[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

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

                                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                     
          
--------------------------------------------------------------------------------------


            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

                              ----------                              

                         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.
---------------------------------------------------------------------------
     \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.
---------------------------------------------------------------------------
    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.
---------------------------------------------------------------------------
    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\
---------------------------------------------------------------------------
     \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.
---------------------------------------------------------------------------
    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.
---------------------------------------------------------------------------
     \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
---------------------------------------------------------------------------
    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.
---------------------------------------------------------------------------
     \5\ https://www.census.gov/foreign-trade/statistics/highlights/
top/top1812yr.html
---------------------------------------------------------------------------
    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
---------------------------------------------------------------------------
    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.
---------------------------------------------------------------------------
     \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
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                                ------                                


        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:
---------------------------------------------------------------------------
     \1\ https://www.banking.senate.gov/imo/media/doc/
Wolf%20Testimony%206-4-19.pdf
---------------------------------------------------------------------------
    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.
---------------------------------------------------------------------------
     \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.
---------------------------------------------------------------------------
     \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.
---------------------------------------------------------------------------
     \1\ https://www.france24.com/en/20190324-sri-lanka-new-chinese-
silk-road-disappointment-economy-debt-italy-france-investment
---------------------------------------------------------------------------
    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\
---------------------------------------------------------------------------
     \1\ https://www.straitstimes.com/asia/east-asia/chinas-premier-
tells-foreign-ceos-china-will-commit-to-reform-opening-up
---------------------------------------------------------------------------
    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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