. But, these
are the results of investments made domestically--especially
following the Second World War--that are not necessarily self-
sustaining.
I would support expanded investment in domestic capacities
at home, particularly as relates to managing income and wealth
inequality, as essential elements of maintaining our
international economic power and the continued viability of our
general economic model.
In my view, this would require a range of policies
including, among other things:
Restoring fairness in our tax code to reduce the
wealth gap, especially with the mega-rich;
Addressing the burdens created by excessive student
loan debt, which drags on the economy as a whole and
undermines the generations now joining the work and
consumer force;
Investing in research and development for new
technologies and techniques in manufacturing;
Investing in research and development for new
technologies and techniques for the production of
carbon neutral energy;
Establishing incentive structures for companies
that appropriately compensate their workers and impose
consequences on those that do not;
Investigating and prosecuting corruption,
particularly when involving Government officials; and,
Addressing problems of systemic economic unfairness
and wealth inequality, which creates a variety of
social and economic ills.
In my opinion, the United States has a rare opportunity to
demonstrate that its economic model can be reformed and work in
support of its entire population, presenting a counter example
to the Chinese model and others that may seek to compete with
us in the future.
Q.4. Fentanyl--In Massachusetts, health providers, first
responders, and public officials have worked together in their
communities in an effort to tackle the opioid crisis that has
affected families across my State. While there are signs that
many of these efforts are having an impact in reducing the
number of opioid overdose deaths, the illicit use of fentanyl,
an extremely dangerous synthetic opioid, continues to fuel this
epidemic. In 2018, for opioid-related overdose deaths in which
a toxicology screen was available, fentanyl was present in 89
percent of them.
The State Department's most recent annual International
Narcotics Control Strategy Report (INCSR) observes, ``In
December 2018, China committed to control fentanyl compounds as
a class. Once implemented, this move should help thwart illicit
chemists and manufacturers who quickly change their illicit
formulations to nonregulated analogues to evade law
enforcement.'' Has China's commitment produced this outcome?
A.4. Yes, China has modified its legislation to address this
problem in early April. The revised legislation went into
effect on 1 May.
It is still too soon to be able to say with any authority
whether the changes in legislation have been matched by changes
in enforcement.
Q.5. Referring to China, the State Department's INCSR observes,
``U.S. law enforcement reports that the most common diversion
tactic used by traffickers is the intentional mislabeling of
shipments containing precursors. Perpetrators caught
mislabeling precursor shipments often face only civil penalties
and small fines rather than criminal charges. The challenge of
preventing precursor diversion is further exacerbated by
China's ineffective enforcement of land, air, and sea transport
regulations.'' Aside from revising its laws and regulations,
working with U.S. law enforcement partners and the Postal
Service, and cooperating with international regulatory efforts
like the International Narcotics Control Board (INCB), what
additional steps should the Chinese Government be taking to
ensure that its relevant authorities are properly scheduling
fentanyl analogues, tracking trends in the illicit fentanyl
market, and holding traffickers and their affiliates
accountable?
A.5. The most important step for China to take now is to
resource and empower adequately those enforcement entities in
the country that are responsible for countering illicit
trafficking.
Creating a legislative mandate is useful but absent
officials who are empowered to identify, investigate and arrest
those engaged in illicit trade, this mandate will be ultimately
useless.
Importantly, a result of these investigations will be
additional insight into how traffickers operate and how they
are adapting to the legislation that is now in effect.
Ideally, internal Chinese developments will then be fed
back into a diplomatic process--run by the State Department's
INL Bureau in cooperation with domestic law enforcement
agencies--that will allow the United States to adapt its own
approaches here. For example, if Chinese investigators learn of
a new tactic to evade postal inspections, then it would be
appropriate (and, in my view, necessary) for China to share
that with the U.S. State Department.
Such an evolution in the U.S.-China relationship on this
matter would also demonstrate that China is not merely
attempting to convince the United States that fentanyl is no
longer a problem but rather taking concrete steps to ensure
that it is not one.
Q.6. Do you believe that Justice Department indictments of, and
Treasury Department sanctions against, alleged Chinese fentanyl
manufacturers and distributors have a meaningful deterrent
effect on Chinese fentanyl trafficking networks?
A.6. I believe that indictments probably have a limited
deterrent effect on Chinese manufacturers and distributors who
have no intention of traveling either to the United States or
to jurisdictions where extradition is likely.
Sanctions may likewise have a limited effect if their only
operative mechanisms are asset freezes and visa bans. On the
other hand, if the U.S. sanctions toolkit were to expand (as
with the Fentanyl Sanctions Act), then distributors and
traffickers may have a more complicated set of decisions to
make. For this reason, I believe that sanctions utility is
directly related to the range of options that are available to
the U.S. Executive Branch. With more options, the United States
can choose to impose sanctions against a wider range of
entities and individuals (including companies that are engaged
in the provision of precursor chemicals to illicit traffickers)
and with more specificity in the measures selected so as to
ensure the pain applied is targeted, tailored, and severe.
------
RESPONSES TO WRITTEN QUESTIONS OF
SENATOR CORTEZ MASTO FROM RICHARD NEPHEW
Q.1. I have heard repeatedly from U.S. companies that are
concerned about forced technology transfer as a precondition
for doing business in China. The Chinese Government passed a
new Foreign Investment Law earlier this year, which the
Government claims will address some of those issues.
Since the passage of China's Foreign Investment Law earlier
this year, have you seen any indications that the Chinese
Government may actually curtail forced technology transfer, and
other tactics used to steal intellectual property?
A.1. I believe that it is probably too early to say whether the
law will be implemented in a manner that is consistent with
U.S. and other countries' expectations for the protection of
intellectual property.
Certainly, China is making clear that it understands the
importance of this issue to its investment attractiveness. For
example, on 20 June, Chinese Premier Li Keqiang met with 19
large multinational companies and restated the Chinese
Government's intention to ``create a market-oriented, law-based
internationalized business environment.'' \1\
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\1\ https://www.straitstimes.com/asia/east-asia/chinas-premier-
tells-foreign-ceos-china-will-commit-to-reform-opening-up
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But, this is an issue that requires constant scrutiny,
monitoring, and evaluation.
------
RESPONSES TO WRITTEN QUESTIONS OF SENATOR SINEMA
FROM RICHARD NEPHEW
Q.1. Many experts say a multilateral approach will ultimately
be needed to hold China accountable for its role in the
production and distribution of illicit fentanyl. Do you share
that view?
A.1. I believe that, as a general rule, sanctions are most
effective when they have multinational support. Such a
structure helps to prevent evasion and cheating; manage
political debates about the value, utility, and ethics of
sanctions; and, create the maximum pressure on sanctions'
intended targets.
That said, in the near term, I would anticipate that the
unique nature of this problem--which, as I understand it, still
is largely confined to North America as a crisis--may lend
itself to more unilateral approaches. But, as this problem
becomes more global and as political pressure builds on all
potential suppliers to do more to arrest illicit trafficking,
then I would also anticipate other States being willing to join
our efforts.
Q.2. Do you feel that the Administration's policies and
rhetoric on trade could undermine the necessary goodwill to
work collaboratively with our trading partners to hold China
accountable and stop the flow of fentanyl?
A.2. Yes, I believe that the Trump administration's approach to
international relations--particularly with our partners but
also with China--are a hindrance in our efforts to address this
problem.
Thus far, China has continued to make progress--at least in
a legislative sense--in working to prevent trafficking,
notwithstanding the broader challenges that exist in the U.S.-
China relationship.
But, China scholars have warned that the U.S. approach may
undermine China's willingness and ability to work on this
problem.
Moreover, the degree to which the United States is
perceived as sanctioning everyone and everything in reach and
for a variety of reasons (in pursuit of trade deals; to manage
the situation with Iran and North Korea; to support human
rights) may make it much harder to bring international partners
into a workable coalition with us.
Additional Material Supplied for the Record
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