[Senate Hearing 116-385]
[From the U.S. Government Publishing Office]


                                                   S. Hrg. 116-385

                        U.S.-CHINA: WINNING THE ECONOMIC 
                                 COMPETITION

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

                                HEARING

                               BEFORE THE
                               
                            SUBCOMMITTEE ON
                            ECONOMIC POLICY

                                 of the

                              COMMITTEE ON
                   BANKING,HOUSING,AND URBAN AFFAIRS
                          UNITED STATES SENATE

                     ONE HUNDRED SIXTEENTH CONGRESS

                             FIRST SESSION

                                   ON

EXAMINING THE HIGH STAKES OF THE STRATEGIC ECONOMIC COMPETITION BETWEEN 
                      THE UNITED STATES AND CHINA

                               __________

                             JULY 22, 2020

                               __________

  Printed for the use of the Committee on Banking, Housing, and Urban 
                                Affairs
                                
                                
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                Available at: https: //www.govinfo.gov /

                               __________
                               

                    U.S. GOVERNMENT PUBLISHING OFFICE                    
42-704 PDF                  WASHINGTON : 2021                     
          
--------------------------------------------------------------------------------------


            COMMITTEE ON BANKING, HOUSING, AND URBAN AFFAIRS

                      MIKE CRAPO, Idaho, Chairman

RICHARD C. SHELBY, Alabama           SHERROD BROWN, Ohio
BOB CORKER, Tennessee                JACK REED, Rhode Island
PATRICK J. TOOMEY, Pennsylvania      ROBERT MENENDEZ, New Jersey
TIM SCOTT, South Carolina            JON TESTER, Montana
BEN SASSE, Nebraska                  MARK R. WARNER, Virginia
TOM COTTON, Arkansas                 ELIZABETH WARREN, Massachusetts
MIKE ROUNDS, South Dakota            BRIAN SCHATZ, Hawaii
DAVID PERDUE, Georgia                CHRIS VAN HOLLEN, Maryland
THOM TILLIS, North Carolina          CATHERINE CORTEZ MASTO, Nevada
JOHN KENNEDY, Louisiana              DOUG JONES, Alabama
MARTHA MCSALLY, Arizona              TINA SMITH, Minnesota
JERRY MORAN, Kansas                  KYRSTEN SINEMA, Arizona
KEVIN CRAMER, North Dakota

                     Gregg Richard, Staff Director

                Laura Swanson, Democratic Staff Director

                      Cameron Ricker, Chief Clerk

                      Shelvin Simmons, IT Director

                    Charles J. Moffat, Hearing Clerk

                          Jim Crowell, Editor

                                 ______

                    Subcommittee on Economic Policy

                     TOM COTTON, Arkansas, Chairman

       CATHERINE CORTEZ MASTO, Nevada, Ranking Democratic Member

KEVIN CRAMER, North Dakota           ROBERT MENENDEZ, New Jersey
BEN SASSE, Nebraska                  DOUG JONES, Alabama
DAVID PERDUE, Georgia                TINA SMITH, Minnesota
THOM TILLIS, North Carolina          KYRSTEN SINEMA, Arizona
JOHN KENNEDY, Louisiana

               Kyle Hauptman, Subcommittee Staff Director

          Carol Wayman, Democratic Subcommittee Staff Director

                                  (ii)


                            C O N T E N T S

                              ----------                              

                        WEDNESDAY, JULY 22, 2020

                                                                   Page

Opening statement of Chairman Cotton.............................     1
    Prepared statement...........................................    32

Opening statements, comments, or prepared statements of:
    Senator Cortez Masto.........................................     3
        Prepared statement.......................................    33

                               WITNESSES

Walter Russell Mead, James Clarke Chace Professor of Foreign 
  Affairs and the Humanities, Bard College.......................     4
    Prepared statement...........................................    34
    Responses to written questions of:
        Chairman Crapo...........................................    77
        Senator Sinema...........................................    78
J. Christopher Giancarlo, Senior Counsel, Willkie Farr & 
  Gallagher, and Former Chairman, U.S. Commodity Futures Trading 
  Commission.....................................................     6
    Prepared statement...........................................    39
    Responses to written questions of:
        Senator Sinema...........................................    79
Tim Morrison, Senior Fellow, Hudson Institute....................     7
    Prepared statement...........................................    45
    Responses to written questions of:
        Senator Sinema...........................................    79
Lisa D. Cook, Professor of Economics and International Relations, 
  Michigan State University......................................     9
    Prepared statement...........................................    69
    Responses to written questions of:
        Senator Sinema...........................................    80
Martijn Rasser, Senior Fellow, Technology and National Security 
  Program, Center for a New American Security....................    10
    Prepared statement...........................................    72
    Responses to written questions of:
        Senator Cortez Masto.....................................    80
        Senator Sinema...........................................    82

              Additional Material Supplied for the Record

``COMMON CODE: An Alliance Framework for Democratic Technology
  Policy''.......................................................    84
``Digital Dollar Project Summary''--July 2020....................   114

                                 (iii)

 
              U.S.-CHINA: WINNING THE ECONOMIC COMPETITION

                              ----------                              


                        WEDNESDAY, JULY 22, 2020

      U.S. Senate, Subcommittee on Economic Policy,
          Committee on Banking, Housing, and Urban Affairs,
                                                    Washington, DC.
    The Subcommittee met via Webex at 9:31 a.m., Hon. Tom 
Cotton, Chairman of the Subcommittee, presiding.

            OPENING STATEMENT OF CHAIRMAN TOM COTTON

    Chairman Cotton. Welcome to today's meeting of the Economic 
Policy Subcommittee, which is open to questions from all 25 
Members of the Banking Committee.
    I would like to thank Senator Cortez Masto and her staff 
and all the Committee staff for helping pull together this 
hearing.
    We have an exceptional roster of witnesses prepared to 
testify today. I want to introduce them briefly.
    First, Professor Walter Russell Mead is the Chace Professor 
of Foreign Affairs and the Humanities at Bard College and a 
distinguished fellow at the Hudson Institute. You can also read 
him now twice a week in the Wall Street Journal's opinions 
section, where he is the Global View columnist. I certainly do.
    The Honorable Chris Giancarlo is the founder of the Digital 
Dollar Project and is here today to speak about that effort and 
the importance of an emerging technology known as the 
``blockchain.'' He is also the former Chairman of the Commodity 
Futures Trading Commission.
    Mr. Tim Morrison is a senior fellow at the Hudson 
Institute, where he specializes in Asia-Pacific security. 
Formerly, he served as Deputy Assistant to the President for 
National Security under President Trump.
    Dr. Lisa Cook is a professor of economics and international 
relations at Michigan State University. She previously served 
as Senior Economist at the Council of Economic Advisers under 
President Obama.
    Mr. Martijn Rasser is a senior fellow in the Technology and 
National Security Program at the Center for a New American 
Security. He previously served as a senior intelligence officer 
and analyst at the CIA.
    I want to thank you all for testifying. Thanks to our 
audience today for tuning in to this hearing entitled ``U.S.-
China: Winning the Economic Competition''.
    While, of course, we would have all preferred to convene in 
person, perhaps it is appropriate that we have to hold this 
hearing due to a virus that first emerged from Wuhan, China--
after a cover-up by the Chinese Communist Party.
    This should serve as a reminder that the misrule and 
strategic calculations of the Chinese Communist Party can have 
profound consequences for us, half a world away. It also serves 
as a reminder of the high stakes in this strategic competition 
between the United States and China.
    We should not underestimate our opponent in this struggle. 
China is the most formidable adversary the United States has 
faced in living memory. Near the height of its power in 1980, 
the Soviet Union's economy was 40 percent the size of the 
American economy. In 1943, the combined economies of our 
enemies Nazi Germany and Imperial Japan were also 40 percent 
the size of the American economy. Today China's economy is two-
thirds the size of our economy. So China is richer than any 
adversary we have faced.
    It is also far more entangled with us economically, as we 
were reminded in the early days of this pandemic. We rely on 
China for the manufacture of many important goods, from the 
medicines in our cupboards to the electronics in our 
cellphones.
    This reflects not only the decline of our industrial 
capacity and the failure of decades of naive ``engagement,'' 
but also the Chinese Communist Party's grand ambitions, which 
Chairman Xi describes as nothing less than the ``great 
rejuvenation of the Chinese Nation.''
    Beijing is investing hundreds of billions of dollars to 
develop technologies it believes are key to the future--not 
just airplanes and automobiles but frontier technologies like 
semiconductors, artificial intelligence, and quantum computing.
    The task we face is to preserve and in some cases rebuild 
America's position as the technological and economic leader of 
the world, and to end our compromising dependence on China for 
essential goods.
    The Senate is scheduled to vote today on one such measure: 
a bipartisan bill I led to strengthen the semiconductor 
industry. We passed it in an overwhelming majority as an 
amendment yesterday, and I believe it will pass finally today. 
But there is much more that is left today, and that is the 
purpose of this hearing.
    Finally, I want to note for the benefit of our witnesses 
and audience that the Economic Policy Subcommittee majority is 
preparing a report that addresses this very issue, which will 
include concrete proposals about how to compete with--and 
beat--China. Your testimony will help inform our report, which 
will likely be released later this year.
    So thank you again for serving as witnesses. I look forward 
to your testimony, and I would like to remind all witnesses and 
Members of a few important technical details for this hearing.
    For Members, please make sure you turn on your camera when 
you are ready and able to speak. If you do not turn on your 
camera, I will assume that you are away from your desk and not 
able to speak at that moment.
    For Members and our witnesses, please remember to mute 
yourself when you are not speaking. If there is background 
noise, it will cause the central camera to change to you even 
if you are not talking.
    Finally, I want to remind everyone that all 25 Members of 
the Committee are welcome to join and ask questions today, even 
if they are not Members of our Subcommittee.
    Senator Cortez Masto, I turn it over to you.

      OPENING STATEMENT OF SENATOR CATHERINE CORTEZ MASTO

    Senator Cortez Masto. Thank you. Senator Cotton, thank you 
so much, and I appreciate the collaborative relationship we 
have with your staff in putting this hearing together.
    Today's hearing gives us an opportunity to discuss how we 
ensure our economy is strong for all Americans and for future 
generations.
    I am pleased to see the panel here today and engage in this 
discussion. I know Dr. Lisa Cook has engaged in path-breaking 
economic research that has found that it is not enough just to 
create the laws to support innovation. You know, patents, 
copyright courts, and Government-funded research and 
development do not result in greater economic growth and 
prosperity for all if the Government fails to provide the most 
basic protections to those facing disadvantage.
    If the U.S.A. wants to maintain its status as the world's 
biggest and most dynamic economy, the holder of the world's 
currency, the leader in international alliances and 
collaboration, and the most liquid and wealth-producing capital 
markets, we must assess how we structure our Government to 
ensure we meet the needs of our families and respond to changes 
in the world.
    Let me just focus on my home State for a minute. Nevada has 
been hit particularly hard by the pandemic with an unemployment 
rate of 15 percent. Our State economy relies on travel, 
tourism, entertainment, and hospitality--all hard hit sectors. 
More than 430,000 Nevadans have filed for unemployment.
    So the question is: How can we--and the rest of our 
Nation--rebuild our crumbling infrastructure, provide effective 
job training to displaced workers, and improve the educational 
outcomes of our children? How can we invest in our public 
health infrastructure and collaborate with those of other 
Nations to prevent future pandemics? How do we recover 
economically from this pandemic in a way that benefits those 
hit the hardest by this whole crisis?
    To respond to these crises, we must rely on a vibrant and 
responsive public sector. We need civic institutions to not 
only battle our urgent health, economic, and racial crises, we 
need Government at all levels to invest for future economic 
growth.
    In particular, America's economic growth will in large part 
depend on maintaining our technological edge.
    The U.S. has long led in many key technologies, which has 
helped underpin our economy and helped shape international 
norms and standards, promoting values such as freedom, 
innovation, and fairness.
    To build a strong future economy, we must invest heavily in 
a range of key strategic technologies, such as 5G wireless, 
artificial intelligence, and quantum computing.
    And we are holding this hearing in part because the U.S. 
and Chinese economic competition over these technologies--who 
makes them, who owns them, who benefits from them, who exports 
them, and who determines the norms and standards users must 
adhere to--will define much of the century.
    Emerging technologies can improve societies, but we must 
ensure that guardrails that govern their use are designed to 
foster innovation and fairness, and that they protect 
minorities and the free flow of ideas.
    China is attempting to displace the United States as a 
leader in high-tech sectors, but China does not play by the 
same rules of the road. It subsidizes State-owned enterprises, 
it restricts market access, and steals U.S. intellectual 
property.
    Moreover, by seeking to become a global leader in these 
technologies, China is also seeking to shape how they are used 
around the world by setting the standards.
    However, unlike the United States, which ensures 
international standards are consistent with democratic values, 
China has used new technologies such as AI to surveil and 
repress their own people, from the Uyghurs to Hong Kong's 
protesters.
    This is why I am pleased also to welcome Mr. Rasser, who is 
leading pivotal research into the competition between the 
United States and China in the area of technology.
    It is the vitality and creativity of our scientific 
research communities that will drive American innovation. And 
to ensure our future competitiveness, we must educate and 
prepare the workforce for the industries of the future.
    We are made stronger by investing in our people, by 
investing in a just society, and by working with our allies and 
friends in a multilateral fashion. To be competitive in the 
long term, we must continue to invest in scientific research 
and development, which is the building block for the next 
generation of technology.
    In Nevada, we know that technology is an economic driver 
for our State. Our Innovation State Initiative was making 
progress prior to this pandemic.
    So I look forward to hearing from all of the witnesses, and 
I hope that today's discussion will help us progress a 
discussion of how we can improve the lives of every American 
and ensure we provide a better future for the next generation.
    So thank you for joining us.
    Chairman Cotton. Thank you, Senator Cortez Masto.
    We will now go to the witnesses' opening statements. Your 
written statements will be admitted in their entirety to the 
record. We'll have opening statements for up to 5 minutes, and 
we will start with Professor Walter Russell Mead.

STATEMENT OF WALTER RUSSELL MEAD, JAMES CLARKE CHACE PROFESSOR 
      OF FOREIGN AFFAIRS AND THE HUMANITIES, BARD COLLEGE

    Mr. Mead. Well, Senator Cotton, Ranking Member, it is an 
honor to be in this hearing, and thank you for inviting me.
    When we look at China today, I think we see a puzzle as 
well as a problem; that is, China, we thought for some time, 
Americans tended to think that China had moved beyond Marxism, 
that it was sort of nominally Marxist but Communist ideology 
was no longer a factor in Chinese thinking. And that really 
turns out not to be true. Today's China combines a Leninist 
party structure, State control if not always ownership of the 
means of production, near totalitarian controls over society, a 
planned economy, an intolerant atheism, and a ruthless 
determination to hold onto power at all costs.
    That Beijing incorporates market mechanisms into its system 
is not new. Even Lenin introduced a new economic policy as a 
way to speed recovery from Russia's civil war. But the Chinese 
Communist Party, armed with information technology that lets it 
monitor and control economic activity on a scale Lenin could 
only dream of, has grafted market mechanisms onto a Communist 
State structure with great success.
    American policy responses to this puzzling entity must take 
account of the geographical, ideological, and economic 
dimensions of the new China. None of it will be easy. Even in a 
competitive relationship, our goal cannot be to stop China's 
economic growth or to dictate the course of its political 
development. The United States has no desire and has no power 
to prevent more than a billion people from working toward a 
better life.
    Nevertheless, the U.S. relationship with a revisionist and 
possibly revolutionary neocommunist China cannot simply be 
business as usual. Countries like China and Russia that claim 
they are actively seeking to undermine U.S. interests and 
counter U.S. values need to be taken at their word.
    U.S. diplomats and agents abroad must respond to attempts 
to extend hostile influence in strategically important 
countries and proactively defend American interests.
    When we come to economics, the United States cannot simply 
treat trade as a purely economic question with a country like 
China. As the Senator mentioned, distinctions between State-
owned corporations and private business cannot really be taken 
at face value. Chinese businesses and investors are under the 
thumb of central officials.
    Given the party's ambitions, other countries have no choice 
but to monitor Chinese investment and financial flows, to audit 
supply chains for key materials, and to eliminate strategic 
dependences on China and to eschew the use of Chinese tactics 
that threaten their telecom and infrastructure security.
    China's attempts to achieve technological supremacy through 
theft and illegal behavior are not, again, purely economic 
questions. They are security questions and need to be addressed 
with that degree of urgency.
    The steady military buildup of Beijing has implications for 
the U.S. defense budget, and the United States needs to scale 
up its efforts to secure primacy on land, at sea, in the air, 
in cyber, and in space. This, again, is not simply a matter of 
defense spending. It's a matter of investment in technology. It 
requires a very broad whole-of-Government approach.
    Developing the right policies for this new situation is a 
difficult but necessary task. It represents a significant 
commitment of American resources. It will require bipartisan 
cooperation. This Subcommittee hearing is certainly an 
excellent example of that. But at the end of the day, Beijing 
cannot be allowed to dictate its terms of engagement with the 
global system to which it is fundamentally hostile.
    Thank you.
    Chairman Cotton. Thank you, Professor Mead.
    We will turn now to Chris Giancarlo.

STATEMENT OF J. CHRISTOPHER GIANCARLO, SENIOR COUNSEL, WILLKIE 
 FARR & GALLAGHER, AND FORMER CHAIRMAN, U.S. COMMODITY FUTURES 
                       TRADING COMMISSION

    Mr. Giancarlo. Thank you, Chairman. Thank you, Ranking 
Member and Senators. It is an honor to be with you.
    As a former market regulator, I think a lot about how to 
strengthen the global competitiveness of U.S. financial markets 
and our overall economy, and I believe there are many steps we 
can take. Or perhaps there is one that is more important than 
the others, and that is, upgrading our own national currency, 
the U.S. dollar, into a modern programmable instrument for a 
new digital 21st century.
    Let me begin with three observations from my public 
service.
    First, we know that most of--excuse me. I lost my testimony 
here. We know that much of America's physical infrastructure--
its bridges and its tunnels and its airports and mass transit 
systems--have been allowed to age and deteriorate and become 
obsolete.
    Well, sadly, the same is true about much of our financial 
infrastructure. Systems for payment and settlement, shareholder 
and proxy voting, and investor access and disclosure that were 
global models in the 20th century are falling behind the times 
in the 21st, and nothing reveals the limits of our existing 
financial system more clearly than the tens of millions of 
Americans having to wait a month or more to receive COVID 
relief payments by paper check.
    My second observation is that we are entering a new era 
when things of value, like contracts, stock certificates, and 
titles of ownership, will be stored, managed, and moved around 
instantaneously from person to person. They will move without 
central validators, but through collaborative cryptography, 
tokenization, shared ledgers, and a network of computational 
algorithms. It will make sending money as easy and cost-free as 
sending a text message.
    My third observation is by acting now, we can harness this 
wave of innovation for greater financial inclusion, capital and 
operational efficiency, and economic competitiveness for 
generations to come.
    The Digital Dollar Project is a not-for-profit effort to 
encourage public discussion on potential advantages of a U.S. 
central bank digital currency, or CBDC, as it is known. The 
project's recent white paper proposes a new additional form of 
money, a tokenized digital bearer instrument. It would have the 
same legal status as the dollars in one's purse but on a mobile 
device. And it would operate alongside existing forms of money, 
distributed through the existing two-tiered banking system, and 
potentially recorded by distributed ledger technology. This 
type of CBDC is about the core financial architecture of the 
dollar itself.
    Today most of the world's tradable commodities, benchmarks, 
and contracts, are priced at America's deep and liquid 
commodity futures markets overseen by the CFTC. Those market 
prices are set and accounted for in the U.S. dollar, and this 
dynamic is one of the important pillars of the dollar's reserve 
currency status. Tomorrow those tradable commodities and 
contracts will be digitized, tokenized, and coupled with smart 
contracts. The question is whether the digital commodities and 
contracts of the future will still be priced and accounted for 
in the U.S. dollar if the dollar remains an analog instrument. 
Or will they be priced and accounted for in some other currency 
that is similarly digitized, tokenized, and programmable?
    We must face this question today. It would be foolish to 
take the dollar's predominant global status for granted. We 
must future-proof the dollar for a digital tomorrow. Doing so 
will spark creative new industries, jobs, and economic growth. 
But it is an enormous undertaking. It must be done carefully, 
thoughtfully, and deliberately. Something that is worthy of the 
dollar's global importance will take time to get right, but now 
is the time to get started.
    The recent launch of SpaceX reminds us that America 
explored outer space and the lunar surface through a series of 
pilot programs. They were known as Mercury, Gemini, and Apollo. 
So, too, should the U.S. explore a digital dollar in a series 
of well-conceived pilot programs.
    Today a team of fine researchers of the Federal Reserve is 
already thinking about a U.S. CBDC. The next step should be a 
series of pilot programs driven by the Fed and the there that 
draw upon the innovativeness of the private sector to test 
various designs, technologies, and protocols.
    Throughout modern history, the U.S. has been a leader in 
innovation. Whether launching the space program or building the 
Internet, it incorporated America's core values of the rule of 
law, privacy rights, freedom of speech, individual liberty, and 
free enterprise. The world today is asking what role America 
will play in the future of money. The choice is either we take 
a leadership role or we accept that the values of others will 
be enshrined in this new technology. Let us choose to lead, and 
in so doing let us enhance democratic values, increase 
financial inclusion, and future-proof the dollar for 
generations to come.
    Thank you.
    Chairman Cotton. Thank you.
    Mr. Morrison.

   STATEMENT OF TIM MORRISON, SENIOR FELLOW, HUDSON INSTITUTE

    Mr. Morrison. Chairman Cotton, Ranking Member Cortez Masto, 
it is not too much to say that the United States and the 
Chinese Communist Party are well into the great power 
competition of this and the next generation. To understand the 
stakes, we need look no further than what the General Secretary 
of the Chinese Communist Party, Xi Jinping, pledged to the 
party in January 2013, shortly after taking power, and I quote: 
``Capitalism is bound to die out and socialism is bound to win. 
This is an inevitable trend in social and historical 
development.'' He added his assistance to the party of, and I 
quote, ``the eventual demise of capitalism and the ultimate 
victory of socialism.''
    This is not a promise of peaceful coexistence between 
competing world views. General Secretary Xi promises an 
existential fight, one he intends to win.
    Attached to my statement I have included what we used to 
call the ``wheel of death'' when I served in Government. It 
shows how the CCP leverages what FBI Director Wray calls its 
``whole of society'' approach to steal its way to economic 
development and military modernization. I urge the Members of 
this panel, the staffs, and everyone watching to familiarize 
themselves with this unclassified U.S. Government product. Do 
not assume you are not involved in the competition with the 
Chinese Communist Party
    In my prepared remarks, I recommend to you three specific 
areas of focus to enhance U.S. economic strength to win the 
competition with the Chinese Communist Party, which I will 
briefly summarize for you.
    First, trade. Today the U.S., Mexico, and Canada comprise 
one of the freest, mostly deeply integrated trade blocs on 
Earth. It serves 478 million people without economic output of 
approximately $24 trillion per year. Now, imagine if a newly 
sovereign United Kingdom, with its 66 million people and nearly 
$3 trillion in gross domestic product, joined USMCA. What about 
Japan's $5.1 trillion in GDP and 126 million citizens? 
Australia, South Korea, New Zealand together represent $3.7 
trillion in gross domestic product and 81 million people. They 
could be brought in too.
    At a combined economic output of nearly $36 trillion and 
751 million citizens, a USMCA joined by the remaining Five 
Eyes, plus Japan and South Korea, could be the freest and most 
productive trade bloc on Earth, and it would be based on 
Western values with the rule of law. The choice between access 
to CCP's socialist marketplace and such a free trade bloc is 
really no choice at all.
    Second, leveraging U.S. foreign assistance and investment. 
The Chinese Communist Party really does not hide its plans. It 
certainly has not tried to hide its Made in China 2025 plan. In 
essence, the CCP has destroyed the free market in its 
prioritized areas. We need to strengthen the free trade bloc, 
as I outlined above, and implement a strategic approach that 
can level the playing field to defeat China Incorporated. And 
we have tools. We have lots and lots of tools.
    For example--and this is not an exhaustive list--the 
Export-Import Bank, the Development Finance Corporation, ID, 
the Millennium Challenge Corporation, and many, many others. In 
essence, the United States already has what amounts to a $200 
billion sovereign wealth fund. What is missing is a clear 
strategy and clear lines of authority to harness it.
    Who in the U.S. Government has the responsibility to make 
sure that the CCP does not acquire advanced aerospace 
technology in Ukraine, a key port in Portugal or Israel, or 
some of the world's largest rare earth deposits in Greenland? 
There must between clear direction given by the President for 
how he expects U.S. foreign aid to be utilized in the strategic 
competition with the CCP.
    Last, leveraging export controls. Export controls have 
historically been a key tool the U.S. uses to prevent the 
spread of military sensitive, and especially proliferation 
sensitive, technologies. They can also be used to advance U.S. 
values, as the Commerce Department proved yet again this past 
Monday with the third tranche of Entity List designations 
related to the CCP's digitized concentration camps. But the 
United States may also reach a point with export controls where 
it creates an incentive to off-shore technology and production 
to put activity outside the reach of our export controls and 
other tools.
    Secretary Ross should be commended for his 100 percent 
commitment to the China competition. That said, it is time for 
additional agencies with their authorities to come to the 
table.
    Additionally, policymakers should consider whether it 
continues to make sense to split responsibility for the 
administration of export controls between the Department of 
Commerce and the Department of State. Such separation adds 
complexity for exporters and creates gaps through which our 
adversaries can seek to acquire our technology.
    Mr. Chairman, Ranking Member, Members of the Subcommittee, 
when confronted the last strategic great power rivalry, we 
managed to make this a bipartisan fight. Teamed up were 
national security hawks and human rights doves, Wall Street and 
labor, churches and intellectuals. So must it be this time 
around as well.
    Thank you.
    Chairman Cotton. Thank you.
    Dr. Cook.

     STATEMENT OF LISA D. COOK, PROFESSOR OF ECONOMICS AND 
            INTERNATIONAL RELATIONS, MICHIGAN STATE
                           UNIVERSITY

    Ms. Cook. Chairman Cotton, Ranking Member Cortez Masto, and 
Members of the Subcommittee on Economic Policy, thank you for 
the opportunity to speak to you today on ``U.S.-China: Winning 
the Economic Competition''.
    At least three factors currently make or could make the 
innovation economy in the United States competitive 
domestically and internationally.
    First, by several measures the innovation workforce 
generates positive spillover for the entire economy and better 
pay and job security for those in the innovation economy. The 
innovation economy comprises 7 to 25 million workers. These 
innovation workers earn substantially more than the median 
income for all workers. The median innovation worker earned 
over $85,000 per year compared to nearly $38,000 for other 
workers. Innovation economy jobs are also growing faster than 
in other sectors, and unemployment rates are lower. During and 
following the Great Recession, the U.S. workforce contracted, 
while the innovation workforce was less affected by the overall 
economic contraction.
    Despite the popular conception of the innovation economy, 
one does not need a Ph.D. in engineering to participate in the 
innovation economy. For example, digital tools are being 
developed and refined to augment traditional contact tracing. 
This includes case management, proximity tracing, and exposure 
notification. In some States, as little education as a high 
school diploma is required, and online training is both free 
and available. In general, if workers are able, getting 
additional training is desirable during periods of weak labor 
markets such that skills are not lost or are enhanced, 
something we observed during the Great Recession.
    Second, another feature that makes the U.S. competitive 
internationally is the protection of intellectual property 
rights. This is a feature of the American innovation system 
that is the envy of other countries and is used by firms that 
plan to sell their products and processes internationally. My 
research shows that firms in some emerging markets like China 
decided to do what Soviet inventors did during the cold war and 
take advantage of the U.S. patent system to protect their 
intellectual property. Chinese interests in protection of 
intellectual property rights has been increasing over several 
years. How do we know this? It can be measured in the number of 
U.S. patents obtained by inventors who are Chinese residents, 
and the share----[Loss of signal.]
    Chairman Cotton. We are apparently having connectivity 
issues with Dr. Cook, so for the moment, why don't we move to 
Mr. Rasser. We will work on Dr. Cook's connection and hopefully 
have the conclusion of her opening statement once she is back 
online.
    Mr. Rasser.

  STATEMENT OF MARTIJN RASSER, SENIOR FELLOW, TECHNOLOGY AND 
 NATIONAL SECURITY PROGRAM, CENTER FOR A NEW AMERICAN SECURITY

    Mr. Rasser. Thank you. Chairman Cotton, Ranking Member 
Cortez Masto, distinguished Members of the Subcommittee, thank 
you for the opportunity to testify today on how to win the 
economic competition with China.
    This contest of economic power is rooted in technological 
advances. U.S. economic security is entrenched in American 
technological leadership. Today that leadership is at risk. 
Preserving it requires renewed investments in R&D and in human 
capital. It means addressing illicit tech transfer which costs 
the U.S. economy hundreds of billions of dollars. The United 
States must also protect its competitiveness by controlling 
exports and securing supply chains.
    While the United States can do a lot on its own, it can do 
much more with its unmatched network of allies. The stakes are 
high: long-term economic security, technological 
competitiveness, critical infrastructure integrity. A 
multinational approach to technology policy should be a 
cornerstone of the U.S. strategy to outcompete China.
    Working with allies, the United States can develop and 
execute a full strategy to build a technology future where the 
most innovative and dynamic companies succeed, not those 
swaddled by mercantilist industrial policies, a future that 
promotes and protects democratic norms and principles, not one 
that erodes our freedoms or threatens our values.
    So what would this look like? Let me touch on two examples 
of fundamental importance to the economic competition with 
China: 5G and semiconductors. 5G networks will be essential to 
and inseparable from all we do. 5G will enable a transformation 
of global infrastructure. Getting 5G right is all the more 
urgent. We all know the risks while they pose this to U.S. 
national security and that of its allies.
    The United States has a chance to introduce a paradigm 
shift in the communications industry. Wireless infrastructure 
built on a modular architecture with open interfaces, often 
referred to as ``OpenRAN.'' A modular architecture allows an 
operator to choose multiple vendors for a range of offerings. 
No more being locked in with a single, large, integrated 
vendor. Open interfaces, which means equipment from any vendor 
working with that of another, make that possible.
    This new industry goes to the heart of concerns over 
untrusted vendors such as Huawei. The upsides are big: better 
security, robust supply chains, cost savings, and healthy 
competition. All this blunts Beijing's industrial policies. The 
United States cannot bring about this shift on its own. It 
should join forces with allies in Europe and Asia on joint R&D 
and promoting OpenRAN deployments.
    Preserving America's edge in semiconductors needs a similar 
approach. Semiconductors are the backbone of modern military 
and economic power. The United States has a major global lead 
in semiconductor design. China looks to challenge that 
position. To safeguards its advantage, the United States should 
pursue a three-part strategy.
    One, place multilateral export controls on semiconductor 
manufacturing equipment. Beijing wants to position itself as a 
semiconductor powerhouse. To build its own foundries, however, 
China is dependent on foreign machines. This equipment is made 
by companies in just a handful of countries: the United States, 
Japan, the Netherlands. Together they account for 90 percent of 
global market share. This is huge leverage. Working together to 
control exports to China protects a key advantage.
    Two, secure semiconductor supply chains. A new 
international consortium comprised of tech-leading democracies 
could pull resources to build new foundries and shift 
production out of China. Now you have greater geographic 
diversity and you offset lost revenue from export controls with 
new production lines.
    Three, create the next generation of microelectronics. This 
means investing in R&D for breakthroughs, new materials, and 
designs. Here also, working with allies is the smart play. 
Collaboration options range from personnel exchanges to setting 
up joint R&D centers. Congress can promote these partnerships 
by enhancing visa and work permit regimes, providing grants and 
loans, and organizing multinational innovation prize 
competitions.
    U.S. technological leadership is at the core of the 
economic competition with China. The United States needs a 
national strategy for technology with allied collaboration as a 
key feature. Together, the world's leading tech democracies can 
build and maintain an innovative global economy that promotes 
and protects democratic norms and values.
    I look forward to taking your questions. Thank you.
    Chairman Cotton. Thank you, Mr. Rasser.
    Dr. Cook, we regret the connection difficulties. Please 
complete your opening statement.
    Ms. Cook. Thank you, Senator Cotton.
    Between 1963 and the year 2000, Chinese residents were 
granted 917 patents from the U.S. Patent Office. That ranked it 
number 30 out of all the other foreign countries. By 2019, they 
were granted 22,294 patents, 24 times the period 1963 to 2000, 
and they ranked number 3 behind Japan and South Korea and 
represented 10.9 percent of patents issued to foreign residents 
by 2019.
    It is clear that the U.S. patent system is offering 
something the Government of China will not or cannot offer its 
inventors and entrepreneurs: determination of originality, or 
first to patent, and defense of intellectual property, and, by 
extension, the ability to compete abroad, to encourage 
innovation, and, therefore, to promote long-term economic 
growth.
    A third factor that could make the U.S. system of 
innovation competitive internationally is more diversity and 
inclusion at every stage of the innovation process. My coauthor 
and I calculate that, between 1970 and 2006, patent output for 
all U.S. inventors is 235 patents per million; for women, it is 
40 patents per million; and for African Americans it is only 6 
patents per million. Cook and Yang find that U.S. GDP per 
capita would be 0.6 percent to 4.4 percent higher if there were 
more African Americans and women included at each stage of the 
innovation process. I propose a number of policy interventions 
which might broaden participation in the innovation economy. 
Among these are increasing the participation of women and 
minoritized groups in STEM education and in the SBA's SBIR and 
STTR programs and addressing racial and gender workplace 
climate issues at tech firms and other institutions where 
invention and innovation occur.
    In addition, to broaden participation in patenting and 
innovation, accurate demographic data related to patenting must 
be available. The SUCCESS Act, which this body passed in 2018, 
and the IDEA Act, which is currently being considered by this 
body, are based on my previous research and create the 
foundation for careful collection of and reporting on such 
data. I urge passage of the IDEA Act in order to measure and 
encourage progress in patenting, innovation, competitiveness, 
growth, and higher living standards in the United States and 
for all Americans.
    Thank you.
    Chairman Cotton. Thank you, Dr. Cook. Thank you to all of 
our witnesses.
    We will now move to the first round of questions. Out of 
deference and gratitude to the Members who showed up for this 
hearing, almost all of the Subcommittee, we will keep the first 
round to 5 minutes. For those of you who have more questions, 
we will have subsequent rounds in which timing will be more 
flexible. I will begin, and I will lead by example.
    The coronavirus pandemic has exposed the extent of our 
dependency on China for critical goods. Earlier this year, the 
Chinese Communist Party imposed export restrictions on personal 
protective equipment produced in China that is so important for 
our doctors, our nurses, our law enforcement officers, and 
other frontline workers.
    Xi Jinping and the party maintain control over other 
segments of supply chains for personal protective equipment, 
life-saving drugs, rare earth elements, microelectronics, to 
name just a few. It is an economic and national security 
imperative that we end this dependence.
    I want to ask Professor Mead first, can you please discuss 
any historical parallels between our present economic and 
supply chain entanglement with China and what we might draw 
from such historical parallels to past great power 
competitions?
    Mr. Mead. Senator, thank you. If we look back to, say, the 
1930s and 1940s when the U.S. was facing industrialized 
opponents in Nazi Germany, Fascist Italy, and Imperial Japan, 
we can see that in these cases there actually were ways in 
which U.S. investments in U.S. products were supporting our 
opponents. There are allegations that Ford factories were still 
producing military equipment for Germany after the war began. A 
lot of Japanese rearmament and military operations dependent on 
scrap metal and energy exports from the United States.
    So we have definitely seen cases in the past where an 
economic entanglement may be originating in time of peace, then 
in time of war or time of great tension proved to be 
problematic.
    The Soviet Union was less of an example of this because the 
Soviet Union was not entangled in the supply chains of the 
Western world the way China has become. I think our problem 
here is that we have assumed that trade was simply an economic 
question with China. It seems to me that is not the case. It is 
political, it is security-related, and we need to reexamine the 
relationship with that in mind.
    Chairman Cotton. In addition to strategic reasons for 
pulling up supply chains, there are also compelling moral 
reasons. The State Department just issued a business advisory 
that factories in Xinjiang and elsewhere in China are at risk 
of using slave labor. The Chinese Communist Party is known to 
use slave labor to manufacture goods.
    Mr. Mead, do you have any thoughts on how we can convince 
or maybe compel U.S. business leaders to move those supply 
chains out of China not only for our strategic calculations but 
also for these moral considerations?
    Mr. Mead. Well, you are right. The moral issues are quite 
serious, and the evidence that is coming to light now about 
both the extent of the repression of minorities in China and 
the tactics being used really do require substantial response.
    I would say one thing that we should do is look at some of 
the examples that we have seen from the World War II era, you 
know, where Japanese companies and German companies have had to 
pay compensation for slave labor. I think we should make sure 
that there is--you know, we should construct a framework so 
that companies that are using slave labor cannot get away with 
it and have to pay compensation and restitution, and that there 
is real liability to that. What that would do is it would 
ensure that corporations would police their own supply lines to 
a much greater extent, and this I think is something that we 
need to do.
    Additionally, identifying particular factories in China or 
industries where this kind of labor or these tactics are a 
greater concern could also be quite beneficial and important, 
and that is something the Government can do.
    Chairman Cotton. Thank you for that answer. I could not 
agree more than neither multinational corporations nor the 
Chinese Communist Party should be benefiting from slave labor.
    I have more questions on this topic, but to honor our 5-
minute rule, I am going to stop now and turn the questioning 
over to Senator Cortez Masto.
    Senator Cortez Masto. Thank you. So far this has been just 
an incredible conversation. But let me maybe just start--there 
is so much to it. Let me start with emerging technologies 
because--and, Mr. Rasser, let me start with you because I 
absolutely agree that 5G is a game changer, and whichever 
country has the ability to take the lead in this space is just 
going to benefit tremendously in the next century.
    Let me ask you, give me your thoughts on what we should be 
doing to develop 5G. There has been a conversation amongst us, 
and Senator Cruz and I believe that when we are looking at 
developing 5G, it should be a public-private partnership, and 
the private sector should be involved. There has been 
discussion that the Government should take literally control 
over the growth of 5G in this country.
    Talk to me about not only best practice and how we should 
approach this, but, two, if we do not approach this in the 
future, who is our biggest competitor in this space? And when 
would they overcome us in addressing and taking on the lead 
when it comes to 5G?
    Mr. Rasser. Thank you, Senator. As you mentioned, the 5G 
question is critical. A lot of the options that are being 
discussed now, such as building a U.S. national champion or 
perhaps taking an equity stake in a company like Nokia or 
Ericsson, I see that more as just nibbling at the edges of the 
problem, because what we are still doing then is perpetuating a 
very inefficient industry. Right now we are facing an oligopoly 
dominated by four companies, and that still plays into Huawei's 
game, where Chinese industrial policies can still create an 
unlevel playing field, which makes it very difficult and very 
expensive for any U.S.-backed company to compete.
    That is why I am advocating for a whole new approach, which 
is really promoting open architecture, OpenRAN, as the way 
forward. This creates a much more competitive industry and one 
where primarily U.S. companies are already very strong. And by 
creating new entrants into the market, you diversify the supply 
chains; you create healthy competition, and particularly this 
is an area where Huawei in particular is not very well placed 
to compete. The barriers to entry for software are quite low, 
which will encourage a lot of new companies to come in. And 
Huawei, as we know, is particularly bad at software 
development, so the whole compelling reason that Huawei 
presents now for being the go-to source for 5G equipment goes 
away.
    But, again, I do want to emphasize that in order to promote 
this shift in the industry, we do have to work with allies and 
partners on this shift in the industry. We do have to work with 
allies and partners on this because so much of the 5G industry 
is focused in Europe and Asia right now. We have world-class 
companies here in the United States, such as Cisco and 
Qualcomm, for example, but it will take a collective effort to 
really promote that effort.
    Senator Cortez Masto. Thank you. So let me open this up to 
the panel as well, because I know--we have talked about this, 
and this is my concern. We see how China has literally 
subsidized State-owned--subsidized a lot of what we see, Belt 
and Road Initiative, and so much that is happening. And to the 
extent that we invest in our research and development here in 
the United States, there is so much more that needs to be done.
    But let me ask you this: How are our global and regional 
development organizations, including the United Nations, the 
World Bank, the Asian Development Bank, and AIIB, financing and 
promoting China's one belt, one road goals? And in what ways, 
if any, do such activities support or undermine our interests? 
I will open it up to the panel. Does anybody have any thoughts 
around that, those concerns?
    Mr. Rasser. I will jump in real quick. It is pretty evident 
how Beijing has taken advantage of their entry into the 
international system that the United States built after the 
war. I think it is time for fresh approaches to international 
organizations such as creating a technology alliance, for 
example, amongst the world's tech-leading democracies that can, 
with their combined purchasing power, help rising countries, 
middle powers, build secure digital infrastructure, for 
example, by providing new technological alternatives and 
providing grants and loans in order to help them build this, 
provide viable alternatives to cheap Chinese technology.
    Senator Cortez Masto. Thank you. I notice my time is up. I 
will throw it back to the Chairman. Thank you.
    Chairman Cotton. Thank you, Senator Cortez Masto. Thank 
you, Mr. Rasser, for a very informative answer.
    We will turn now to Senator Tillis.
    Senator Tillis. Thank you, Mr. Chairman. I have got to do 
an AV fix here real quick. Sorry. I was watching you on TV for 
the opening comments, and now I will turn it off.
    Thank you for this important Committee, and I was 
particularly interested in the opening testimony. Mr. Rasser, I 
want to maybe pick up where you left off in response to the 
Ranking Member's question. I know that we are trying to figure 
out what that fresh approach looks like, and I think a part of 
this is to what extent the other Nations are going to step up. 
I know recently China has mentioned possible incentives to 
their manufacturing base to onshore some of the manufacturing 
that is in China. What should that look like both from an 
international coordinated perspective and what we are doing? I 
am in the camp of trying to provide a basis for the numbers to 
work in the United States, to bring back some of the jobs, but 
I think it is equally important that we look at relationships 
with our allies, more reliable Nations, to potentially move 
some of the links in the global supply chain out of China.
    At the same time, we have to pay attention to the 
complexity of the supply chains and the fact that some of the 
inputs may themselves come from China.
    So how can we work on that in a coordinated fashion?
    Mr. Rasser. Thank you, Senator. Well, one of the ways is 
what Mr. Morrison mentioned. I think it is a great idea to look 
at an expanded democratic trading bloc, for example. But, in 
general, there is a lot of interest that you are seeing now. 
There is, for instance, what the Quad is doing now, for the 
first time doing military maneuvers in the Indo-Pacific. There 
is great interest and greater cooperation on that front in 
India just because of China's reach and recent belligerence, 
but also in Europe, which before has been somewhat fractious. 
The pandemic crisis presents the United States and its allies a 
real opportunity to bring about substantial change. Senator 
Cotton mentioned the extensive brittleness of our supply 
chains. All these countries have a common interest in securing 
supply chains for critical inputs into our economies. So 
because of the complexity of those supply chains, I really see 
the only feasible way to do this in a time- and cost-effective 
manner is to collaborate on figuring out how to best 
restructure these supply chains.
    Part of that will be bringing capacity back home, but we 
also need geographic diversity in the supply chain so that we 
can have a search capacity if need be, or in the event of 
another major crisis where part of the supply chain is knocked 
out that we can restart production and manufacturing in other 
areas.
    Based on discussions I have been having with colleagues 
around the world around the concept of the technology alliance, 
one of the key areas of common interest is exactly what you 
said, to rebuild supply chains in a way that they are secure, 
robust, and resilient.
    So the appetite is there. The devil is in the details, and 
that is something I am working on in a project right now, and I 
will be putting forward recommendations on that front in coming 
weeks on how to get that dialogue started and what specific 
steps to take.
    Senator Tillis. Well, it seems to me--and I want to get on 
to a question of Ms. Cook, but, you know, it seems to me if we 
dust off the TPP and we advance discussions with two trade 
agreements with Asia Pacific countries predominantly and 
Europe, those should be a stream in there that really tries to 
focus on this onshoring and the kinds of agreements that you 
have talked about particularly around technology. I hope that 
we can actually get those back on the books, if not TPP in its 
original form, then a series of bilateral relationships with a 
number of jurisdictions in Asia Pacific that could also 
potentially be hosts for some of the links in the supply chain.
    Ms. Cook, in my remaining time, I love the way the Chairman 
has managed the time. I may stay on for another round. I just 
wanted to mention to you and to everyone here, I think 
intellectual property theft, if we do not have that concomitant 
with trying to accelerate R&D and more innovation in this 
country and with our allies, we could be aiding and abetting a 
process where China steals our intellectual property. I have 
monitored this closely as the Chairman of the Intellectual 
Property Subcommittee on Judiciary, and we have got to fix that 
leakage for innovation that allows them to catch up pretty 
quickly. It is very clear that China constantly steals our 
technology, puts something on the market that looks 
substantially similar.
    Ms. Cook, I am going to follow up with you on your points 
on diversity and innovation. I have held a Subcommittee hearing 
on that subject, and I am going to be very interested in 
getting your feedback. I think it is a priority for us to 
accelerate innovation.
    Thank you, Mr. Chair.
    Chairman Cotton. Ms. Cook, would you like to answer that?
    Ms. Cook. Did you want me to respond, Senator Cotton?
    Chairman Cotton. Go ahead.
    Ms. Cook. OK. I was just going to say that I think you are 
exactly right that China is taking advantage of our public 
good, the U.S. patent system. This is a 35-percent increase, a 
30-fold increase almost, in the number of patents they have 
gotten in the U.S. system. And on the other side, they are 
using our technology without compensating the inventors who 
have been investing in this kind of technology, whatever the 
technology is. So I completely agree with you wholeheartedly. 
We have got to stay competitive and get as many people involved 
in innovation as we can.
    Senator Tillis. Thank you.
    Chairman Cotton. Thank you.
    We will turn now to Senator Menendez.
    Senator Menendez. Thank you, Mr. Chairman.
    While this hearing is looking at our economic competition 
with China, I am working with my colleagues on a bill to create 
a comprehensive China strategy, including trade and economic 
issues and investments here at home, which we plan to introduce 
soon. But given the shortcomings of President Trump's ``all 
bluster and tactics, no strategy'' approach to China, a 
comprehensive and integrated approach I think is very much 
needed.
    At the start of his trade war with China, the President 
told Americans that if they were willing to accept some short-
term pain, higher prices for manufacturing inputs and consumer 
goods, the long-term tradeoff would be worth it. China would 
stop its predatory behavior, and we could finally have a level 
playing field.
    But after the Phase 1 part of the deal, the Administration 
chose to keep the tariffs in place because, by the 
Administration's own account, China still has not dismantled 
overcapacity, China had not stopped stealing American 
intellectual property, and China had not stopped subsidizing 
its own State-owned industries.
    Ambassador Bolton recently wrote that, in his negotiations 
with President Xi, President Trump ``stressed the importance of 
farmers and increased Chinese purchases of soybeans and wheat 
in the electoral outcome. In other words, from my perspective, 
the President sold out American manufacturers, innovators, and 
workers for a literal hill of beans. And it is even unclear now 
whether China is buying the U.S. agricultural products they 
said they would.
    Then last week the President, as he does so many times, 
said the quiet part out loud. He said that he is no longer 
interested in talking to China about trade. He admitted what 
many Americans already knew, that the Administration never 
really had an intention of solving our trade problems with 
China. The President got what he wanted: a shallow promise from 
Communist China to help his base while America got saddled with 
more economic pain and a corrupt and ineffective trade policy.
    So my question to this panel: Does anyone on the panel 
believe that the Phase 1 deal requires China to end its massive 
State subsidies?
    [No response.]
    Senator Menendez. Do I take your silence as saying no, you 
do not believe so?
    Mr. Mead. Senator, if I could briefly speak, it is a good 
question. I think one response to that would be that China has 
built its entire economic system on a foundation of subsidies, 
control, export promotion using dumping, and other things. It 
is not going to make that change lightly. It is a difficult 
change. It is something that is likely to be a multiyear, 
multi-Administration task. So my own sense would be we have a 
long way to go, and it is going to take a lot of deep thought 
and a bipartisan effort to really make those changes happen.
    Senator Menendez. Does the Phase 1 deal do anything--again, 
I will pose it to the panel--to reduce Chinese overcapacity in 
steel and aluminum?
    [No response.]
    Senator Menendez. I assume the silence means it does not. 
Does the Phase 1 deal require China to end cyberattacks on U.S. 
companies or even the U.S. Government? I think the answer to 
all of this is pretty clear. No.
    Mr. Giancarlo, I want to ask you about another flaw in the 
Phase 1 deal. We know that China committed to buy a total of 
$32 billion worth of agricultural products by the end of 2021, 
but we do not know the specific breakdown of the purchase 
commitments from each individual product like rice, wheat, or 
soybeans.
    Now, when the deal was announced, USTR Ambassador 
Lighthizer said that those specific targets would not be made 
public in order to prevent market manipulation. But here is the 
problem: The Chinese Government does know those individual 
targets, and if they wanted to, they could use that information 
to distort or even profit off movements in our agricultural 
markets.
    To your knowledge, does the Phase 1 deal include anything 
to prevent China from using this nonpublic information to 
manipulate U.S. commodity markets?
    Mr. Giancarlo. I do not have information on that 
specifically, Senator. During my tenure at the CFTC, though, we 
were not aware of overt efforts to manipulate markets by China.
    Senator Menendez. Would you recommend that the 
Administration share the full details of the Phase 1 deal with 
the CFTC and SEC so those agencies can police potential market 
manipulation that could come from the China Phase 1 deal?
    Mr. Giancarlo. Again, during my time there was good 
information sharing, but I cannot speak to whether that 
specific information was passed----
    Senator Menendez. Yeah, my question was: Would you suggest 
in the absence--let us assume there is not any sharing. Would 
you suggest that they do that?
    Mr. Giancarlo. Yes, I think that information sharing 
amongst agencies is critically important so each individual 
agency can fulfill the mission it has been assigned to do.
    Senator Menendez. Thank you, Mr. Chairman. I have other 
questions. I will wait for the second round.
    Chairman Cotton. Thank you.
    Senator Kennedy.
    Senator Kennedy. Thank you, Mr. Chairman, and I want to 
thank all the members of our panel today.
    I would like to offer up a proposition for each of our 
panelists to react to. I will take about a minute to do so, if 
each of you would, please, and here is the proposition. Our 
goal should be a China that has a vested interest in a stable 
world order. In order to achieve that, China must be made to 
stop its predatory behavior, not just in terms of its economics 
but its predatory behavior socially and its predatory behavior 
militarily.
    The final tenet of the proposition that I would like your 
reaction to is that that will be impossible to achieve by 
America alone, that we have to have a coalition of like-minded 
countries--Europe, Canada, Australia, New Zealand, South Korea, 
Japan, as much support as we can get in Africa and South 
America.
    Do you agree with that proposition or is that proposition 
wrong?
    Mr. Giancarlo. Senator Kennedy, maybe I can lead off on 
this. I think ultimately the future is going to be determined 
in a contest of values. The values of a liberal world order, of 
openness, freedom of speech, rights of privacy, free 
entrepreneurship is going to be in conflict with the closed-
society approach, a society of central control, central 
surveillance. And it is going to be that battle of ideas that I 
think is going to determine what the future is going to look 
like. And what we need to do, I fully agree, is align with 
other value systems, the other economies that share those value 
systems, and make sure that those values are on offer to the 
developing part of the world for them to choose which course 
they want to take and what the future will look like.
    So I agree with you wholeheartedly that we need to ally 
ourselves with others that share these values in the global 
economy and make sure that the future order of events reflects 
those values and not the alternative that China is offering of 
closed systems, State surveillance, State control, lack of 
privacy, lack of freedom of speech.
    Senator Kennedy. Anyone else?
    Mr. Mead. Senator Kennedy, if I may, I agree with the 
proposition insofar as China accepts that we are not going 
anywhere, and I do not believe they have accepted that yet. As 
I mentioned in my opening, General Secretary Xi believes that 
history dictates that socialism will prevail over capitalism. I 
believe China absolutely wants a stable world, but it is a 
world where socialism has defeated capitalism. They need to 
understand we are not going anywhere.
    And so I think the extent to which we can partner with 
like-minded democracies--Korea, the Five Eyes, Japan--will 
strengthen our bid for survival. But General Secretary Xi is 
telling his people, who are very proud of their 5,000-year-old 
civilization, that capitalism will be defeated. So the first 
thing we have to do is prove to them that we are not going 
anywhere.
    Senator Kennedy. OK. Thank you. Who else?
    Mr. Rasser. Yes, Senator, I agree with what you stated, and 
I concur with the comments of my fellow panelists. China is a 
revisionist power. It does not want to be a part of the 
international system that the United States and its allies 
created. So, yes, a united front is absolutely necessary to 
make sure China understands that what it seeks is not realistic 
and not feasible. Thank you.
    Senator Kennedy. Do you think we are doing enough to 
achieve that united front?
    Mr. Rasser. Not yet, Senator, but there is a lot of good 
movement underway in order to make sure that that is happening. 
So we are seeing a lot of good initiatives popping up around 
the world. Now the task at hand is to solidify all those 
individual efforts into a more coherent strategy where we can 
all move forward together.
    Senator Kennedy. Cut me off, Mr. Chairman, when I am over 
time. I cannot see the clock.
    [Laughter.]
    Ms. Cook. I can just jump in, if I might.
    Chairman Cotton. Go ahead, please.
    Ms. Cook. Just for a moment. In the narrower realm of 
intellectual property rights, you are exactly right. On the one 
hand, China would like a system that protects its own firms' 
intellectual property rights, and that is why the U.S. system 
is being taken advantage of extensively.
    On the other hand, when I was in China, I was being told 
that it is a developing country so, in fact, it deserves to 
have property rights abrogated, that it does not have to follow 
these. And I pointed out to them that they have been protecting 
property rights for millennia. I looked at the terra cotta 
soldiers and reminded them that even there you could see 
intellectual property rights being protected when we do not 
know who the inventor of Venus de Milo is, our oldest object in 
the Western world. So I had to point out to them that they have 
been interested in this for a very long time. They have been 
interested in it globally, and we have an interest to have 
allies who work with us to protect intellectual property from 
whatever firm, whatever inventor, in any part of the world. 
Thank you.
    Senator Kennedy. Thank you, Mr. Chairman.
    Chairman Cotton. Thank you, Senator Kennedy.
    Senator Jones.
    Senator Jones. Thank you, Mr. Chairman. Thank you for this 
hearing. Thanks to all our witnesses today.
    First, let me kind of align myself with what Senator 
Kennedy's proposition is. I completely agree with my friend 
from Louisiana about that. But I will say my one big concern 
that I have had over the last year-and-a-half or so has been 
that we seem to be going it alone against China. I think that 
trade issues and agreements with China are important. They have 
been a rogue country. But my concern has always been we seem to 
also be starting trade wars with our friends and allies at the 
same time, and I thought that was, you know, counterproductive.
    Having said that, I would like to also talk a little bit 
about the markets, and we talk a lot about technology and 
semiconductors and all of those things. And I appreciate 
Senator Cotton's work on the semiconductor issue. I was also a 
part of the bills, and I am so pleased that we will get it in 
the NDAA.
    But closer to home, I want to talk about health care 
manufacturing. You know, when this pandemic started a few 
months ago, the images of doctors and nurses who were having to 
wear garbage bags and makeshift PPE and reuse masks and do 
those things really struck me that we had a real serious 
problem with health care manufacturing in this country.
    I wrote a letter to our Governor asking that she provide 
State incentives to try to bring some of that back to Alabama. 
We used to have a huge textile manufacturing segment in 
Alabama.
    I have introduced a bill, Health Care Equipment in America, 
that would give some tax incentives to kind of repurpose some 
existing structures that have been abandoned from businesses or 
either to startup new ones. And I would like to ask, you know, 
is that the kind of effort we need? Because I really believe 
certainly that we can on a bigger scale look at a lot of 
different things to try to bring jobs back. But health care 
manufacturing, those masks, the PPE, the ventilators, those 
kind of things, that is not something that is going away. And, 
in fact, I think it is something that this country is going to 
be using in greater and greater numbers, even as this pandemic 
slides down, hopefully within the next few months.
    Dr. Cook, could you address that a little bit about what we 
need to do to try to bring this kind of manufacturing for 
issues like these, what would normally be like a little bit 
lower-paying job than these high-tech jobs, but bring those 
back to this country? What can we do to ensure that that 
happens?
    Ms. Cook. I think you are exactly right. We have got to 
diversify the supply chain that we have been caught out, as we 
are, with respect to health care manufacturing as well as other 
types of manufacturing, even simple manufacturing. I think that 
we really need to think more about this. And as you know, since 
I am sitting in the middle of manufacturing central in 
Michigan, the infrastructure is still here, and we can still do 
this if we thought broadly about how that could be done, 
absolutely. This is a national security priority. It is a 
national health priority. I agree with you.
    Mr. Morrison. Senator Jones, may I----
    Senator Jones. But I will be quick to add that Alabama's 
going to give Michigan a run for your money on manufacturing, 
with automobiles and other things.
    Mr. Morrison, did you want to say something?
    Mr. Morrison. Yes, sir. I appreciate that. Sorry for 
interrupting. Your point about the supply chain that we talked 
about and health care manufacturing in particular is spot-on, 
and it reminds me, frankly, that we do not actually understand 
the extent of our supply chain and its compromise to China.
    I had a colleague in Government who told us a story when he 
was talking to the Chinese about 5G, and the Chinese were 
clearly growing very testy with our success on countering 
Huawei on 5G. This Chinese diplomat told my colleague in 
Government that there are 2.5 million Americans with Huawei 
code, Huawei, on their pacemakers, and he said, ``It would be 
horrible if they could not get an update.'' That is the extent 
to which our health care supply chain is compromised. And I 
think, frankly, we do not actually even understand the full 
extent of it. We all think about 5G, we think about face masks, 
but who thinks about who has built the software code for our 
pacemakers for 2.5 million Americans?
    Senator Jones. Well, thank you for that. I appreciate that, 
especially since my Mom is back home in Alabama with a 
pacemaker. So if she starts speaking Chinese, I will understand 
now. And I am not making light of that. I think it is a very, 
very serious problem.
    One thing very quickly as my time expires. State-owned 
entities, we have got local governments around the country that 
are purchasing and doing different things in procurement. What 
are the tools out there--and I will ask this of anybody real 
quickly. What are the tools out there to help State and local 
governments in their procurement understand who they are 
actually purchasing from and contracting with? And do we need 
some kind of data base of some type that these folks could 
access to help them in their procurement decisions? I will just 
open that up to anybody who might have an answer.
    Mr. Giancarlo. Well, Senator, I might jump in on this. You 
know, as we think about delivery systems, we need to think 
about the technology on which they are built. The world is 
quickly moving to a new technology, distributed ledger 
technology for global supply chains, and with it will come the 
opportunity to identify every element along the supply chain 
from original origin all the way to final delivery and final 
manufacturing capacity.
    Now, as we think about that technology, however, we have to 
recognize that China is also providing leadership in that area 
with their new blockchain initiative across their entire 
country and then out through their distribution systems. So we 
in the United States also need to make sure that we remain a 
leader in this technology as well so we can have exactly that 
verification identification that you are talking to at the 
final point of purchase.
    Senator Jones. Great. Well, thank you.
    Thank you, Mr. Chairman. I may have some questions for the 
record. Thank you.
    Chairman Cotton. Thank you.
    Senator McSally.
    Senator McSally. Thanks, Chairman Cotton, for holding this 
very important hearing. For those of us who served, Senator 
Cotton and myself, we have seen China on the rise and the 
growing national security threat. The economic element of that 
is really important for us to be addressing today and what we 
can do--how we got here and what we can do to address this for 
our own national security, for our public health, and to ensure 
that China does not replace us. They are trying to replace us 
and dominate the world. We have seen that. They are doing it in 
plain sight as a parasite off of us. So I appreciate the 
thoughtful discussion today about this.
    As was already discussed, unlike previous--you know, the 
cold war of the West against the Soviet Union, we are in a 
situation where over the last many years we have become 
economically entangled with China. And as has already been 
discussed, supply chains for national security elements, our 
critical minerals, our pharmaceuticals, our PPE, semiconductors 
somehow in plain sight have been shifted over to China, and we 
are now in a place where we are reliant on an adversary for 
these things. And they have already threatened at different 
times to cut those off.
    How do we disentangle ourselves as quickly as possible to 
ensure that our national security is not at stake as tensions 
continue to rise so it is protecting American jobs, but also 
American security? There was a hearing yesterday about 
coronavirus vaccine development, and companies were asked, 
yeah, they said they would be making the vaccines in America, 
but it was not clear whether there were any elements that would 
be reliant on China, who could use it against us to threaten to 
cut that off with increased tensions.
    So, Mr. Morrison, can you comment on--like this is a very 
different great power competition and the entanglements are 
deep and wide, and what do we need to do immediately? What does 
Congress need to do? And then what does the private sector need 
to do on their own to, as quickly as possible, disentangle us 
economically?
    Mr. Morrison. Thank you, Senator. You are exactly right. 
When I got my last flu shot, which I guess was probably last 
October, I grabbed the little wrapper that the flu shot came 
in, and sure enough, ``Made in China.'' So the flu shot itself 
we do not even produce here anymore. And so can we make sure 
that the syringes and other basic commodities, the active 
pharmaceutical ingredients we need, are not under the thumb of 
the Chinese Communist Party?
    Unfortunately, we did not get into this mess overnight 
since the decision was made to bring China into the World Trade 
Organization over 20 years ago, and we are not going to get out 
of it overnight. We need to do a number of things in parallel. 
We need a new free trade bloc. We need to harness--I referenced 
we have $200 billion or so between the DFC and the Eximbank 
that amounts to a sovereign wealth fund. We need to harness 
that right now. We need to harness the Defense Production Act, 
harness free trade. We need to map our supply chain, 2.5 
million Americans with Huawei source code on their pacemakers. 
Where else are those kinds of compromises?
    But we have a plan. The Chinese are not shy. They use the 
Made in China 2025 plan. Start with those strategic goals, 
those State champions, map those supply chains, figure out who 
our allies are that we can partner with. I do not know about 
you. I will not lose much sleep with 5G partnerships with 
Sweden, Finland, or Japan. But I do when it is Huawei or ZTE.
    Senator McSally. Yes.
    Mr. Morrison. And so just to not burn all your time, we 
need to do a lot of things, and we need to do them all at once 
because we have been digging this hole for over 20 years now, 
and we need to stop digging as the first triage.
    Senator McSally. Great. Thanks. I know other panelists may 
have something else to say, but I also want to address the--so, 
you know, first talk about our supply chain for things that we 
need and how we have outsourced it to our adversary. But, 
similarly, we have China investing in U.S. companies. We have 
China bidding for public transportation bids in major American 
cities. We have China supplying drones to local law enforcement 
and other entanglements. On the stock market we have double 
standards is not having the same kind of oversight. So can we 
talk about the reverse of it, too, and what China is doing that 
also puts us at risk economically and security-wise and using 
our rules and taking advantage of them, which is also a place 
of vulnerability for us? And that is for any of the panelists. 
Mr. Morrison.
    Mr. Morrison. Congresswoman--I am sorry. Excuse me. 
Senator, forgive me. I worked with you on HASC. There are any 
number of things that the Administration is considering. You 
talked about drones. The President right now is considering an 
Executive order to prohibit Chinese drones.
    Senator McSally. Yes.
    Mr. Morrison. You know, there is a 2013 MOU with China that 
allows for Chinese companies to benefit from access to our 
equity markets and not have to comply with basic standards that 
American, European, and Japanese companies do. That needs to be 
torn up posthaste.
    I think, again, there are any number of things that are 
actively being considered where Congress and the oversight from 
this body--from this panel, from this body, and the other body 
can help to shed light on where Chinese is trying to compromise 
our freedoms and our transparency, but do not reciprocate in 
any measure on their own domestic market.
    Senator McSally. Great. If any other panelist wants to jump 
in, I know that the Chairman wants to keep good time here.
    Mr. Giancarlo. Just very quickly, you know, China's whole 
premise is based upon technological superiority going out into 
this new century. We need to make sure that our technological 
capabilities, which have proven themselves over time, can 
continue to develop. We need leadership at the highest level in 
many areas. There is some very good work coming out of some of 
financial regulators here in the U.S., but perhaps greater 
coordination and some instructions from Congress would be 
helpful to further our own ability to keep technologically, 
certainly in the financial technology area.
    Senator McSally. Great. Thanks. I am way over my time. I 
will wait for another round, but thank you, Mr. Chairman.
    Chairman Cotton. Thank you, Senator McSally.
    I believe that everyone has had a chance to answer 
questions in the first round. Unless I am mistaken, we will 
move to the second, and I will start that round by speaking 
directly to Mr. Giancarlo's opening statement about the 
digitized dollar. This is a somewhat technical line of 
questioning, but very important as he outlined in his opening 
statement. For us, maintaining the dollar's supremacy is not 
merely an economic matter; it is a critical strategic matter as 
well. It is what allows us to have such effective sanction 
regimes around the world, in addition to its other benefits.
    So, Mr. Giancarlo, what do you consider to be the critical 
next step that the U.S. needs to maintain that supremacy in 
international finance?
    Mr. Giancarlo. You know, throughout history what makes one 
currency get greater patronage from global market participants 
is technological capability. During the period of the European 
exploration of the east coast of North America in the 16th and 
17th centuries, there were many currencies in use. There were 
pounds, there were Dutch guilders, there were French francs. 
But the currency that was most attractive back then was the 
dollar, but it was not the U.S. dollar. It was the Spanish 
dollar. And the reason it was the most attractive was because 
it was minted with New World silver, which was lighter and, 
therefore, required less alloy, more consistently pure, but 
also it was breakable into eight equal pieces, known as 
``pieces of eight,'' which made it fractionable. So the point 
was technologically that dollar was superior than other 
currencies in use.
    As we go into a digital 21st century, we need to think 
about our dollar and how do we enhance its technological 
capability in the world. And this is what China is 
experimenting with today in their own currency, to make it 
technologically superior by making it digital, tokenizable, 
fractionalizable, and programmable. This is the new frontier. 
We are going into a new Internet of Things of value where all 
things in the world will be digitized, including some of the 
key commodities that are priced in dollars today. And we have 
to ask ourselves, as soybeans, as cotton, as copper, as energy 
products themselves become digitized and programmable, how long 
can the dollar remain the world's reserve currency if we do not 
also modernize it itself and make it tokenizable and ultimately 
programmable? And that is why what we propose is a series of 
pilot programs to start experimenting with our own dollar to 
make it fit for purpose, future-proof, you might say, in a 
digital environment in a digital century. That is what China is 
doing. That is what central banks around the world are doing. 
And the United States unfortunately has been a little bit late 
to this experimentation. But that does not mean we lose this 
because ultimately the winner is not who is first. The winner 
is what economy gets their values, free enterprise, freedom of 
speech, a liberal world order built into their currency. I 
believe that is what has made the dollar strong for the last 80 
years, and as we look at this new century, that is what we need 
to do to make it strong for the century to come.
    Chairman Cotton. You talked about the need for pilot 
projects at Treasury and the Federal Reserve. What kinds of 
pilots are you envisioning? And how long do you think they 
might last?
    Mr. Giancarlo. So there are a lot of elements. The dollar 
is so important in the global economy. We cannot just overnight 
fiddle with it and make changes. We have got to do that in the 
same way we explored space through a series of deliberate pilot 
programs with each one building on the one before and what did 
we learn. We need to examine the issue of privacy, which is so 
important to the cash dollar, to the accounts-based dollar, 
needs to be equally important to a digital dollar.
    We need to look at financial inclusion, which is critically 
important, and we have communities today that are underserved 
by the accounts-based system. We need to see how a digital 
dollar can do a better job of providing on-ramps into financial 
inclusion for those communities.
    We need to look at areas that are underserved by banks and 
how we can use a digital dollar to serve them. We need to look 
at wholesale payments, and we need to look at international 
payments.
    There are so many elements of this, but if we get started 
in a series of well-crafted pilot programs, involving, as we 
have always done in the United States, the private sector and 
the public sector working together, we could do discrete 
programs in, say, one Fed regional area that is focused on 
rural issues. We can do another one in another area focused on 
inner-city issues. We can do another program looking at global 
remittances. There is so much that we need to look at. We could 
gather that information on that, and we can build something 
that would be durable and long-lasting.
    Chairman Cotton. Thank you, Mr. Giancarlo.
    Professor Mead, as someone who wrote a very fine book 
called God and Gold, what are your thoughts on this new 
frontier in the role of currency and international relations?
    Mr. Mead. Well, I think it has been key to the rise of the 
American world system that we know now as it was to the British 
system before us that a strong financial system which is 
capable of using both Government and private debt in a 
productive way, which also imposes sort of reasonable limits on 
spending and inflation, has been a foundation of prosperity and 
of power for hundreds of years. I do not see that changing. And 
I think that, you know, even today the need of so many 
countries to use the U.S. banking system is one of our most 
effective tools of power.
    So we cannot just take an asset like that for granted. We 
have to assume that as the nature of finance changes, the 
nature of currencies change, we have to stay at the front edge, 
the leading edge of that curve of innovation. So I think we do 
need to be thinking actively about how the dollar can be a 
fundamental building block for economic activity in this time 
of the information revolution.
    Chairman Cotton. Thank you both.
    Senator Cortez Masto.
    Senator Cortez Masto. Thank you. Thank you also for this 
really enlightening, engaging conversation. But let me pull it 
back to the workforce because I think this is key. And, Dr. 
Cook, the introduction about the innovation economies that 
create innovation, jobs that are higher-paying, it will create 
more opportunities for jobs in the future, you do not need a 
Ph.D. But you also have done a lot of research in how important 
it is to diversify that workforce and how social conditions 
have an impact on that innovation or invention and economic 
growth. Can you talk a little bit more about that? Why is that 
diversity important?
    Ms. Cook. It is important because we could reap the 
benefits of higher living standards from having more women and 
African Americans--so those were the focus of my research, so I 
am not saying other types of diversity, but I am just saying 
that that has been my narrow focus. We are losing out on 0.6 
percent to 4.4 percent higher GDP per capita by not including 
more women and minorities and invention and innovation at every 
stage. So that is the stage of education and training, the 
stage of actually inventing, working in labs, also in the 
process of IPOs and being entrepreneurs. We are missing out on 
all that talent.
    An analogy that has often been used in Washington is we are 
proceeding with one hand behind our backs, and what we have 
been saying during this entire hearing is that we need to be 
more competitive. And this is one way to help us to be more 
competitive, is to bring more people into the workforce, not 
necessarily everybody with a Ph.D. I talked about people who 
could do contact tracing with just a high school degree and 
with online training. So I think that we have to be more 
focused on making sure that our workforce is more competitive.
    Senator Cortez Masto. Thank you. And as part of that 
workforce and that innovation, having the best and the 
brightest, does that include international students? And let me 
open this up to anyone who is interested in this respect. Part 
of what I believe we are looking to do here is not only create 
the best and the brightest in our workforce and give 
opportunities, but that innovation and that research, if we are 
going to look to work on a national strategy with our allies, 
does that mean that we shut the door to international students 
or we include international students in as part of that 
research that is necessary for the innovation?
    Ms. Cook. I think that is absolutely necessary. I think 
that my view and my research suggests that we need to augment 
the free flow of ideas as much as we can and make sure that we 
are the ones doing it. This is what every country depends on, 
including China. They depend on us being the technological 
leader and coming up with these new ideas, coming up with an 
infinite number of new ideas. So we need to have as much of the 
free flow of information as we can. So that comes from 
minimizing workplace climate that is hostile, say, in tech 
industries, and then making sure that we have people from every 
sector, whether they are women or other minoritized groups, in 
the tech industry and in other parts of the innovation economy.
    So I think cutting out international students is cutting 
our arms off in the process of doing this innovation.
    Senator Cortez Masto. Thank you. And as part of the 
workforce, let me also kind of jump to an industry: mining. 
Nevada is a mining State. We have lithium mining. We started to 
do a little rare earth mining. I have watched over the years as 
China, and smartly so, has cornered the market in rare earth 
mining.
    But let me ask the panel in general, this type of mineral 
is important for our technology, right? Nevada right now has 
the only lithium mining that is going on in the country. Do you 
think there is an opportunity for us to start focusing on this 
type of mining in this country, bringing back this 
manufacturing, control the supply chain for mining particularly 
when it comes to rare earth minerals that is important for the 
technology that we are all talking about? And if we are to do 
that, how do we develop that strategy?
    Mr. Rasser. If I may, Senator, rare earth elements are 
critical. They are essential components for a lot of our 
consumer electronics, but more importantly for military 
systems, but also for electric vehicles, windmills.
    Fortunately, the United States has quite plentiful deposits 
of rare earth elements, but, yeah, to your point, China has 
cornered the market not just in mining but, in particular, for 
processing.
    Now, there are some good efforts underway in Texas and 
Colorado, for example, to open up new mines and rebuild 
processing facilities. But, again, here I think this is an area 
where partnering with a country like Japan, for example, or 
Denmark because of their big deposits in Greenland makes a lot 
of sense. Certain elements like the ones that are in the 
Greenland deposits, for example, are hard to find outside of 
China. These are the heavier rare earth elements. So it would 
make a lot of sense for the United States to partner with 
Denmark on establishing environmentally sound mining and 
processing facilities in that part of the world.
    But the opportunity here in the United States is just 
tremendous. It is an area where we should be investing more 
money. The Department of Defense is doing some, but it is 
still--there is some legislation in Congress right now that 
would help push that forward, but more needs to be done on this 
because China has threatened just last year to cutoff supplies. 
Beijing has shown that it is willing to ultimately really hit 
us where it hurts. And if they do cut us off from rare earth 
elements, it is going to make America's economic recovery 
postpandemic extremely difficult and also put us at serious 
military risk as well.
    Senator Cortez Masto. Thank you.
    Chairman Cotton. Thank you, Senator Cortez Masto.
    Senator Menendez.
    Senator Menendez. Thank you, Mr. Chairman.
    In my view, the best way to make America more competitive 
against China is not to strike a deal that requires purchases 
of specific goods. It is to work with our allies that are 
facing the same threats and, most importantly, to reinvest in 
the fundamentals that made America the greatest economy in the 
world. And whether it is on trade, national security issues 
like Huawei, human rights, we have pretended to confront China, 
but we have not done anything to actually make us more 
competitive.
    So, Dr. Cook, especially now that we are facing a daunting 
recession with millions of Americans out of work and the lowest 
borrowing costs we have seen in decades, how do we best go on 
the offense and invest in our economy, educational system, 
infrastructure, and health care so that we can replenish 
America's resources and the sources of innovation and 
competitiveness that made us the envy of the world?
    Ms. Cook. You said one of them, and sitting at a university 
I think it is incredibly important that we not only invest in 
R&D--our R&D budget is one of the lowest in the world as a 
share of GDP--it is also infrastructure. Our students have gone 
back to rural areas, to their homes, and we do not have the 
kind of digital infrastructure that we need. We have been shown 
to not have the kind of underlying infrastructure that we need 
to produce this infinite flow of ideas, and this is where we 
got our competitiveness from. You are exactly right. And we are 
showing that we are sitting on a very, very shallow foundation. 
So I think that would be the first strategy.
    Senator Menendez. Thank you.
    Finally, in response to the COVID-19 outbreak, we have seen 
how the Chinese Government leans on its relationships with 
domestic tech firms to track people's whereabouts. Individuals 
can have their social credit scores impacted by actions they 
take to help or hurt the fight against COVID. We have also seen 
how Chinese firms like Alipay and WeChat have used COVID as an 
excuse to expand surveillance capabilities, better integrate 
wide-ranging data sets to increase the sophistication of their 
surveillance and thereby demonstrate their usefulness to the 
Government.
    For example, according to the New York Times, visitors to 
office buildings, shopping malls, and metro transportation are 
now scanning QR codes using their phones, allowing the Chinese 
Government to track their movements.
    So, Mr. Rasser, how should the U.S. Government and U.S. 
companies approach this situation where the Chinese Government 
is using a serious public health issue to potentially expand 
its censorship and surveillance reach? Should USTR, for 
example, or the Department of Commerce warn U.S. companies of 
the potential negative implications to privacy rights if they 
help China expand its surveillance? Is there a risk that U.S. 
companies and China wanting to do the right thing will 
cooperate, but then inadvertently strengthen China's censorship 
in the surveillance regimes?
    Mr. Rasser. Yes, absolutely, Senator. Part of the strategy 
should be to educate the American private sector on exactly 
what it is that the Chinese Government is doing. But we also 
need to go beyond that and ensure that there is a very robust 
export control regime focused on end uses, because right now it 
is still the case that some of the technologies being used in 
Xinjiang, for example, but also for the broader social credit 
system, there are American technology components in those 
devices that are being used to perpetuate that.
    And then the third component would be America taking a 
leading role in shaping the norms for how surveillance 
technologies are used worldwide, and to your point, this is 
really critical that we then also work with like-minded 
countries to make sure that the message is clear that this type 
of activity by Beijing is unacceptable and that it is also very 
much unacceptable that Beijing is trying to export not just 
these technologies but also how those technologies are used to 
other countries, because that is a direct threat to democracy 
and democratic institutions around the world, and we have to 
put an end to that.
    Senator Menendez. Thank you very much. Thank you for your 
insights, all of you.
    Chairman Cotton. Thank you, Senator Menendez.
    I have just a few follow-up questions. First, in the 
category of direct foreign investment and the Committee on 
Foreign Investment in the United States, Mr. Morrison, the U.S. 
Government recently released a list of Chinese military 
companies that are operating in the United States. These 
include the aircraft company AVIC, China Industry Shipbuilding 
Corporation, Huawei, and China Mobile, among others. Do you 
believe that we should bar these companies from doing business 
in the United States?
    Mr. Morrison. Senator, absolutely. These are companies that 
are State-owned enterprises. They are fronts for the Chinese 
military. Not only should we bar them from operating in the 
United States, lobbyists who represent them in Washington 
should have to explain that. If you are a Chinese military 
company and you are a lobbyist, should you have to register 
under FARA and, therefore, record your dealings with the 
Government on their behalf? If you are a U.S. company and 
having a joint venture with one of these companies, should you 
have to explain that to your shareholders as a material risk to 
their value because you are partnering with the Chinese 
military? There are, you know, a litany of things that the 
issuance of that report tees up that I hope the interagency is 
executing.
    Chairman Cotton. I would agree, very much so. Is there any 
compelling reason to allow Chinese companies to invest in 
critical U.S. industries more broadly?
    Mr. Morrison. There is, of course, a balance in terms of 
allowing free access to capital, but where you are looking at 
the Chinese Communist Party, no one would have thought to allow 
the Soviet Union and its Sate-owned enterprises to invest in 
U.S. electric grids or to invest in our information technology. 
And I think we are still in the beginning stages of the course 
correction of the gamble that we made that if China has 
McDonald's, there will be a peaceful future. That was 
essentially the bumper sticker behind why we should have PNTR 
with China in 1999 and 2000. And that is a gamble that I think 
many of the architects of that whole strategy have now admitted 
that they were wrong. And so we have to stop the digging and 
begin to dig out of that mistaken gamble.
    Chairman Cotton. So that touches on inbound Chinese 
investment in the United States, which is covered by the 
Committee on Foreign Investment in the United States. Outbound 
U.S. technology is covered through export controls, but we do 
not monitor outbound U.S. investment into China. So U.S. banks, 
private equity firms, venture capital firms are free to invest 
in cutting-edge Chinese technology startups. Do you believe 
that the U.S. Government should consider outbound investment 
controls to China as well?
    Mr. Morrison. Senator, when I worked on the Armed Services 
Committee, I worked on the modernization of the CFIUS law, 
FIRRMA, and one of the things that Senator Cornyn and Senators 
like yourself tried to do was give CFIUS authority over joint 
ventures. One of the problems with the ultimate conclusion of 
that legislation in the fiscal year 2019 NDAA was that joint 
ventures would be dealt with through export controls, through 
controls on emerging and foundational technologies. As you 
know, because I believe you wrote a letter with Senator 
Schumer, those export control regulations have still not been 
issued by the Department of Commerce.
    Let me bring it back to your fundamental question. When you 
are an American company, you do not necessarily have access to 
information that the U.S. Government has on who your partner in 
China truly is. With the DOD report, you now have a better idea 
that, at least for 19 or so companies, these are fronts for the 
Chinese military.
    What if you are not dealing with a company on that list, 
you are dealing with another company? We know there is no such 
thing as a private sector in China. We know that Chinese has a 
national security law where any company or citizen has to 
answer any edict from the party without any rule of law. And we 
also know China has a rule on civil-military fusion. You might 
think you are doing business with a civilian company, but 
everything you give to that civilian company has to, by force 
of law, be given over to the military for its access.
    So does that mean we have to cutoff all outbound 
investment? I do not know if that is what we have to do, but we 
certainly have to figure out how do we share more information 
with U.S. companies about who is ultimately their business 
partner and what are the risks of a technology transfer or any 
other cooperation in China? People make the mistake of mirror 
imaging, that there are private companies in China as there are 
in the United States. That is simply not the case.
    Chairman Cotton. Thank you, Mr. Morrison.
    Senator Cortez Masto, any more questions from you?
    Senator Cortez Masto. No, Senator Cotton, other than to say 
thank you to all the panelists. Thank you so much for the great 
conversation today.
    Chairman Cotton. Yes, I want to reiterate our thanks to the 
panel for this very valuable hearing. I believe all other 
Senators have concluded their questions as well. However, you 
will have the opportunity to submit questions for the record. 
Those will be due in 1 week, on July 29th, from Senators, and 
we will ask our witnesses to respond to those as promptly as 
possible.
    Again, thank you all very much for your appearance today. 
This hearing is adjourned.
    [Whereupon, at 11:14 a.m., the hearing was adjourned.]
    [Prepared statements, responses to written questions, and 
additional material supplied for the record follow:]
               PREPARED STATEMENT OF CHAIRMAN TOM COTTON
    Welcome to today's meeting of the Economic Policy Subcommittee, 
which is open to questions from all 25 Members of the Banking 
Committee.
    I would like to thank Senator Cortez Masto and her staff and all 
the Committee staff for helping pull together this hearing.
    We have an exceptional roster of witnesses prepared to testify 
today. I want to introduce them briefly.
    First, Professor Walter Russell Mead is the Chace Professor of 
Foreign Affairs and the Humanities at Bard College and a distinguished 
fellow at the Hudson Institute. You can also read him now twice a week 
in the Wall Street Journal's opinions section, where he is the Global 
View columnist. I certainly do.
    The Honorable Chris Giancarlo is the founder of the Digital Dollar 
Project and is here today to speak about that effort and the importance 
of an emerging technology known as the ``blockchain.'' He is also the 
former Chairman of the Commodity Futures Trading Commission.
    Mr. Tim Morrison is a senior fellow at the Hudson Institute, where 
he specializes in Asia-Pacific security. Formerly, he served as Deputy 
Assistant to the President for National Security under President Trump.
    Dr. Lisa Cook is a professor of economics and international 
relations at Michigan State University. She previously served as Senior 
Economist at the Council of Economic Advisers under President Obama.
    Mr. Martijn Rasser is a senior fellow in the Technology and 
National Security Program at the Center for a New American Security. He 
previously served as a senior intelligence officer and analyst at the 
CIA.
    I want to thank you all for testifying. Thanks to our audience 
today for tuning in to this hearing entitled ``U.S.-China: Winning the 
Economic Competition.''
    While, of course, we would have all preferred to convene in person, 
perhaps it is appropriate that we have to hold this hearing due to a 
virus that first emerged from Wuhan, China--after a cover-up by the 
Chinese Communist Party.
    This should serve as a reminder that the misrule and strategic 
calculations of the Chinese Communist Party can have profound 
consequences for us, half a world away. It also serves as a reminder of 
the high stakes in this strategic competition between the United States 
and China.
    We should not underestimate our opponent in this struggle. China is 
the most formidable adversary the United States has faced in living 
memory. Near the height of its power in 1980, the Soviet Union's 
economy was 40 percent the size of the American economy. In 1943, the 
combined economies of our enemies Nazi Germany and Imperial Japan were 
also 40 percent the size of the American economy. Today China's economy 
is two-thirds the size of our economy. So China is richer than any 
adversary we have faced.
    It is also far more entangled with us economically, as we were 
reminded in the early days of this pandemic. We rely on China for the 
manufacture of many important goods, from the medicines in our 
cupboards to the electronics in our cellphones.
    This reflects not only the decline of our industrial capacity and 
the failure of decades of naive ``engagement,'' but also the Chinese 
Communist Party's grand ambitions, which Chairman Xi describes as 
nothing less than the ``great rejuvenation of the Chinese Nation.''
    Beijing is investing hundreds of billions of dollars to develop 
technologies it believes are key to the future--not just airplanes and 
automobiles but frontier technologies like semiconductors, artificial 
intelligence, and quantum computing.
    The task we face is to preserve and in some cases rebuild America's 
position as the technological and economic leader of the world, and to 
end our compromising dependence on China for essential goods.
    The Senate is scheduled to vote today on one such measure: a 
bipartisan bill I led to strengthen the semiconductor industry. We 
passed it in an overwhelming majority as an amendment yesterday, and I 
believe it will pass finally today. But there is much more that is left 
today, and that is the purpose of this hearing.
    Finally, I want to note for the benefit of our witnesses and 
audience that the Economic Policy Subcommittee majority is preparing a 
report that addresses this very issue, which will include concrete 
proposals about how to compete with--and beat--China. Your testimony 
will help inform our report, which will likely be released later this 
year.
    So thank you again for serving as witnesses. I look forward to your 
testimony, and I would like to remind all witnesses and Members of a 
few important technical details for this hearing.
    For Members, please make sure you turn on your camera when you are 
ready and able to speak. If you do not turn on your camera, I will 
assume that you are away from your desk and not able to speak at that 
moment.
    For Members and our witnesses, please remember to mute yourself 
when you are not speaking. If there is background noise, it will cause 
the central camera to change to you even if you are not talking.
    Finally, I want to remind everyone that all 25 Members of the 
Committee are welcome to join and ask questions today, even if they are 
not Members of our Subcommittee.
    Senator Cortez Masto, I turn it over to you.
                                 ______
                                 
          PREPARED STATEMENT OF SENATOR CATHERINE CORTEZ MASTO
    Thank you Chairman Cotton.
    Today's hearing gives us an opportunity to discuss how we ensure 
our economy is strong for all Americans and for future generations.
    I appreciate the collaborative relationship we have with your staff 
in putting this hearing together.
    I'm pleased to welcome Doctor Lisa Cook, whose path-breaking 
economic research has found that it is not enough to create the laws to 
support innovation. Patents, copyright courts, and Government-funded 
research and development do not result in greater economic growth and 
prosperity for ALL if the Government fails to provide the most basic 
protections to those facing disadvantage.
    If the U.S.A. wants to maintain its status as the world's biggest 
and most dynamic economy, the holder of the world's currency, the 
leader in international alliances and collaboration and the most liquid 
and wealth-producing capital markets, we must assess how we structure 
our Government to ensure we meet the needs of our families and respond 
to changes in the world.
    Let me just focus on my home State for a moment. Nevada has been 
hit particular hard by the pandemic with an unemployment rate of 15 
percent. Our State economy relies on travel, tourism, entertainment and 
hospitality--all hard hit sectors: more than 430,000 Nevadans have 
filed for unemployment.
    How can we--and the rest of our Nation--rebuild our crumbling 
infrastructure, provide effective job training to displaced workers, 
and improve the educational outcomes of our children? How can we invest 
in our public health infrastructure and collaborate with those of other 
Nations to prevent future pandemics? How do we recover economically 
from this pandemic in a way that benefits those hit the hardest, low-
income, frontline workers
    To best respond to these crises, we must rely on a vibrant and 
responsive public sector. We need civic institutions to not only battle 
our urgent health, economic, and racial crises, we need Government at 
all levels to invest for future economic growth.
    In particular, America's economic growth will in large part depend 
on maintaining our technological edge.
    The U.S. has long led in many key technologies, which has helped 
underpin our economy and helped shape international norms and 
standards, promoting values such as freedom, innovation, and fairness.
    To build a strong future economy, we must invest heavily in a range 
of key strategic technologies, such as 5G wireless, Artificial 
Intelligence (AI), and quantum computing.
    And we're holding this hearing in part because the U.S. and Chinese 
economic competition over these technologies--who makes them, who owns 
them, who benefits from them, who exports them, and who determines the 
norms and standards users must adhere to--will define much of the 
century.
    Emerging technologies can improve societies, but we must ensure 
that guardrails govern their use are designed to foster innovation and 
fairness, and that they protect minorities and the free flow of ideas.
    China is attempting to displace the United States as a leader in 
high-tech sectors, but China does not play by the same rules of the 
road--it subsidizes State-owned enterprises, restricts market access, 
and steals U.S. intellectual property.
    More, by seeking to become a global leader in these technologies, 
China is also seeking to shape how they are used around the world by 
setting the standards.
    However, unlike the United States, which ensures international 
standards are consistent with democratic values, China has used new 
technologies such as AI to surveil and repress their own people, from 
the Uyghurs to Hong Kong protesters.
    This is why I'm pleased to also welcome Mr. Martijn (MARTIN) 
Rasser, who is leading pivotal research into the competition between 
the United States and China in the area of technology.
    It is the vitality and creativity of our scientific research 
communities that will drive American innovation. And to ensure our 
future competitiveness, we must educate and prepare the workforce for 
the industries of the future.
    We are made stronger by investing in our own people, by investing 
in a just society, and by working with our allies and friends in a 
multilateral fashion. To be competitive in the long-term, we must 
continue to invest in scientific research and development, which is the 
building block for the next generation of technology.
    In Nevada, we know that technology is an economic driver for our 
State. Our Innovation State Initiative was making progress prior to 
this pandemic.
    I look forward to hearing from our witnesses and I hope that 
today's discussion will help us progress a discussion of how we can 
improve the lives of every American and ensure we provide a better 
future for the next generation.
                                 ______
                                 
               PREPARED STATEMENT OF WALTER RUSSELL MEAD
  James Clarke Chace Professor of Foreign Affairs and the Humanities, 
                              Bard College
                             July 22, 2020
    Good afternoon, Mr. Chairman, Ranking Member Cortez Masto, and 
Members of the Subcommittee:
    It is an honor to be invited to testify before this Subcommittee 
and its distinguished Members. It is a great privilege to join you 
today to discuss the economic challenges the United States currently 
faces and will continue to face with regard to China.
    Today there is great concern over China's growing strength, its 
assertive behavior, and its potential to overtake the United States as 
the preeminent economic power in the world. Rising powers are often the 
cause of great concern to established powers like the United States. In 
the 1970s and 1980s, leaders in the United States looked on at Japan's 
growing economy with worry. The U.S. imposed tariffs on semiconductors 
and other products that were the focus of dumping allegations. In the 
run-up to the 1984 presidential election, Walter Mondale asked ``What 
do we want our kids to do? Sweep up around the Japanese computers?'' A 
growing trade deficit with Japan and concerns over the low valuation of 
the yen amplified worries in Europe and the United States.
    Unlike Japan, though, China does not accept the basic 
characteristics of the international system. More importantly, China 
does not share the same ambitions as Japan. In the recent past, China 
appeared to many observers to be a capitalist country operating within 
the global economic system with the common aspiration of expanding its 
economy and furthering its development. However, China's political and 
economic apparatus is controlled by the State's Communist Party. China 
must be thought of not as a developing Nation working within the global 
economic system but as a communist country actively hostile to the 
current global economic system and world order. Because the Chinese 
Government increasingly deploys the economic and financial tools at its 
command to undermine and subvert the American-led global system, every 
economic question about China is also a political one.
China's Regression and the Current Threat
    The diagnosis is not in my view that there can be no decent 
relationship with a China ruled by the CCP. I would say rather that 
China under Xi Jinping has taken a wrong turn. The CCP has in the past 
been the instrument of a terrible despotism under Mao, and in the 
service of Mao's political and economic delusions, China lost several 
decades on the road to modernization and inflicted horrific suffering 
on itself.
    After Mao's death, the CCP leadership drew back from the brink. The 
fanatics behind the cruelties and distortions of the Cultural 
Revolution were removed from power, and a chastened CCP leadership took 
steps to prevent a return to the personalistic dictatorship of Mao even 
as it abandoned the madness and folly of his economic vision. Realizing 
that China needed to move toward a market economy and the 
institutionalization of power, they enacted a series of visionary 
reforms that raised living standards throughout the country while 
increasing the personal freedom of the Chinese people.
    Americans viewed this turn toward a more humane and successful 
approach to governance with respect and sympathy and hoped that 
continuing development would open the door to further economic and 
political development. Many Chinese, including senior figures in the 
CCP, shared this hope.
    Unfortunately, in recent years China has taken a different turn. 
Instead of continuing to evolve away from totalitarianism and 
personalistic rule, the CCP has regressed. The repression of Tibetans, 
Uighurs and others recall the atrocities of Mao's time, and the CCP 
inflicts the kind of degrading and humiliating control of intellectuals 
and civil society participants that limit China's development and lower 
its intellectual and cultural standards. Thoughtful voices calling for 
reform have been forced into silence or marginalized in today's China, 
but there is an internal opposition to the new hard line that might one 
day renew the promise of a better future for China's people.
    Tempted perhaps by the allure of the power that new surveillance 
technologies make possible, China's leadership seems ready to sacrifice 
the cultural and economic development of the Chinese people and of 
China's neighbors to entrench its own power and privilege. Ren 
Zhiqiang, a member of the CCP who has been known to criticize the 
State's censorship, has been missing since mid-March after he published 
an article that criticized Xi Jinping's leadership and referred to him 
as a ``clown.'' In the midst of the COVID-19 pandemic, the Cyberspace 
Administration of China (CAC) has increased its censorship of social 
media.
    It is important to make clear that America's goal in our 
relationship with China cannot be to block its economic development or 
to dictate the course of its political development. The rise of China 
is a great moment in human history and we have no desire--and we have 
no power--to prevent more than one billion people from standing up.
    Nor should American policy be predicated on the destruction of the 
CCP. While under its present leadership and on its present course, the 
CCP is a threat to China's development and to world peace, there are 
healthy elements in the CCP who would like to steer China on a more 
sustainable course.
Policy Considerations
    There are ways the United States can work to prevent a worst case 
scenario and try to prevent U.S.-China competition from boiling over 
into an all-consuming contest as difficult, as dangerous and as long as 
the Cold War, and we should explore them. But at the same time, we 
cannot delay dealing with the challenges China's behavior currently 
presents in the hope that American restraint would find an echo in 
Beijing. Certain changes in Beijing require responses in American 
policy and both condition and limit the opportunities to engage. There 
are six areas of concern I would like to highlight for you today.
    The first is that the CCP leadership not only seems to view harsh 
and even brutal crackdowns at home as necessary to its survival; it has 
also adopted international policies that undermine world peace, corrode 
the international trading system, limit the opportunities for economic 
development in many countries, and support harsh Governments and 
dictators who need outside support to control their own unhappy people.
    The CCP leadership envisions Belt and Road as a means to not only 
offload the excess steel, concrete, and infrastructure that China 
produces, but also as a means of restructuring the global economic 
system around China's economic needs. Not only would their success 
undermine American economic competitiveness, it will also set back the 
development aspirations of the people in target countries, who will be 
trapped in a subservient relationship with China.
    Belt and Road is an extension of the Xi regime's efforts to return 
back to the Maoist concept of total penetration of the State. The 
purpose of China's foreign investments and infrastructure projects is 
to adjust the norms of the current international order to more closely 
align with the values of the CCP. As Elizabeth Economy noted in 2018, 
Xi has stated that ``China should be capable of `constructing 
international playgrounds'--and `creating the rules' of the games 
played on them.'' Projects in Pakistan include the development of 
surveillance programs similar to those used in China and ventures to 
deliver Chinese media to Pakistani citizens. The CCP's goal is to make 
China indispensable for not just Pakistan's economy, but its security 
and society too.
    In 2018, Beijing established the China International Commercial 
Court (CICC) as part of the BRI to help resolve commercial disputes 
related to BRI projects. One can interpret this as an effort on the 
part of the CCP to safeguard its SOE's involved in BRI projects and 
force partner countries and foreign firms to adhere to Beijing's trade 
practices. While the BRI is marketed as a series of international 
development projects, it is clear that the CCP intends to use increased 
economic integration to challenge the current norms of the global 
economic order.
    Debt-trap diplomacy furthers China's efforts at drawing other 
countries into its orbit. Even before the advent of BRI, China carried 
out a policy of bilateral and opaque lending programs. According to the 
International Monetary Fund, the share of poor countries' debt held by 
China increased from 6.2 percent in 2013 to 11.6 percent in 2016. China 
has lent roughly $1.5 trillion to over 150 countries globally through 
loans and trade credits. This makes China the largest creditor in the 
world. However, it is unclear exactly how much China has lent and at 
what terms because China does not report on its loans and debtor 
countries often fail to report the data themselves. The Harvard 
Business Review completed a years-long analysis of China's lending 
practices and their data show that China lends at market terms, unlike 
traditional institutions such as the World Bank that offer countries in 
need easier terms than they can receive elsewhere. Chinese loans are 
also frequently backed by collateral. HBR found that the average stock 
of debt owed to China increased from less than 1 percent of a debtor 
Nation's GDP to over 15 percent from 2005 to 2017. Twelve countries owe 
20 percent or more of their nominal GDP to China. Half of China's loans 
are unreported.
    These lending practices should be of great concern to the United 
States and its allies. Experts note that some BRI projects are 
unfeasible; Morgan Stanley predicts that by 2027 BRI expenses could 
reach $1.3 trillion. Poor countries that have accepted loans from China 
have already faced the consequences of default. Sri Lanka was unable to 
repay the loan to construct a port in Hambantota and allowed China to 
sign a 99-year lease for use of the port in exchange. Across Africa, 
Nations in debt distress risk forfeiting strategic assets to China due 
to its lending practices.
    The CCP has made inroads into the developed world as well, 
particularly in Europe. Last year, Italy broke with the G7 to endorse 
the BRI. Italy faces a projected GDP decline of 9.1 percent this year 
and is dissatisfied with the relief efforts of the European Commission. 
It is unlikely that, without a major aid package, Italy will reject 
future Chinese investment. Chinese firms already have a controlling 
stake in the Greek port of Piraeus and Italian ports, which are 
desperate to prevent Greece from taking their traffic, could welcome 
further Chinese ownership.
    China's Belt and Road Initiative and other predatory lending 
practices violate the standard and fair practices of development that 
international institutions such as the IMF and World Bank adhere to. 
While many of the BRI projects may not be completed, the initiative 
will, and has already, expand China's influence in poor countries as 
well as its material holdings. The BRI can be seen as part of the Xi 
regime's strategy to undermine the established global order and replace 
it with one that is more favorable to the CCP's principles.
    One of the great ironies of the post-Cold War era is that China's 
attempts to maintain State control over its growing economy has created 
many of the problems that doctrinaire Communists predicted would hasten 
the downfall of capitalism. Lenin believed that as capitalist countries 
became wealthier, their domestic economies would become awash with 
excess capital and production. Banks would chase increasingly 
precarious investments in factories that could never quite make enough 
profit to stay solvent, and the resulting economic collapse would pave 
the way for the revolution to bring true Communism to the industrial 
world.
    The only way to stave off the catastrophe was to find new markets 
for this extra capital and industrial capacity, which for Lenin was the 
true motive behind capitalist imperialism. The European powers built 
empires and extended their reach around the world in search of new 
projects for their bankers and new markets for their goods, but 
competition for the remaining virgin territories would become more 
intense, eventually leading to wars between the imperial powers.
    Capitalism eventually resolved this dilemma by increasing the 
purchasing power of each consumer and through the creation of a global 
market, but China has closed off this path to development and now has 
caught itself in Lenin's trap. Worse, decades of State directed 
overinvestment in both manufacturing and infrastructure producing firms 
has produced powerful lobbies. Even a ruler as powerful as Xi Jinping 
can only restructure the Chinese economy away from heavy production and 
infrastructure spending by alienating powerful factions that could 
threaten his hold on power. From this perspective, Belt and Road is not 
just a geopolitical exercise for Beijing, but also a gamble to keep 
unproductive but important sections of the Chinese economy going as 
long as possible.
    In any case, the combination of a Leninist State-guided economy and 
an imperialist foreign policy forces the United States, among others, 
to treat China as something other than a ``normal'' market economy 
pursuing normal market competition.
    Under these conditions we can no longer treat trade as a purely 
economic question. Given China's clear interest in challenging other 
countries, other countries have no choice but to audit their supply 
chains for key materials to eliminate any strategic dependence on China 
and to protect themselves against Chinese technology that may be used 
for other purposes. Nor can our diplomats simply engage with China as a 
``normal country.'' Countries like China--and Russia--who have 
essentially declared themselves to be actively seeking to undermine 
American interests and countering American values--need to be taken at 
their word.
    The second problem involves the connection between State power and 
technological development. In a world driven increasingly by the logic 
and the power of the information revolution, China's attempts to reach 
technological supremacy through theft, illegal behavior and the 
elimination of competition pose direct security threats to other 
countries, including the United States. The CCP requires many foreign 
companies that wish to sell their products in China to partner with a 
Chinese firm and transfer their technology to their local partner, who 
often later becomes their competitor. Hackers and other actors 
affiliated with the Chinese Government actively seek to steal American 
technology, acquiring everything from information about antisubmarine 
weapons to kernels of genetically modified corn. Just yesterday, the 
U.S. Government indicted two hackers for allegedly conspiring with the 
Chinese Government to steal trade secrets related to our national 
defense and health care.
    While some have warned against erecting a ``digital iron curtain'' 
as tensions between the U.S. and China continue, there are legitimate 
reasons to be wary of cooperation with China on IT and of Chinese 
investment in telecommunications initiatives such as 5G in the U.S. and 
its allies. The CCP has demonstrated its willingness to use 
surveillance technologies for both espionage and for monitoring its 
citizens. China's domestic development and foreign investment 
strategies are both centered on the growth of its high-tech and IT 
sectors.
    China's focus on the development of surveillance, communications 
and artificial intelligence technologies is intimately connected to its 
ideological project. The Cyberspace Administration of China (CAC) has 
released research stating that ``If our Party cannot traverse the 
hurdle represented by the internet, it cannot traverse the hurdle of 
remaining in power for the long term.'' Xi himself has stated his 
ambition for China to become a ``cyber superpower.'' The ways in which 
China develops and uses these technologies is then of utmost relevance 
to how the U.S. should cooperate with or counter China.
    The use of advanced technologies to exert State control is central 
to Xi's mission. In 2015 at the World Internet Conference in the 
Zhejiang province, Mr. Xi called for ``cyber sovereignty.'' 
Domestically this philosophy has been expressed through increased 
censorship and monitoring. As China continues to broaden its reach, we 
should expect CCP attempts to make other States adhere to its 
philosophy as well. The Chinese Government recognizes as legitimate 
few, if any, restrictions on the State's use of technology to control 
its people.
    These threats must be addressed even at significant political and 
economic cost. China's trading partners must protect themselves against 
illicit practices by both State-owned and private firms in China, and 
they are entitled to exact retaliation by placing limits on Chinese 
business.
    The third problem posed by communist China's role in the world 
economy is that under the new system of hyper-centralized control that 
increasingly and sadly characterizes China today, distinctions between 
State-owned corporations and private business can no longer be taken at 
face value. The installation of party committees in both SOE's and 
private enterprises, in accordance with the 2012 constitution, gives 
the CCP immense influence. The extent of said influence within private 
businesses, unfortunately, is impossible to know. In 2017, more than 
two out of every three private sector companies in China had CCP 
officials working in their offices overseeing their activities.
    The Chinese Government protects domestic companies from competitors 
by hamstringing foreign investors that want to invest in Chinese 
startups that could threaten the court favorites. Demanding hundreds of 
regulatory documents from potential investors, central and local 
governments create a complex and foreboding market for FDI. These 
restrictions are often successful in limiting competition in sectors of 
particular political interest to the CCP. While foreign investors whose 
projects are rejected may appeal, all approval authorities and People's 
Courts are under the control of the CCP. This limits any FDI that may 
conflict with the CCP's agenda.
    Chinese business and Chinese investors are under the thumb of the 
Chinese Government. This necessarily reduces the willingness of foreign 
Governments, including the American Government, to treat them in the 
same way Governments treat true private actors.
    The fourth issue that demands a response involves China's open 
efforts to infringe on the law of the sea and to make illegitimate 
territorial claims.
    By now, many are familiar with China's island-building campaign in 
the South China Sea, which is a vital artery of international commerce. 
International tribunals have ruled against the Chinese Government's 
territorial claims, but the CCP has ignored those rulings. The Chinese 
navy, coast guard, and paramilitary naval units also regularly harass 
and attack civilian vessels in international or disputed waters, attack 
the naval and coast guard ships of neighboring countries, and further 
other Chinese attempts to exploit the natural resources of disputed 
territories at great cost to China's neighbors and the local 
environment.
    Creating instability in a region that one-third of global shipping 
traverses threatens global and American prosperity, but China's 
ambitions do not stop there. China makes and attempts to enforce 
territorial claims against other neighboring countries and is trying to 
claim a stake in the Arctic Ocean as well, which could become both an 
important shipping route and a source of valuable natural resources in 
the coming decades.
    The fifth issue is that China's steady military buildup combined 
with its increased efforts to partner with countries like Russia and 
Iran have major implications for the American defense budget. We must 
scale up our efforts to ensure levels of primacy on land, at sea, in 
the air, in cyber and in space that deter any rivals from contesting. 
Some of this effort may require restructuring our forces to operate 
better in the vast and varied Indo-Pacific theater and to respond to 
new threats, such as the new aircraft carriers China is building 
rapidly. But other steps need to be taken that will have both military 
and nonmilitary applications. Among these are investing in research and 
development to maintain the current American technological lead in 
fields like artificial intelligence as well as basic sciences in fields 
like biology that are likely to define the economies of the late 
twenty-first or even twenty-second centuries.
    China and Russia are working together to develop their AI 
capacities. In June of last year during Xi Jinping's visit to Russia, 
the two States announced a joint investment fund with a focus on 
funding AI research. It launched in September with a $1 billion budget. 
In December of 2019 Vladimir Putin signed a decree declaring 2020 ``the 
year of Russian-Chinese Scientific, Technical and Innovation 
Cooperation.'' Chinese and Russian firms have cooperated on the 
development of facial recognition products and other AI technology. 
Last June, Huawei acquired the rights to Russian firm Vocord's facial 
recognition technology for $50 million. Vocord's website specifically 
highlights the surveillance applications of its technology in public 
spaces, while offering a tool for seeing ``which relative your child 
most resembles.'' Huawei's vice president Jiang Tao has spoken of the 
construction of ``an AI ecosystem'' in Russia.
    While China and Russia have not announced cooperation on military 
AI, China has already exported unmanned aerial vehicles (UAVs) like the 
Rainbow CH-4 to the United Arab Emirates, Saudi Arabia, Pakistan and 
elsewhere in the Middle East. Through its foreign investment strategy 
China has increased poor Nations' dependency on it and increased its 
own assets including strategically located ports and military bases. 
Through the Made in China 2025 strategy Beijing has directed the State-
led economy toward high-tech innovation. Beijing now intends to export 
its products and philosophical model globally. China is furnishing 
militaries in the Middle East and exporting its surveillance technology 
to many parts of the world. There is a direct line connecting China's 
domestic development strategy to its geopolitical strategy that is 
focused on undermining the liberal order.
    Unlike the arms race of the Cold War, IT has dual uses. While the 
civilian applications of emerging technologies are lucrative and 
private enterprises ought to have the ability to expand their markets 
abroad, these technologies can be used by militaries and Governments 
for ends that could pose a threat to national security.
    The sixth issue is that the new levels of repression currently 
being used against ethnic and religious minorities in China and the 
prospect of a further extension to other groups as yet only lightly 
targeted requires an international response. There are many elements of 
Chinese governance that Americans do not like, but we do not insist 
that Chinese practice conform to our ways or those of our Atlantic 
partners and friends in order to have normal relations. However, the 
systemic destruction of cultures and religious communities crosses a 
line that neither the United States nor other countries can ignore.
    China's attempts to silence or eradicate religious and ethnic 
minorities in China do not merely strengthen the elements within the 
CCP committed to a brutal and totalitarian vision of their country; 
they also leave the world poorer by depriving the Chinese and other 
people of the beauty, insight and wisdom created by these communities, 
many of which have been a part of China's heritage for centuries, if 
not longer. The high-tech repression the CCP is perfecting at home now 
will be used abroad in the future, to the detriment of both Americans 
and other peoples. Although the United States and its partners should 
not seek to overthrow the current Chinese Government or attempt to 
force it to make structural changes that will threaten its survival, it 
is important to raise the costs of Chinese repression and impede its 
spread outside of China's borders.
    It is important to remember that the realities of our current 
conflict with China do not mirror those same challenges we faced in the 
Cold War the Soviet Union. Unlike with the Soviet Union, the economies 
of the U.S. and its allies are deeply connected to the Chinese economy. 
China remains the second largest economy in the world, to completely 
sever economic relations with it would have devastating implications 
for the United States. Rather, we should focus on areas where we have 
mutual interests. Sectors that involve the production or development of 
security-sensitive technology should be encouraged to consider their 
level of interaction with China with care. In other sectors it will 
remain profitable to cooperate and trade.
Conclusion
    I would like to leave you with a couple of thoughts. We should take 
China and the challenges it poses seriously, but we think calmly and 
rationally about the relationship. China is not 10 feet tall. It has 
achieved some remarkable, even historic, economic growth, but it lacks 
important factors needed for long term stability and success.
    Despite the heated, chest-thumping rhetoric from the so-called 
``wolf diplomats,'' China's leadership is worried about the future. In 
developing our policies in response to the China Challenge, we must 
understand these fears--not only because they point to strategic 
vulnerabilities which can be exploited, but because more importantly 
they point to factors and forces which could either prevent a full 
rupture between China and the United States or ensure that in the event 
of such a rupture the United States and its associates and allies would 
prevail.
    China's recent behavior raises significant concerns for the United 
States as well as for the global economic system that has raised 
hundreds of millions out of poverty in just a few decades. In response, 
the United States and its partners should push back against harmful 
Chinese actions while also encouraging the CCP to make choices that 
will enhance both Chinese well-being and global peace. China's behavior 
was more acceptable in the past, which means that it can be in the 
future. If a new Cold War must come, America can and must rise to the 
challenge. But we should not abandon all hope that wiser counsels will 
prevail in Beijing. Our goal is and should remain the construction of a 
relationship which promotes the prosperity and security of both the 
American and Chinese peoples.
                                 ______
                                 
             PREPARED STATEMENT OF J. CHRISTOPHER GIANCARLO
  Senior Counsel, Willkie Farr & Gallagher, and Former Chairman, U.S. 
                  Commodity Futures Trading Commission
                             July 22, 2020
    Thank you Chairman Cotton, Ranking Member Cortez Masto, and Members 
of the Subcommittee for the opportunity to testify today.
    I am Chris Giancarlo, Senior Counsel at Willkie Farr & Gallagher. I 
am also a founder and principal in the Digital Dollar Project.
Three Observations
    A few weeks ago, I had the honor to appear before the full Senate 
Banking Committee. In my testimony, I offered three observations from 
my years of service on the Commodity Futures Trading Commission. The 
first stems from the fact that so much of America's physical 
infrastructure--its bridges, tunnels, airports, and mass transit 
systems--that were state-of-the-art in the 20th century, have been 
allowed to age, deteriorate, and become obsolete in the 21st century.
    Sadly, the same is true about too much of America's financial 
infrastructure. Systems for payment and settlement, shareholder and 
proxy voting, investor access and disclosure, and indeed, financial 
system regulatory oversight, that were once state-of-the-art and global 
models in the 20th century, have fallen behind the times and, in some 
cases, embarrassingly so in the 21st century. This aging financial 
system infrastructure puts the United States at a competitive economic 
disadvantage to economies like China that are building new financial 
infrastructure based on 21st century digital technology.
    For example, it typically takes days in America to settle and clear 
retail bank transfers. In many other countries it takes minutes, if not 
seconds. It also takes days to clear and settle securities 
transactions, and weeks to obtain land title insurance. And, nothing 
reveals the limits of our existing financial system more starkly than 
the U.S. Government's response to the current COVID-19 pandemic, in 
which tens of millions of Americans had to wait a month or more to 
receive relief payments by paper check, while an estimated 1.1 million 
payments totaling nearly $1.4 billion were distributed to deceased 
Americans. Meanwhile, other economies, like China's, are advancing 
rapidly in deploying instantaneous, digital currency payment systems.
    Another observation is that the world is indeed entering a new era 
when things of value, such as money, contracts, stock certificates, 
land records, cultural assets like art and music, our personal 
identities, and even our votes, will be stored, managed and moved 
around in a secure way instantaneously from person to person without 
central validators. This is what some people call the Internet of 
Value.
    That first internet wave over the past few decades was an internet 
of information, \1\ which was then followed by the Internet of Things, 
where everything from assembly lines to refrigerators becomes connected 
to the internet. All of that is about to be superseded by the next 
wave, the Internet of Value. In this new era, trust will be less often 
provided by established, central institutions, as is the case in most 
of the world's existing financial market infrastructure. Rather, with 
proper governance it will be achieved through cryptography, 
tokenization, shared ledgers, and a network of computational 
algorithms. In the same way that the first wave of the internet enabled 
immediate transfer of words and information through distributed 
computer networks, this next wave will enable instantaneous person to 
person transfer of things of value, be they shares of stock, automobile 
titles, or money.
---------------------------------------------------------------------------
     \1\ An early example of the first Internet wave is Wikipedia, 
which is composed collaboratively by largely anonymous volunteers who 
share information and compose peer reviewed entries without pay. A 
later example is Facebook, an online social community that is valued 
largely for its prowess in analyzing and merchandising large data sets.
---------------------------------------------------------------------------
    My third observation is that, if we act now, we can harness this 
wave of innovation for greater financial inclusion, capital and 
operational efficiency, and economic growth for generations to come. If 
we do not act, however, this coming wave of the internet will lay bare 
the shortcomings of America's aged, analog financial systems.
    These three observations--the aging of our existing financial 
market infrastructure, the coming Internet of Value, and the economic 
and social benefits if we do act--have driven my professional 
engagements since leaving the CFTC.
The Digital Dollar Project
    Early this year, I created the Digital Dollar Foundation, a not-
for-profit enterprise, along with my brother, Charles Giancarlo, a 
veteran Silicon Valley engineer, entrepreneur, and corporate executive 
and Daniel Gorfine, the CFTC's former Chief Innovation Officer. The 
Foundation partnered with David Treat and his innovation team at 
Accenture on a pro bono basis as lead architect and technology advisor. 
\2\
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     \2\ Globally, Accenture's work on central bank digital currency 
includes engagements with the Bank of Canada, the Monetary Authority of 
Singapore, the European Central Bank, and Sweden's Riksbank.
---------------------------------------------------------------------------
    Together, the Foundation and Accenture launched the Digital Dollar 
Project (https://www.digitaldollarproject.org). The Project's purpose 
is to lead public discussion of the merits of a tokenized form of a 
U.S. CBDC or, what we alliteratively termed in January of this year, a 
``Digital Dollar.'' The Project is not a commercial enterprise, but an 
effort to encourage research and public discussion on the potential 
advantages of a U.S. CBDC, convene private sector thought leaders and 
actors, and propose possible models to support the official sector, 
from key agencies to member of Congress, as it considers development, 
testing and adoption. The Project looks to advance the public interest 
in future-proofing the dollar for consumers and institutions here in 
America and around the world.
    To gain diverse perspectives from key stakeholders, the Digital 
Dollar Project formed a nonpartisan advisory group that includes a 
broad array of economists, business leaders, technologists, innovators, 
lawyers, academics, and consumer advocates across the social and 
political spectrums. \3\ The Advisory Group helps explore design 
options and approaches for creating a U.S. CBDC through a deliberative 
process, including stakeholder meetings, roundtable discussions and 
open forums.
---------------------------------------------------------------------------
     \3\ Members of the Advisory Group are set out in the appendix 
hereto.
---------------------------------------------------------------------------
    The Project recently published its inaugural white paper detailing 
a path forward and considerations for the development of a U.S. CBDC. 
The white paper proposes for consideration as a champion model a 
tokenized U.S. CBDC that operates alongside existing monies, is 
primarily distributed through the existing two-tiered architecture of 
commercial banks and regulated money transmitters and is recorded on 
new transactional infrastructure informed by distributed ledger 
technology (DLT). The white paper outlines the benefits of a CBDC in 
the context of the U.S. dollar, and proposes potential use cases and 
pilots.
    Among the multitude of highly effective payment options in the 
United States (e.g., cash payment, credit, debit, etc.), a CBDC would 
offer a new choice for digital transactions, instantaneous peer-to-peer 
payments, and in-person transactions. It could also potentially lower 
costs and further diversify payment rails. A U.S. CBDC could be 
distributed to end-users through commercial banks and trusted payment 
intermediaries. It would facilitate financial inclusion by broadening 
access to services through additional mechanisms, such as digital 
wallets. In particular, a U.S. CBDC could expand the ability of 
currently un- or-underbanked populations to access digital financial 
services and transact on e-commerce platforms that do not deal in 
physical cash. \4\
---------------------------------------------------------------------------
     \4\ Bank notes are often used to make small payments in the 
physical world, although, on average, physical cash usage is in decline 
compared against other payment methods. This dynamic is likely to 
progress in a post- COVID-19 world, thereby making it increasingly 
important for digital financial options to extend more broadly.
---------------------------------------------------------------------------
Central Bank Digital Currencies: Decentralized Fiat Money
    Before delving further into the benefits of a U.S. CBDC, it may be 
helpful to review the ability to distribute money with existing 
financial infrastructure. Practically speaking, traditional dollar bank 
notes are local instruments. They are distributed by the Federal 
Reserve to local banks and restricted to physical transactions in the 
presence of payer and payee, making them impractical for large value 
payments. Traditional dollar banknotes do not work in modern eCommerce.
    A U.S. CBDC would represent a new format of central bank money to 
complement bank notes and reserves while integrating seamlessly with 
existing banking and payment functions. The innovation rests in the 
adoption of properties akin to a token or digital bearer instrument, 
allowing the dollar to become digital and portable. Distributed ledger 
technology (DLT) may offer the most effective approach to issue, 
distribute, transfer, and redeem tokens. It would enable the dollar to 
be sent in real time anywhere in the physical and virtual worlds as 
easily as sending a text message.
    The Digital Dollar Project proposes that issuance, distribution, 
and redemption of a U.S. CBDC take place just as cash does today. It 
would be issued by the Federal Reserve to domestic banks or regulated 
entities against reserves. Banks would distribute Digital Dollars to 
domestic end-users' digital wallets against bank deposits and against 
collateral to nonresident banks. It would be redeemed against bank 
deposits and collateral at banks and against reserves at the central 
bank. The token-based properties would allow Digital Dollars to be 
intermediated through existing channels.
    For domestic end-users, digital wallets would offer essential 
payment functionalities and be integrated with existing banking 
services to enable a seamless integration with the financial system. 
Payments at points of sale could still be conducted through 
conventional terminals or fully contactless solutions. Regulated 
entities would extend such wallets to their customers through existing 
outlets for mobile phone applications covering required know-your-
customer and anti- money laundering provisions. For unbanked end-users, 
wallet services could come preloaded on mobile phones. Advanced off-
line capabilities are possible to allow local transactions to take 
place when the telecommunication networks are down.
    The DLT network would operate on an autonomous permissioned network 
and ensure validity and integrity of all transactions. The verification 
of transactions would rest on the complete history or lineage of the 
tokens from original issuance in order to attest tokens are genuine and 
have not been double spent. The advantages of tokens derive from their 
bearer instrument nature and the ease with which interactions with 
existing banking and payment functions can be performed. Participants 
only need to interact with the tokens and do not require to be 
connected to a payment system.
    DLT network participants would include the central bank and 
potentially resident banks, other financial intermediaries, and new 
entities that can help afford greater resilience in payment processing. 
The distributed nature of the DLT platform would enhance security as 
manipulation of the network would be computationally near impossible. 
The DLT platform would add to payment system diversification by 
operating on separate payment rails using the Internet, enabling 
distribution of central bank money independent of the functioning of 
the banking system.
Tokenized Money: A Brief History
    Money has evolved over the span of human civilization. Initially 
trade was through barter: a chicken for a clay pot. However, what does 
a society do when a person wants to trade a blanket, but doesn't need a 
clay pot in return? The answer was a token that society recognized as 
representing value and could be traded for any good whether a clay pot, 
a chicken, or a blanket. The first token may have been shells or beads. 
It evolved to things that carried some inherent value such as salt (the 
currency of the Roman army from which the word ``salary'' derives) or 
coins minted from precious metals like silver and gold. In more recent 
times, tokens of currency were based on intangible items of little 
intrinsic value such as paper or, today, polymer notes. As economies 
evolve into the future, so will their tokens.
    The physical paper greenback dollars in circulation today are 
tokens. In comparison, the dollars that can be spent by use of credit 
and debit cards and money drawn with a check are account based. Most 
money used in the U.S. economy is account based.
    A major distinction between token-based and account-based money is 
the process of verification upon use. With token-based money, 
verification is primarily performed by the recipient confirming that 
the token is authentic and not counterfeit. On the other hand, 
accounts-based money requires third-party authentication of the 
identity of both parties to the transaction and the adequacy of funds 
in the transferor's account.
Tokenized Money: A Glimpse at Its Future
    The Digital Dollar Project believes that the time is right for the 
U.S. to explore development of a token-based form of central bank 
digital currency. The Project believes that it would bring a number of 
potential benefits to payment, clearing, and settlement systems as well 
as enable new access points for populations that traditionally have 
been underserved by financial services. The Project recognizes that 
such an innovation would undoubtedly pose risks and challenges. That is 
why the Project recommends that such development be done carefully, 
thoroughly and thoughtfully through a series of pilot programs.
    A U.S. CBDC is ultimately about core financial system architecture. 
A dollar CBDC would take advantage of emerging distributed ledger 
technology to enable more direct monetary relations and diversified 
payment systems. It would offer new functionalities and more refined 
tools to overcome existing limitations of central bank money. It would 
enhance the dollar's functionality for a new digital age.
    Today, prices for most of the world's key tradable commodities, 
contracts and significant items of value are established in America's 
deep and liquid commodity futures markets overseen by the CFTC. Those 
market prices are set in U.S. dollars. As a result, those commodities 
are paid and accounted for in U.S. dollars. This dynamic is one of the 
important pillars of the U.S. dollar's primary reserve currency status.
    Tomorrow with the Internet of Value, those U.S. dollar-denominated 
commodities, contracts and significant items of value will be rendered 
into digitized, tradable tokens and coupled with algorithmically driven 
smart contracts. The question is whether the instrument in which those 
important commodities and contracts are accounted will be 
correspondingly digitized or whether it will remain an analog 
instrument. If so, will the digital commodities and contracts of the 
future will still be priced and accounted for in analog U.S. dollars? 
Or will the digital commodities and contracts of the future be priced 
and accounted for in some other currency that is digitized, 
decentralized, and programmable?
    We must face these questions today. It would be foolish to take the 
dollar's predominant status in the international financial system for 
granted. Creating the Digital Dollar will provide it with the best 
opportunity to maintain that status.
Global Competition for the Future of Money
    There is an enormous amount of work being done currently by 
overseas central banks on central bank digital currency. I have 
included in the appendix to my testimony a chart of some of the major 
developments underway around the world.
    As this Subcommittee knows well, China appears to be particularly 
advanced in development of a central bank digital currency, known as 
the Digital Currency Electronic Payment (DCEP) system. A number of 
large, important Chinese businesses are now joining this initiative as 
partners in testing and implementing the technology.
    A key purpose of the DCEP is to integrate China's impending digital 
currency, the Renminbi, into thousands of DLT applications involving 
autonomous sensors and 5G telecommunications technology. Its 
development is designed to provide China with a significant advantage 
in operating outside of the current Western-dominated, bank centric 
accounts-based financial system.
    Imagine, for example, a large African city with a water filtration 
station in which an electronic sensor developed and provided by China 
recognizes that its reserves of chlorine are running low. In time, 
using 5G telecommunications technology, that Chinese-built sensor will 
instruct a computer to automatically order chlorine supplies from a 
Chinese supplier in return for a direct, digital Renminbi payment with 
little to no human management and no transmittal through the global, 
account-based bank system.
    Undoubtedly, creating direct information and money transfer 
mechanisms that avoid transaction intermediaries will bring efficiency 
gains to smart cities, supply chains, and electricity grids. At the 
same time, working around the Western-dominated, traditional banking 
system will undoubtedly help China's independent economic expansion. In 
time, China is likely to integrate DCEP into its expanding Belt and 
Road Initiative by encouraging participating economies to direct peer-
to-peer payments using digital Renminbi. Or it could lure developing 
economies throughout South East Asia and Africa to peg their digital 
domestic currencies to that of China.
    The stakes of the contest for the future of digital money are as 
high as any of the transformational technological revolutions of the 
past 100 years. On the outcome lies a balance of geopolitical power. 
Chinese technological dominance in deploying digital currency systems 
that serve the coming Internet of Value certainly pose challenges for 
the U.S. and other democratic societies. If payment systems can bypass 
the global, account-based banking system, the United States will lose a 
powerful policy tool of economic sanctions, a tool that, whatever one's 
opinion of specific instances or frequency of utilization, is less 
widely destructive than a key alternative: warfare. In addition, if 
foreign central banks come to maintain lesser amounts of dollar 
reserves to fund purchases decreasingly priced in dollars, demand will 
decline for U.S. Government bonds. This will result in higher interest 
rates for the United States Government and American consumers as well.
    With such developments, we are indeed entering a new world. The 
question is who will design and build those digital systems, what 
tokenized currency will be utilized within them and what social values 
will be brought to bear. If the U.S. dollar is to remain the world's 
primary reserve currency in the unfolding century, then it also must 
evolve from an analog to a digital currency and a unit of account that 
measures, supports and transacts with the world's digital tokenized 
things of value.
Assuring Democratic Values in the Future of Money
    This post-World War II period of the dollar's ascendance has been 
accompanied by another historical rarity: the birth of a truly global 
market for goods and services. And that birth led to the emergence into 
the middle class of hundreds of millions of historically impoverished 
people. It is not a coincidence, but a consequence, I believe, of the 
ascendancy of the U.S. dollar as a global reserve currency that today 
more people than ever before in recorded human history enjoy improved 
health, child welfare, educational, and civil liberty attributes that 
accompany material where-with-all.
    I also believe that this remarkable flowering of human well-being 
has something to do with the global flowering of democratic ideals of 
individual liberty, freedom of speech, personal privacy, limited 
Government, the rule of law, and the aspirational nature of democratic 
societies, which I frequently cited during my time in public service. 
These ideals are encoded in the U.S. currency, the dollar.
    Some of those ideals are also set out in America's Constitution. 
One in particular, the Fourth Amendment's right to privacy, is the 
source of a rich body of jurisprudence defining the balance between 
individual rights to privacy, including financial privacy, and the 
State's ability sometimes to abridge that privacy for legitimate 
interests in law enforcement, national defense and other overriding 
concerns. Amongst the major democracies and certainly compared to 
autocracies, the United States has some of the most constitutionally 
established and well developed protections against Government 
infringement of individual financial privacy.
    With the proper legal and jurisprudential development around the 
Fourth Amendment and thoughtful design choices around anonymity and 
individual privacy, the Digital Dollar could well enjoy superior 
Constitutional privacy rights over many competing instruments, whether 
provided by commercial interests or other sovereigns. This would 
especially be so compared to a digital instruments of nondemocracies 
which, it would be implausible to believe, will not be used as an 
instrument of State surveillance.
    It may turn out that the United States has an ace to play in the 
contest for the future of digital money: privacy rights. Coding 
traditional American ideals of economic freedom and balanced privacy 
into a Digital Dollar will surely enhance its global appeal. Hundreds 
of millions of people in the developing world may well be reluctant to 
surrender their growing economic security and autonomy to authoritarian 
State surveillance, simply for the convenience of digital payments. As 
it has so often in its history, the U.S. has the opportunity to lead in 
a way consistent with its finest ideals.
Piloting Development of the Digital Dollar
    A well-architected, durable and universal U.S. CBDC is in America's 
national interest and, I believe, in the interest of the world economy. 
Crafting it will be an enormous and complicated undertaking. It needs 
to be done carefully, thoughtfully, and deliberately. Something as 
complex and worthy of the U.S. dollar's global importance should not be 
completed in a hurried manner. It will take time and seriousness to get 
it right.
    Nevertheless, now is the time to get started. The recent launch of 
SpaceX reminds us that the United States explored outer space and the 
lunar surface through a series of pilot programs known as Mercury, 
Gemini, and Apollo. So too, should the U.S. explore a Digital Dollar in 
a series of well-conceived and executed pilot programs.
    The Federal Reserve is already looking thoughtfully at central bank 
digital currency. It has assembled some fine researchers. It should now 
take the next step and work with the U.S. Treasury to kick off a series 
of pilot programs drawing upon the innovativeness of the private sector 
to test various design options and specific approaches, technologies, 
and protocols.
    Among other imperatives, the pilot programs should explore how a 
central bank digital currency can:

    Preserve the effectiveness of U.S. monetary policy and 
        financial stability;

    Enable ease of payments and provision of financial services 
        to those parts of the American population that are financially 
        underserved or excluded;

    Enhance scope, access, diversification, and resilience in 
        U.S. dollar payments;

    Provide needed scalability, security, and privacy in 
        retail, wholesale, and international payments;

    Unlock further innovation by creating the public 
        infrastructure for tokenized and programmable money, upon which 
        the private sector can develop;

    Offer comprehensive and seamless integration with the 
        financial infrastructure and interoperability with central bank 
        digital currency infrastructures being developed outside of the 
        United States;

    Adhere to existing KYC/AML requirements amid distribution 
        through regulated payment intermediaries and banks, preserving 
        the two-tiered banking system;

    Ensure requisite individual privacy and security laws and 
        regulations in payments is preserved and enhanced;

    Enhance economic policy insights through greater 
        transparency offered via digital payments; and

    Develop U.S. leadership and best-in-class technology to 
        support needed digital currency functionalities.

    In addition, the U.S. Treasury and the Federal Reserve could 
regularly update Congress on the progress of these pilot programs and 
their achievement of these objectives, including enhancing financial 
inclusion, and offer proposals to further build out and implement a 
U.S. CBDC across the financial system.
    When the U.S. has led the world in technological innovation--
whether exploring outer space in the last century or cyberspace in the 
turn of this century--it has done so through public/private 
partnerships. \5\ In these partnerships, the U.S. Government has 
directed central policy frameworks to further the public interest while 
the private sector supplied technological innovativeness, large project 
management capability, and competitive urgency. Without the blending of 
the two, exploration of the lunar surface and cyberspace may have 
slipped beyond the 20th century into the 21st.
---------------------------------------------------------------------------
     \5\ In the 1960s, NASA partnered with a host of private sector 
vendors, engineering firms, and contractors to land a man on the moon 
and accomplish America's then highest priority. Also in the 1960s, the 
Pentagon's Defense Advanced Research Projects Agency (DARPA) contracted 
to the private sector development of key Internet components while, 
later in the century, the National Science Foundation created NSFNET to 
contract with both private companies and public universities to lay the 
groundwork for the Internet as we know it today.
---------------------------------------------------------------------------
    It may be argued that developing a dollar CBDC is so important to 
the national interest that it should be the exclusive work of the 
public sector and not involve the private sector. I disagree. It is 
because the development of a dollar CBDC is so important to the 
national interest that it must involve the private sector. It is the 
way America succeeds in doing big technological things. It was the 
basis for successful exploration of both outer and cyberspace. It is 
the right way to explore the future of money.
Conclusion
    A new technological age is unfolding, bringing with it the 
digitization of things of value that can be tokenized, decentralized, 
and programmed. Across the globe, Governments and private entities are 
experimenting with tokenized commodities, contracts, legal titles and, 
most critically, commercial and central bank digital currencies.
    A U.S. CBDC would address limitations in the ability to distribute 
emergency monetary relief revealed by the COVID-19 crisis. It can 
provide the tools and infrastructure to make emergency liquidity 
distribution work better and faster. It can provide advantages over 
traditional bank accounts in terms of expanding access for underserved 
populations and a foundation for new and more inclusive financial 
services.
    Yet, a U.S. CBDC is about more than financial relief amidst a 
pandemic. It is about the architecture of money in this new digital 
era. It offers new functionalities and more refined policy tools. It 
takes advantage of emerging distributed ledger technology to enable 
more direct monetary relations and a more diversified payments 
infrastructure. It recrafts the architecture of central bank money and, 
in effect, reimagines the future of money itself.
    Throughout its history, the United States has been a leader in 
innovation and building systems for the next generation. Whether 
launching the space program or building the internet, the United States 
has conducted large technological endeavors through public and private 
partnerships reflecting longstanding American values of free 
enterprise, economic stability, technological innovation, individual 
liberty and privacy, and the rule of law. It is how America does big 
things.
    This global wave of digital currency innovation is quickly gaining 
momentum. The questions for the United States are what role it will 
play in this wave of the Internet and to what degree will its core 
values be brought to bear. The United States must take a leadership 
role in this next wave of digital innovation or be prepared to accept 
that the innovation will incorporate the values of America's global 
competitors.
    The launch of a U.S. CBDC is a logical and critical next step to 
increase financial inclusion, enshrine democratic values in the future 
of money, drive societal and economic benefits, and future-proof the 
U.S. dollar for generations to come.
[Attachment A: ``The Digital Dollar Project Summary'' located in the 
        Additional Materials section of this hearing]
                                 ______
                                 
                   PREPARED STATEMENT OF TIM MORRISON
                    Senior Fellow, Hudson Institute
                             July 22, 2020
    Chairman Cotton, Ranking Member Cortez Masto, thank you for the 
invitation to testify and thank you for holding this hearing on this 
most important topic.
    It is not too much to say that the competition between the United 
States and the Chinese Communist Party is the great power contest of 
this and the next generation (at least).
    Don't take my word for it. Take the word of the General Secretary 
of the Chinese Communist Party, Xi Jinping.
    In his January 2013 remarks to the Party, Secretary Xi laid out the 
competition from the view of the Chinese Communist Party.

        Facts have repeatedly told us that Marx and Engels' analysis of 
        the basic contradictions in capitalist society is not outdated, 
        nor is the historical materialist view that capitalism is bound 
        to die out and socialism is bound to win. This is an inevitable 
        trend in social and historical development. But the road is 
        tortuous. The eventual demise of capitalism and the ultimate 
        victory of socialism will require a long historical process to 
        reach completion. In the meantime, we must have a deep 
        appreciation for capitalism's ability to self-correct, and a 
        full, objective assessment of the real long-term advantages 
        that the developed Western Nations have in the economic, 
        technological, and military spheres. Then we must diligently 
        prepare for a long period of cooperation and of conflict 
        between these two social systems in each of these domains.

        For a fairly long time yet, socialism in its primary stage will 
        exist alongside a more productive and developed capitalist 
        system. In this long period of cooperation and conflict, 
        socialism must learn from the boons that capitalism has brought 
        to civilization. We must face the reality that people will use 
        the strengths of developed, Western countries to denounce our 
        country's socialist development. Here we must have a great 
        strategic determination, resolutely rejecting all false 
        arguments that we should abandon socialism. We must consciously 
        correct the various ideas that do not accord with our current 
        stage. Most importantly, we must concentrate our efforts on 
        bettering our own affairs, continually broadening our 
        comprehensive national power, improving the lives of our 
        people, building a socialism that is superior to capitalism, 
        and laying the foundation for a future where we will win the 
        initiative and have the dominant position.

    It has been said that the first line of encryption the Chinese use 
is Chinese itself. The Chinese Communist Party is not shy, ashamed, or 
particularly secretive about its plans: the extent to which it hides 
them at all, it hides them with the Chinese language.
    General Secretary Xi promises the ``eventual demise of 
capitalism''. He promises that Chinese socialism will ``win the 
initiative and have the dominant position.'' This is not a promise of 
peaceful coexistence between competing world views.
    Professor Josh Eisenman has compared this Chinese socialism to 
earlier incarnations of national socialism in Mussolini's Italy and 
Hitler's Germany given the common themes of fascist Government. It 
appears fascism truly is back, just not necessarily where some are 
looking for it.
    So General Secretary Xi has been clear about his plan. What is our 
plan in the United States?
    On May 20th of this year, the White House released the ``U.S. 
Strategic Approach to the People's Republic of China'', in response to 
Congressional direction, which was nested within earlier strategic 
documents like the National Security Strategy of 2017. It laid out two 
principal lines of effort:

        Our competitive approach to the PRC has two objectives: first, 
        to improve the resiliency of our institutions, alliances, and 
        partnerships to prevail against the challenges the PRC 
        presents; and second, to compel Beijing to cease or reduce 
        actions harmful to the United States' vital, national interests 
        and those of our allies and partners. Even as we compete with 
        the PRC, we welcome cooperation where our interests align. 
        Competition need not lead to confrontation or conflict.

    This document should be read alongside the recent public statements 
of Administration senior leaders like National Security Adviser 
O'Brien, FBI Director Wray, and Attorney General Barr.
    What we are witnessing is a full court press by our senior national 
security leaders to alert Americans to the national security threats 
posed by what Director Wray referred to as a ``whole of society 
threat'' in 2018 testimony before the Senate Select Committee on 
Intelligence.
    Attached to my statement is a public version of what we used to 
call the ``wheel of death'' when I served in Government--it shows how 
China leverages its ``whole of society'' approach to steal its way to 
economic development and military modernization. I urge the Members of 
this panel, the staffs, and everyone watching, to familiarize 
yourselves with this unclassified U.S. Government product: don't assume 
you aren't involved in the competition with the Chinese Communist 
Party.
    Let's be clear, it isn't enough to win a competition in a ``whole 
of society'' contest with only the national security apparatus aligned. 
Our economic apparatus must be aligned as well, and there is work to be 
done in this respect.
    I recommend to you three specific areas of focus to enhance U.S. 
economic strength to win the competition with the Chinese Communist 
Party:

  1.  Expand the surface area of the competition with China by creating 
        a truer competitor to the China market;

  2.  Reform our approach to the promotion of U.S. exports and 
        alternatives to China Inc. into a true strategic process for 
        winning the competition; and,

  3.  Overhaul our approach to export controls (a critical and 
        effective tool, when used as a part of a balanced, integrated 
        policy framework).
First, Developing the Free Market To Defeat Chinese Mercantilism
    The Trans-Pacific Partnership (TPP) arose from trade discussions in 
the early 2000s under President George W. Bush, culminating in an 
agreement between 12 Nations signed by President Barack Obama in his 
final year in office.
    Unfortunately, support for free trade had begun to fade by 2016, 
when both major party candidates for the Presidency announced their 
opposition to TPP.
    Given how the PRC has abused and violated its commitments under 
earlier trade agreements, to the detriment of American workers, 
seemingly with no response from policymakers in Washington, D.C., the 
diminution of support for new trade agreements should not have been a 
surprise.
    To be clear, the withdrawal of the U.S. from TPP was a loss for our 
economic well-being and for our efforts to counter the CCP's predatory 
behavior.
    Yet, on July 1st of this year, the United States, Mexico, Canada 
Agreement (USMCA) took full effect.
    USMCA, the fullest update to date of the 1994 North America Free 
Trade Agreement, deepens the integration of the economies of the United 
States, Mexico, and Canada making North America one of the most deeply 
integrated economic zones on Earth.
    The USMCA agreement was also remarkably successful by political 
standards, being endorsed by both the U.S. Chamber of Commerce and the 
AFL-CIO and passing the Senate on an 89 to 10 vote and the House on a 
385 to 41 vote.
    Of critical importance to the competition with the Chinese 
Communist Party, the update to NAFTA includes critical provisions that 
address the impacts of ``State owned enterprises'' including those not 
in North America that could affect trade or investment within North 
America.
    Together, the USMCA economies serve 478 million people; their 
economic output is approximately $24 trillion per year, representing 
approximately 28 percent of the world's output at 7 percent of its 
population.
    Now imagine if a newly sovereign United Kingdom, with its 66 
million people and nearly $3 trillion in gross domestic product, joined 
USMCA.
    What about Japan's $5.1 trillion in GDP and 126 million citizens?
    Australia, South Korea, New Zealand together represent $3.7 
trillion in output and 81 million people. They could be brought in too.
    At a combined economic output of nearly $36 trillion, and with 751 
million citizens, a USMCA joined by the remaining Five Eyes, plus Japan 
and South Korea could be the freest and most productive trade bloc in 
the world. And it would be based on western values for the environment, 
labor, transparency and the rule of law.
    The choice between access to a socialist marketplace (``with 
Chinese characteristics'') and such a free trade bloc is really no 
choice at all.
    Compare that to the status quo where international banks like HSBC 
believe they have to choose between the PRC and the West as the CCP 
violates China's international agreements and destroys Hong Kong's 
autonomy.
    It would be far easier for Western companies to compete with Made 
in China 2025 State champions to build independent energy, 
telecommunications, and pharmaceutical supply chains. As I mentioned, 
USMCA builds in tools to counter State-owned enterprises in a way the 
World Trade Organization has refused to do.
    But what if we don't build such an economic bloc? By some 
projections, in 2050, the U.S. will not only not be the largest economy 
by 2050, it won't even be the number two economy. How well postured 
will we be to compete with the CCP in that position?
Second, Leveraging U.S. Foreign Assistance and Investment
    As I alluded before, the Chinese Communist Party really doesn't 
hide its plans. China certainly hasn't tried to hide its Made in China 
2025 plan.
    U.S. business has just seen fit to ignore what's plainly obvious, 
lured into Beijing's maw by the promise of market access.
    As you'll see in the enclosed 2019 Newsweek article, this may be 
changing, finally. But significant damage has been done.
    The CCP has proven successful at boosting prospects of its favored 
domestic champions--among the most infamous, Huawei--with tens of 
billions of dollars in tax breaks, cheap financing, access to cheap 
resources, and privileged domestic market access.
    In essence, the CCP has destroyed the free market in its 
prioritized areas.
    What's needed to counter the CCP's approach isn't to copy what 
they've done.
    We need to strengthen the free trade bloc (as I outlined above) and 
implement a strategic approach that can level the playing field. And we 
have tools . . . lots of them. For example:

    the Export Import Bank, with a lending limit of 
        approximately $135 billion according to the Congressional 
        Research Service;

    the Development Finance Corporation, built on the 
        foundation of the old Overseas Private Investment Corporation 
        with $60 billion in financing authority;

    in FY20, the Congress appropriated over $56 billion for 
        international affairs, including approximately $20 billion that 
        USAID manages;

    numerous other related organizations like the Millennium 
        Challenge Corporation, the Economic Support Fund, the Global 
        Fund, and many, many others; and,

    extensive infrastructure at the U.S. Departments of State 
        and Commerce to advocate U.S. trade around the world (you have 
        likely met with representatives of these services on your 
        CODELs and in meetings with various Chambers of Commerce of 
        U.S. business around the world).

    What's missing is an organizational infrastructure and a clear 
mission.
    There needs to be an ongoing evaluation of the important 
battlegrounds of the competition and a regular process to triage these 
battlegrounds and leverage our tools.
    Who in the United States Government has the responsibility to make 
sure the CCP doesn't acquire advanced aerospace technology in Ukraine, 
or a key port in Portugal, or some of the world's largest rare earth 
deposits in Greenland? If there's no U.S. company interested, the 
answer is often ``no one.'' On the other hand, the CCP, with no 
accountability to its people, is willing to make the investment.
    There must be clear direction given by the President for how he 
expects U.S. foreign aid to be utilized in the strategic competition 
with the CCP. To carry out that direction, it is imperative to 
reestablish the international economics directorate at the White House 
that lashed up the National Security and National Economic Councils.
    DFC, as I noted, was built on top of OPIC, a development agency 
with a culture and mission established over decades. Included in its 
implementing legislation, the BUILD Act, was an effective prohibition 
on conducting business other than in low-income countries. The China 
competition doesn't take place only in low income countries.
    Ex-Im has requirements on minimum thresholds of U.S. content to 
qualify for its support. Do these thresholds make sense if the larger 
goal is to ensure a proposal other than Huawei's wins a 5G tender?
    At over $200 billion in capacity, we have what could effectively be 
a sovereign wealth fund for the China competition; what we need is a 
clear strategy to use it, with clear lines of authority and 
accountability to implement it.
    While the 2017 National Security Strategy and the May 2020 
Strategic Approach were important foundational documents, much remains 
to be done.
Lastly, Leveraging Export Controls as a Vital Tool in an Integrated 
        Technology Protection Framework
    Export controls have historically been a key tool the U.S. uses to 
prevent the spread of military sensitive, and especially proliferation 
sensitive, technologies.
    They can also advance U.S. values and interest, as the Commerce 
Department proved yet again this past Monday with the third tranche of 
Entity List designations related to the CCP's digitized concentration 
camps, and its July 1 Business Advisory warning companies of the risks 
of supply chains involving Uighur forced labor.
    In the competition with the Chinese Communist Party, control of 
emerging and foundational technologies will take on new importance.
    This is among the reasons why Congress overhauled export controls 
in the FY19 National Defense Authorization Act, in tandem with the 
modernization of the CFIUS process.
    The Administration has had remarkable success with its campaign to 
counter Chinese 5G by using export controls: use of the Entity List 
and, more recently, updates to the foreign direct product rule, were 
directly responsible for the recent decision by the United Kingdom to 
alter its plans concerning Huawei.
    But, the United States may also reach a point with export controls 
where it creates an incentive to ``off shore'' technology and 
production to put activity outside the reach of export controls.
    Secretary Ross should be commended for his 100 percent commitment 
to the China competition. That said, it is time for additional agencies 
to come to the table.
    For example, the Secretary of the Treasury has authority under the 
International Emergency Economic Powers Act (IEEPA), to add companies 
to the Specially Designated Nationals list, which would have the effect 
of blocking their access to the international banking system.
    Such a designation would eliminate the incentive that export 
controls can create to offshore technology and production.
    Policymakers should also consider whether it continues to make 
sense to split responsibility for the administration of export controls 
between the Department of Commerce and the Department of State for 
separate export control lists.
    Such separation adds complexity for exporters, creates gaps through 
which our adversaries can seek to acquire U.S. technology, and it 
wastes resources that could be better applied to creating a nimble, 
streamlined process that serves both commerce and national security 
(including law enforcement).
    Mr Chairman, Ranking Member Cortez Masto, Members of the 
Subcommittee, I don't think it's really questioned any longer that the 
Chinese Communist Party is a threat.
    It's not too much to say, as commentator Andrew Sullivan did 
recently that,

        [t]here is no doubt at this point that communist China is a 
        genocidal State. The regime is determined to coerce, kill, 
        reeducate, and segregate its Uighur Muslim population, and to 
        pursue eugenicist policies to winnow their ability to sustain 
        themselves.

    Likewise, General Secretary Xi himself spoke of the ``eventual 
demise'' of our way of life.
    When we confronted the last strategic great power rivalry, we 
managed to make this a bipartisan fight.
    Teamed up were: national security hawks, human rights doves; Wall 
Street and labor; churches and intellectuals.
    So must it be this time around.
    Republicans and Democrats can unite to counter the common threat of 
the Chinese Communist Party's doctrine of national socialism.
    Thank you again for the invitation to be here today.
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
                   PREPARED STATEMENT OF LISA D. COOK
  Professor of Economics and International Relations, Michigan State 
                               University
                             July 22, 2020
    At least three factors currently make or could make the innovation 
economy in the United States competitive domestically and 
internationally.
    First, the innovation economy is vast, porous, and encompasses a 
wide array of good-paying jobs. By several measures, the innovation 
workforce generates positive spillovers for the entire economy and 
better pay and job security for those in the innovation economy. In 
2017, the National Science Foundation calculated that the innovation 
economy comprised roughly 7 to 25 million workers. These innovation 
workers earn substantially more than the median income for all workers. 
In 2017, the median innovation worker earned $85,390, compared to 
$37,690 for all workers. Innovation economy jobs also are growing 
faster than in other sectors, and unemployment rates are lower. During 
and following the Great Recession, the U.S. workforce contracted, while 
the innovation workforce was less affected by the overall economic 
contraction. At that time, the income gap between innovation workers 
and the general labor force also widened. In 2012, innovation economy 
earnings were double those of other workers; by 2014, the median 
innovation worker earned an additional 25 percent more than the general 
labor force. \1\
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     \1\ Cook (2020) and National Science Foundation (2019).
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    Despite the popular conception of the innovation economy, one does 
not need a PhD in engineering to participate in the innovation economy. 
In fact, during the pandemic, there are many opportunities for worker 
retraining that could move unemployed workers from jobs disrupted by 
COVID-19 to jobs in the innovation economy. For example, digital tools 
are being developed and refined to augment traditional contact tracing. 
\2\ This includes case management and proximity tracing and exposure 
notification. In some States, as little education as a high school 
diploma is required, and on line training is both free and available. 
In general, if workers are able, getting additional training is 
desirable during periods of weak labor markets such that skills are not 
lost or are enhanced, something we observed during the Great Recession.
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     \2\ CDC (2020).
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    Second, another feature that makes the U.S. competitive 
internationally is the protection of intellectual property rights. This 
is a feature of the American innovation system that is the envy of 
other countries and that is used by firms that plan to sell their 
products and processes internationally. This is particularly true, my 
coauthor and I find, for emerging markets (Cook and Kongcharoen, 
2010b). Specifically, we find that countries that are export-intensive 
and that move up the value chain of production ultimately start 
protecting intellectual property rights related to exports after 
exports begin. Their own intellectual property is at stake and 
countries need to be able to take violators to court. The evidence 
suggests this is true on average.
    However, firms in some emerging markets like China, decide to do 
what Soviet inventors did during the Cold War, and take advantage of 
the U.S. patent system to protect their intellectual property. \3\ 
Chinese interest in protection of intellectual property rights has been 
increasing in recent years. How do we know this? It can be measured by 
the number of U.S. patents obtained by inventors who are Chinese 
residents and the share of patents granted to Chinese residents 
relative to all foreign patents.
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     \3\ Cook (2012) shows that there was substantial patent activity 
by Soviet inventors (and institutions) obtaining U.S. patents during 
the period of the Cold War, although they were largely not awarded 
patents in the Soviet Union.
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    Between 1963 and the year 2000, Chinese residents were granted 917 
patents from the U.S. Patent and Trademark Office (USPTO). At that 
time, it ranked number 30, between Singapore and India. Chinese 
residents obtained approximately 0 percent of foreign patents issued by 
the USPTO during that period. By 2014, Chinese inventors residing in 
China had dramatically increased their holdings of U.S. patents to 
7,236, which was eight times as many as were obtained for the 38 years 
between 1963 and 2000, ranked number 8 among foreign countries, and 
epresented 4.6 percent of foreign patents obtained in the United 
States. By 2019, Chinese inventors in China were granted 22,294 
patents, which was more than 24 times the number in the period 1963 to 
2000, ranked number three behind Japan and South Korea, and represented 
10.9 percent of patents issued to foreign residents in 2019. \4\
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     \4\ USPTO (2015, 2020) and author's calculations.
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    From a recent visit to China that included visits with Chinese 
businesses, it is clear that the U.S. patent system is offering 
something the Government of China will not or cannot offer its 
inventors and entrepreneurs: determination of originality (or first to 
patent) and defense of intellectual property. \5\ U.S. patents are and 
will be critical to Chinese innovation being able to compete abroad, 
not just in the United States. They also serve to encourage innovation 
and, therefore, to promote long-term economic growth.
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     \5\ Cook (2015).
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    A third factor that could make the U.S. system of innovation 
competitive internationally is more diversity and inclusion at every 
stage of the innovation process. Cook and Kongcharoen (2010a) 
calculates that, between 1970 and 2006, patent output for all U.S. 
inventors is 235 patents per million; for women, 40 patents per 
million; and for African Americans, 6 patents per million. It also 
finds that mixed-gender patent teams are more productive than single-
sex patent teams. Like Hunt, Garant, Herman, and Munroe (2013), Cook 
and Yang (2018) finds that GDP per capita would be 0.6 percent to 4.4 
percent higher if the process of innovation included more women and 
African Americans. In several places, I propose a number of policy 
interventions which might broaden participation in the innovation 
economy: Cook (2019), Cook and Gerson (2019), and Cook (2020). Among 
these are increasing the participation of women and minoritized groups 
in STEM education and in the Small Business Administration's Small 
Business Innovation Research (SBIR) and Small Business Technology 
Transfer (STTR) programs and addressing racial and gender workplace 
climate issues at tech firms and at other institutions where invention 
and innovation occur. In addition, in order to broaden participation in 
patenting and innovation, accurate demographic data related to 
patenting must be available. The SUCCESS Act, which this body passed in 
2018, and the IDEA Act, which is currently being considered by this 
body, are based on my previous research and create the foundation for 
careful collection of and reporting on such data. I urge passage of the 
IDEA Act in order to measure and encourage progress in patenting, 
innovation, competitiveness, growth, and higher living standards in the 
United States and for all Americans.


                  PREPARED STATEMENT OF MARTIJN RASSER
 Senior Fellow, Technology and National Security Program, Center for a 
                         New American Security
                             July 22, 2020
Key Observations\1\ \2\
    Chairman Cotton, Ranking Member Cortez Masto, distinguished Members 
of the Subcommittee, thank you for the opportunity to share insights on 
a topic of vital importance to the United States. I want to begin with 
five observations on the economic competition with China:
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     \1\ In addition to new material, this testimony includes original 
content from the witness's previously published and forthcoming work, 
and media commentary.
     \2\ A portion of these observations are derived or pulled directly 
from a forthcoming report from the Center for a New American Security's 
Technology Alliance Project, which the witness leads, and from The 
American AI Century: A Blueprint for Action, for which the witness was 
the lead author.

  1.  U.S. economic security is entrenched in American technological 
        leadership. The 21st century will be defined by competition; a 
        contest of economic power rooted in technological advances. How 
        countries decide to compete will shape the lives of billions of 
        people. Technology-leading countries will determine how to 
        harness new technologies to combat disease, feed their people, 
        counter climate change, gain wealth, explore the universe, gain 
        influence over others, secure their interests, and protect 
        their independence and freedom. The leaders in adopting 
        emerging technologies such as artificial intelligence (AI), 
        quantum sciences, biotechnology, and next generation 
        telecommunications, and those who shape their use, will garner 
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        economic, military, and political strength for decades.

  2.  American technological leadership is at risk. The United States 
        of today is rooted in investments in education, science, 
        research and development (R&D), and infrastructure made decades 
        ago. On its current trajectory, with a shrinking share of 
        global R&D spending, human capital shortfalls, and the rapid 
        rise of a near-peer competitor, the United States cannot 
        continue to coast. America's ability to harness the emerging 
        technologies that will fuel the 21st century economy to the 
        fullest extent possible is at stake. Falling short would 
        squander economic and societal benefits and expose the United 
        States to avoidable risks and challenges.

  3.  The United States needs a national strategy for technology to 
        effectively compete. China has become a serious technological 
        competitor. On strategic emerging technologies such as 5G 
        wireless networks, AI, and genomics, China is at rough parity 
        with the United States, and perhaps ahead. Much of China's 
        success lies in its ability to formulate a comprehensive, long-
        term Government strategy to gain dominance in key strategic 
        technologies. In contrast, in the United States such 
        policymaking is generally reactive and piecemeal: The United 
        States needs a strategic, national level approach to 
        effectively compete with China.

  4.  Multinational collaboration should be a cornerstone of a national 
        technology strategy. The United States cannot go it alone. No 
        one country can achieve its full potential in desired 
        capabilities across the spectrum of critical technology areas 
        on its own. Nor can any single State muster the resources to 
        nurture all the necessary talent and control vital supply 
        chains needed to achieve and maintain such technological 
        leadership. Instead, America should maximize one of its 
        greatest competitive strengths: its unmatched network of allies 
        and partners. Broad-based, proactive, and long-term 
        multilateral cooperation among like-minded countries is needed 
        to maximize effectiveness across a range of areas, including 
        R&D, supply chain diversity and security, standards setting, 
        multilateral export controls, and countering the illiberal use 
        of technology.

  5.  The pandemic crisis presents opportunity and urgency to act. The 
        global order is at an inflection point where decisions made by 
        world leaders in coming months will shape the world for 
        decades. The stakes are high: long-term economic and 
        technological competitiveness, critical infrastructure 
        integrity and security, and cohesion among the world's liberal 
        democracies. Collaboration between the allies will help to 
        ensure that the upheavals of the postpandemic world can be 
        dealt with more effectively. It will also improve the chances 
        that the coming decades are ones where their societies and 
        economies can prosper, all while blunting the coercive power of 
        authoritarian countries.
Recommendations\3\
    The U.S.-China tech relationship requires a recalibration. Congress 
and the Administration can advance U.S. national security and 
competitiveness by undertaking major investments in the U.S. tech 
sector, establishing new rules for technology development and trade, 
and increasing collaboration with allies.
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     \3\ These recommendations are derived or pulled directly from The 
China Challenge: Strategies for Recalibrating the U.S.-China Tech 
Relationship, for which the witness was a coauthor.
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Promote American Innovation
    Increase R&D spending. The United States should increase 
        total national R&D spending from 2.8 percent to 4 percent of 
        gross domestic product (GDP) and Federal R&D spending from 0.7 
        percent to 1.2 percent.

    Increase science, technology, engineering, and match (STEM) 
        education and training. The U.S. Government should invest in 
        improved STEM education and professional development for 
        teachers. Congress should incentivize private industry 
        workforce training in STEM.

    Attract foreign STEM talent. Congress should raise the cap 
        for H1-B visas and remove the cap for advanced-degree holders. 
        Congress should also create new ways to recruit high-skilled 
        immigrants to tackle acute talent shortages for STEM jobs.

    Secure and diversify supply chains. The United States 
        should diversify and secure supplies for key technology inputs 
        such as rare earth elements and semiconductors by investing in 
        domestic industries and working with partners to build trusted 
        international supply chains.
Protect Key Areas of Competitive Advantage
    Establish multilateral export controls on semiconductor 
        manufacturing equipment (SME). The United States should protect 
        its competitive advantage in hardware by establishing 
        multilateral export controls on SME and design tools in 
        partnership with key allies Japan, the Netherlands, and South 
        Korea.

    Establish end-use based export controls for China. The U.S. 
        Commerce Department should develop export control regulations 
        for U.S.-origin and U.S.-developed products with end uses at 
        odds with American security interests and values, such as human 
        rights abuses or adversary military uses.

    Ensure sufficient resources for counterespionage 
        investigations. Congress should ensure the FBI and Department 
        of Justice are sufficiently resourced to conduct 
        counterespionage investigations, particularly in Chinese 
        language resources and scientific and technical expertise.

    Develop better collaboration with universities. The FBI 
        should increase collaboration with universities to counter 
        espionage threats. This should include reestablishing the 
        National Security Higher Education Advisory Board or similar 
        body.

    Create a new sanctions authority to target Chinese firms 
        that steal U.S. technology. The Treasury Department, working 
        with the Commerce and State Departments, should cut off from 
        the U.S. financial system Chinese firms that engage in 
        intellectual property (IP) theft.
Partner With Other Democratic Technology Leaders
    Create a new international regime for technology policy. 
        The United States should lead the creation of a new 
        international organization for technology policy comprised of 
        democratic, technology-leading Nations (a ``technology 
        alliance''). Multilateral cooperation is needed to maximize 
        effectiveness in R&D, supply chain security, standards-setting, 
        export controls, and countering illiberal uses of technology.
What Multinational Tech Policy Could Look Like
    I provide two vignettes of strategic multinational technology 
policy opportunities. Today, technology policy coordination among the 
United States and its allies is largely ad hoc, stove piped, and 
disjointed. The resulting decisions and actions often fail to take into 
account the broader strategic context, blunting the effectiveness of 
the policies designed to achieve a desired outcome and impairing the 
ability to effectively respond to second and third order consequences, 
be they anticipated or unforeseen. These inefficiencies are rooted in 
an underappreciation of how intricately linked the technology futures 
of the world's liberal democracies are. To illustrate what 
comprehensive multilateral technology policy collaboration could look 
like, I will focus on two technology areas of fundamental importance to 
the economic competition with China: 5G and semiconductors.
The Way Forward on 5G: Open Interfaces\4\
    Communication networks are the central nervous system of the 21st 
century economy. The fifth generation of wireless--5G--will be 
essential to and inseparable from all we do. Getting 5G right is all 
the more urgent. Next generation 5G networks will enable telemedicine, 
self-driving cars, and a proliferation of Internet of Things devices to 
fuel the future digital economy. Secure, reliable 5G networks will be 
essential elements of national infrastructure. Chinese firms, Huawei 
most prominently, pose unacceptable risks to U.S. national security, 
and the security of America's allies and partners.
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     \4\ These recommendations are derived or pulled directly from the 
forthcoming report Open Future: The Way Forward on 5G, for which the 
witness is the lead author.
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    The United States has the opportunity to promote a sound 
alternative to 5G that could lead to a paradigm shift in the industry: 
wireless infrastructure built on a modular architecture with open 
interfaces. A modular architecture allows an operator to choose 
multiple vendors for a range of offerings, rather than being locked in 
with a single large integrated vendor. Open interfaces--the ability of 
equipment from any vendor to work with that of another--make that 
possible. Such a shift means upending the industry status quo that is 
dominated by four telecommunications equipment providers: China's 
Huawei, Finland's Nokia, Sweden's Ericsson, and South Korea's Samsung. 
Whereas other proposed responses to the Huawei dilemma and the 
problematic current state of competition in the telecommunications 
industry--such as creating a U.S. national champion or taking an equity 
stake in Nokia or Ericsson--fiddle at the margins, switching to an 
industry centered on open interfaces would change the game altogether.
    A restructured industry based on open interfaces would directly 
address the prevailing concerns over untrusted vendors such as Huawei 
and the broader inefficiencies of the industry. There are distinct 
advantages to be gained in security and interoperability, supply chain 
resiliency, probable cost savings, and the opportunity to stimulate 
much needed competition in the sector. Taken together, these advantages 
do much to blunt Beijing's industrial policies that have enabled 
Huawei's predatory anticompetitive practices.
    The United States should work with allies and partners to promote 
the shift to telecommunication infrastructure based on open interfaces. 
Like the United States, these countries have a shared interest in 
building secure and resilient infrastructure. Operators in Asia, 
Europe, and North America are already deploying open architecture 
networks. The focus of these rollouts is on open interfaces for the 
radio access network (RAN), typically called ``open RAN''.
    There are two key areas for multilateral cooperation:
    One, encourage joint R&D and deployment of open RAN. Joining forces 
with telecommunications technology leaders Japan, South Korea, Finland, 
and Sweden will harness the knowledge of the world's telecommunications 
experts. It will also incentivize the relevant companies and 
Governments to promote open architecture as a preferred alternative.
    Two, promote multilateral 5G policies. The world's leading 
democracies working in concert have the purchasing power to ensure that 
an alternative to the 5G status quo is viable. Multilateral 
coordination will help tech-leading democracies regain the competitive 
edge in global telecommunications and be able to proliferate more 
secure and robust communications infrastructure to middle powers. 
Working in concert to help Ericsson, Nokia, and Samsung transition to a 
revamped industry based on open interfaces will help to cement critical 
support.
Preserving America's Edge in Semiconductors\5\
    Semiconductors comprise foundational technology for the 21st 
century. This sophisticated hardware is essential for computing, 
communications, and critical infrastructure, and is a key enabler of 
fields such as robotics and AI. Semiconductors are the backbone of 
modern military and economic power. The United States has a major 
global lead in semiconductor design, a considerable technological 
strength which China looks to challenge through a concerted technology 
indigenization and innovation effort. To safeguard and preserve its 
advantage, the United States should pursue a three-part multinational 
strategy.
---------------------------------------------------------------------------
     \5\ These recommendations are derived or pulled directly from The 
American AI Century: A Blueprint for Action, for which the witness was 
the lead author, from Martijn Rasser, ``Countering China's 
Technonationalism'', The Diplomat, April 24, 2020, https://
thediplomat.com/2020/04/countering-chinas-technonationalism/, and from 
Rising to the China Challenge: Renewing American Competitiveness in the 
Indo-Pacific, for which the witness was a coauthor.
---------------------------------------------------------------------------
    One, is to enact multilateral export controls in concert with 
allies and partners, to protect their collective competitive edge in 
hardware. China is currently heavily dependent on imports of foreign-
manufactured semiconductors to meet internal demand. As part of its 
Made in China 2025 plan, China is looking to reduce its reliance on 
foreign chips by ramping up domestic semiconductor production. \6\ Yet 
this desire to indigenize production is a major source of strategic 
leverage for the United States.
---------------------------------------------------------------------------
     \6\ ``The Potential Impacts of the Made in China 2025 Roadmap on 
the Integrated Circuit Industries in the U.S., EU and Japan'', working 
paper, U.S. International Trade Commission, August 2019; ``Addition of 
Entities to the Entity List and Revision of an Entry on the Entity 
List'', 84 FR 121 (June 24, 2019); Ana Swanson, Paul Mozur, and Steve 
Lohr, ``U.S. Blacklists More Chinese Tech Companies Over National 
Security Concerns'', New York Times, June 21, 2019; Ana Swanson and 
Paul Mozur, ``U.S. Blacklists 28 Chinese Entities Over Abuses in 
Xinjiang'', New York Times, October 7, 2019; and Department of 
Commerce, ``Addition of Certain Entities to the Entity List'', Richard 
Ashooh, 15 CFR Part 744, October 7, 2019, https://s3.amazonaws.com/
public-inspection.federalregister.gov/2019-22210.pdf.
---------------------------------------------------------------------------
    To accomplish this goal, China needs foreign imports of 
semiconductor manufacturing equipment (SME), which are the equipment 
and tools needed to establish a chip fabrication facility, or foundry. 
The global SME market is highly centralized, with the United States, 
Japan, and the Netherlands accounting for 90 percent of global SME 
market share. \7\ In key areas the market is even more concentrated. A 
single Dutch company is the sole supplier of extreme ultraviolet 
lithography machines required to make the latest generation of 
semiconductors. \8\ Nearly the entire global supply of photoresists, 
chemicals essential to the production of semiconductors, is produced by 
a handful of companies based in the United States, Germany, Japan, and 
South Korea. \9\
---------------------------------------------------------------------------
     \7\ John VerWey, ``What's Causing U.S. Semiconductor Equipment 
Production and Exports To Grow?'' Usitc.gov, January 2019, https://
www.usitc.gov/publications/332/executive-briefings/ebot-john-verwey-
semi-manufacturing-equipment-pdf.pdf.
     \8\ ``The Health and Competitiveness of the U.S. Semiconductor 
Manufacturing Equipment Industry'', working paper, U.S. International 
Trade Commission, July 2019, https://www.usitc.gov/publications/332/
working-papers/id-058-the-health-and-competitiveness-of-the-sme-
industry-final-070219checked.pdf.
     \9\ ``Photoresist'', Science Direct, https://
www.sciencedirect.com/topics/engineering/photoresist; and Kiran 
Pulidindi and Soumalya Chakraborty, ``Photoresist and Photoresist 
Ancillaries Market Size By Product'', Global Market Insights, https://
www.gminsights.com/industry-analysis/photoresist-and-photoresist-
ancillaries-market.
---------------------------------------------------------------------------
    The Commerce Department and State Department should work with key 
allies and partners (the Netherlands, Japan, South Korea, and 
Singapore) to establish multilateral export controls on SME, 
restricting sales to China. While export controls on semiconductors 
themselves should be rare and targeted, such as the action against 
Huawei and a handful of other companies linked to the Chinese military, 
the United States should enact broad restrictions on sales of SME to 
China, working in concert with allies and partners, in order to sustain 
the U.S. advantage in hardware.
    Two, is to secure and diversify semiconductor supply chains by 
setting up new semiconductor manufacturing facilities known as 
``fabs''. The United States should lead the creation of a semiconductor 
fab consortium, consisting of the like-minded countries that produce 
and consume much of the world's chipset output.
    These countries--such as the United States, Germany, France, South 
Korea, Japan, the United Kingdom, and the Netherlands--could 
collaborate to set up new fabs outside of China.
    These countries have a common interest in moving semiconductor 
supply chains out of China and introducing greater geographic diversity 
in global semiconductor supply chains. Taiwan in particular plays an 
outsized role in the global semiconductor market and its proximity to 
China makes it vulnerable to espionage, sabotage, and blockades. The 
consortium could serve as a mechanism to cooperate with Taiwan on 
safeguarding its semiconductor industry against undue Chinese 
influence. One way to do this is building new production capacity 
elsewhere, such as the agreement the United States concluded with 
Taiwanese semiconductor firm TSMC. Consortium members can also help 
Taiwan with investment screening and building safeguards against 
Chinese attempts to siphon human capital.
    Three, is to lay the foundation for the next generation of 
microelectronics. This entails doubling down on R&D. Breakthroughs in 
areas such as novel materials and microelectronics design will be 
necessary to continue effective transistor scaling--the process of 
increasing the number of transistors on a single chip--because 
researchers are approaching the physical limitations of silicon, the 
prevailing semiconductor material.
    Mechanisms to promote multinational collaboration range from 
personnel exchanges to establishing cooperative international R&D 
centers at home and abroad. DARPA's Electronics Resurgence Initiative 
could serve as a model for what an expanded multinational effort could 
look like. \10\ Such collaborative relationships can be encouraged by 
enhancing visa and work permit regimes, providing grants and loans, and 
organizing multinational innovation prize competitions. Such 
competitions could be modeled on DARPA's series of Challenges and the 
XPRIZE competitions, which have successfully tackled some of the 
toughest science and engineering problems. \11\
---------------------------------------------------------------------------
     \10\ Defense Advanced Research Projects Agency, DARPA Electronics 
Resurgence Initiative: https://www.darpa.mil/work-with-us/electronics-
resurgence-initiative.
     \11\ Prize Challenges, Defense Advanced Research Projects Agency, 
https://www.darpa.mil/work-with-us/public/prizes; ``AI to Solve the 
World's Grand Challenges'', XPRIZE Foundation, https://www.xprize.org.
---------------------------------------------------------------------------
    In closing, U.S. technological leadership is a core component of 
the economic competition with China. To maximize its potential in this 
competition, the United States should craft a national strategy for 
technology that has collaboration and cooperation with allies and 
partners as a key feature. Working in concert, the world's tech-leading 
liberal democracies can build and maintain a vibrant, innovative global 
economy, all while promoting and protecting democratic norms and 
principles and blunting Chinese mercantilist policies.
    I look forward to your questions.
        RESPONSES TO WRITTEN QUESTIONS OF CHAIRMAN CRAPO
                    FROM WALTER RUSSELL MEAD

Q.1. Mr. Mead, you write extensively on the threats that China 
poses to U.S. economic competitiveness--including the threat of 
cyberattacks. The Idaho National Laboratory in my hometown of 
Idaho Falls is a world leading institution that pursues 
research into and development of leading edge strategies and 
methods to secure our Nation's industrial control systems and 
critical energy infrastructure. With this context, in mind, I 
have two questions.
    What are the potential disruptive effects that a successful 
cyberattack could have on our economic competitiveness?

A.1. As American companies have adopted the revolutionary 
information technologies that the internet has offered, they 
have become more effective but also more vulnerable. 
Cyberattacks can take different forms and threaten the economy 
in different ways.
    The first threat is that of cyberespionage or intellectual 
property theft. Industrial espionage has existed at least since 
the Byzantine emperor sent some of his subjects to China to 
learn how to make silk almost 1,500 years ago, and it is as 
formidable a threat as it is old. Chinese hackers have become 
notorious for stealing research from American firms, but they 
are not the only bad actors: the scientists racing to find a 
cure to the coronavirus have had to remain vigilant against 
cyberattacks.
    Perhaps an even greater danger comes from hackers who 
destroy data or make it unusable. Some use viruses to encrypt 
data, making it unreadable, and then demanding money from their 
victims to undo the damage. These so-called ransomware attacks 
have briefly crippled hospitals and other companies, but the 
costs have been fortunately low so far. But there is no 
guarantee that it will remain that way. What would be a 
reasonable price if the formula for a coronavirus vaccine is 
locked away? Or if the operating system for a key power utility 
is corrupted? These dangers, and more, are also present when a 
cyberattacker is motivated not by money, but by a desire to 
harm the United States.

Q.2. What is the importance of ensuring that our Nation is 
prepared to prevent, identify, and address any efforts to 
compromise our cybersecurity?

A.2. Robust cybersecurity is important for many reasons, but I 
would like to briefly touch on two. The first is for protecting 
secrets vital to national security. Decoding enemy 
communications was one of the Allies' greatest advantages 
during World War II. After British scientists like Alan Turing 
used some of the first computers to break the German Enigma 
codes, the battle in Europe swung dramatically in the Allies' 
favor. German submarines that had previously been invisible 
were suddenly easy to find and troop movements were discovered 
before they had even begun. American codebreakers earned 
similar advantages over their Japanese counterparts and gave 
the U.S. Navy the advance warning it needed to win the Battle 
of Midway. Internet communications today are as important as 
radio messages were 80 years ago, and they are just as vital to 
keep secure.
    The second reason is that it is more difficult to know what 
a measured response to a cyberattack looks like, weakening 
deterrence. U.S. Government agencies and private firms are 
victims of cyberattacks on a routine basis. The attacks come 
from non-State actors and foreign Governments alike. It is not 
clear what sort of attack prompts a military response. It is 
less clear still what sort of response would be effective. A 
weak response could prove meaningless, a forceful one could 
lead to dangerous escalation. In order to have a symmetric and 
effective response to cyberattacks, the U.S. will need to 
enhance its ability to trace the origin of cyberattacks. 
Cyberweapon programs are cheaper, faster to develop and more 
difficult to detect than the nuclear weapons programs of the 
Cold War. Because of this, the U.S. cannot trust arms control 
treaties to limit the spread of cyberweapons programs. The U.S. 
must rely on cybersecurity programs and intelligence agencies 
to prevent and identity cyberattacks.
    I would add that, from an economic perspective, the fear of 
espionage and cyberattacks is likely to reduce the utility of 
the internet for U.S. companies. The success of the U.S. 
economy in the information age is due in part to the ability to 
move many elements of business online. Financial institutions 
have legitimate concerns that a cyberattack could compromise 
their security and lead to significant losses. For instance, 
the effect of a cyberattack at the present moment, when more 
U.S. white collar workers conduct business remotely than ever 
before, would be devasting. If U.S. firms cannot trust in the 
security of their networks, they will have to limit the extent 
to which they conduct business through the internet.
                                ------                                


        RESPONSES TO WRITTEN QUESTIONS OF SENATOR SINEMA
                    FROM WALTER RUSSELL MEAD

Q.1. With the understanding that effective AML/CTF responses 
may require bilateral or multilateral cooperation, as such 
criminal activity is not geographically confined, what 
recommendations do you have for approaching these threats 
knowing that it may be necessary to cooperate with non-allied 
Nations?

A.1. Given the global nature of the threat, the United States 
should cooperate as broadly as possible. However, since a 
number of non-allied States actually support criminal 
activities and others are penetrated to varying degrees by 
powerful, corrupt non-State actors, such cooperation will need 
to be carefully managed, and in some cases will not be 
advisable at all.

Q.2. China has added U.S. defense firms to its sanctions list. 
Is this a serious economic threat to the defense supply chain 
in the United States?

A.2. U.S. defense firms have had limited interactions with 
China since 1989. The direct impact to our defense supply chain 
is minimal. The sanctions are, first and foremost, a warning to 
the U.S. to limit its engagement with Taiwan. Diplomatic shifts 
with Taiwan are occurring, but sanctioned firms such as 
Lockheed Martin have sold products to Taiwan for decades. In 
recent years, though, China has increased its belligerent 
behavior in East Asia. The Hong Kong national security law is 
an ominous sign of the CCP's long-term ambitions vis a vis 
Taiwan. China's maritime claims over the South China Sea 
threaten regional security and international trade. The CCP has 
shown a willingness to conduct military drills in disputed 
parts of the South China Sea. Last month's missile launches in 
the South China Sea make this clear. The U.S. has responded to 
China's aggression, amongst other things, with sanctions and 
tariffs of its own. China's sanctions are a response the U.S.'s 
continued commitment to its East Asian partners' security. The 
sanctions do not pose a direct economic threat to U.S. defense 
firms but they do signal an increased effort on the part of the 
CCP to force the U.S. out of East Asian security.
                                ------                                


        RESPONSES TO WRITTEN QUESTIONS OF SENATOR SINEMA
                 FROM J. CHRISTOPHER GIANCARLO

Q.1. With the understanding that effective AML/CTF responses 
may require bilateral or multilateral cooperation, as such 
criminal activity is not geographically confined, what 
recommendations do you have for approaching these threats 
knowing that it may be necessary to cooperate with non-allied 
Nations?

A.1. The United States cooperates with countries around the 
world on a broad range of anti- money laundering and criminal 
issues. There are a number of existing mechanisms that enable 
that cooperation, including The Egmont Group of Financial 
Intelligence Units, which is a multilateral forum that brings 
together 166 countries and enables them to share information 
confidentially to combat money laundering, the financing of 
terrorism, and other offenses. Similarly, the United States 
shares information through MLAT exchanges, bilateral 
engagements, and other multilateral fora. As just one example, 
the United States and Gulf Cooperation Council countries formed 
the Terrorist Financing Targeting Center several years ago to 
work together specifically to combat terrorist financing. I 
believe that these types of exchanges are very important to 
preventing abuse by bad actors of the international financial 
system and should continue.

Q.2. China has added U.S. defense firms to its sanctions list. 
Is this a serious economic threat to the defense supply chain 
in the United States?

A.2. My professional expertise and Government service 
experience is concentrated in financial and commodity 
derivatives markets, emerging cryptocurrencies, and central 
bank digital currency. That background makes me ill-equipped to 
provide an informed opinion on this important question of 
national security.
                                ------                                


        RESPONSES TO WRITTEN QUESTIONS OF SENATOR SINEMA
                       FROM TIM MORRISON

Q.1. With the understanding that effective AML/CTF responses 
may require bilateral or multilateral cooperation, as such 
criminal activity is not geographically confined, what 
recommendations do you have for approaching these threats 
knowing that it may be necessary to cooperate with non-allied 
Nations?

A.1. Reply not received in time for publication.

Q.2. China has added U.S. defense firms to its sanctions list. 
Is this a serious economic threat to the defense supply chain 
in the United States?

A.2. Reply not received in time for publication.
                                ------                                


        RESPONSES TO WRITTEN QUESTIONS OF SENATOR SINEMA
                       FROM LISA D. COOK

Q.1. With the understanding that effective AML/CTF responses 
may require bilateral or multilateral cooperation, as such 
criminal activity is not geographically confined, what 
recommendations do you have for approaching these threats 
knowing that it may be necessary to cooperate with non-allied 
Nations?

A.1. Reply not received in time for publication.

Q.2. China has added U.S. defense firms to its sanctions list. 
Is this a serious economic threat to the defense supply chain 
in the United States?

A.2. Reply not received in time for publication.
                                ------                                


               RESPONSES TO WRITTEN QUESTIONS OF
            SENATOR CORTEZ MASTO FROM MARTIJN RASSER

Q.1. You have proposed that the U.S. and like-minded allies, 
such as Australia and European partners, undertake a 
multilateral effort to proactively handle emerging technology 
policy. How would we operationalize such an alliance? In the 
U.S. interagency, which department should run point on this 
effort and what kind of resources would be needed to ensure it 
could lead such a comprehensive policy? What can Congress do to 
best support this effort?

A.1. The first step in operationalizing this effort is 
developing an actionable blueprint that addresses the 
bureaucratic considerations (such as membership, organization 
structure, functioning, and institutionalization) and outlines 
what the organization's top priorities should be. Together with 
colleagues in Europe and Asia-Pacific, I led an effort to do 
exactly that. The resulting report is nearly complete, and I 
will forward it to your staff and the committee clerk as soon 
as it is ready.
    While this project did not focus on the mechanics of how 
each member country would run this effort, for the United 
States suitable lead entities would be the Department of State 
or the Office of Science and Technology Policy (OSTP)/National 
Science and Technology Council. Resources required include 
having the requisite representatives from the departments of 
State, Commerce, Treasury, Energy, and Defense, and agencies 
and offices such as OSTP, National Science Foundation, and the 
Office of the United States Trade Representative attend the 
grouping's meetings as appropriate. As envisioned, the 
grouping's gatherings would rotate similar to the G7's model 
and would not require a sizeable permanent staff to keep 
operating costs down.
    There are at least three ways Congress could support this 
effort. One is to publicly highlight the merits of a strategic 
multilateral approach to technology policy with a series of 
expert-led Congressional hearings. Two is to pass a Sense of 
Congress resolution to formally express support for the 
concept. Three is to appropriate funds to support U.S. 
leadership of and participation in such a grouping.

Q.2. Two years ago, Congress reformed the CFIUS process which 
has helped address the impact of Chinese investment in critical 
sectors. While some countries have started developing similar 
processes, many strategic partners are only beginning to review 
Chinese investments in critical sectors. How can we help those 
allies emulate a CFIUS like process? Does the Department of 
Treasury or another department have the capabilities to lead a 
comprehensive interagency campaign to work with our partners 
and allies and provide technical assistance? If not, what is 
needed to support a comprehensive investment screening effort 
with partners and allies?

A.2. A straightforward and affordable way to improve investment 
screening by strategic partners is better information sharing. 
A first step could be the creation of a joint database of 
legal, extralegal, and illicit Chinese activities aimed at 
acquiring foreign technology across North America, Europe, and 
the Asia-Pacific region. The database should include a list of 
companies, research institutes and individuals affiliated with 
or collaborating with the People's Liberation Army and China's 
State security apparatus. Ideally, the list would be 
accompanied by a set of risk indicators to help public and 
private actors from alliance member States identify entities of 
concern.
    Information on China's technology transfer organizations, 
talent programs, and State-backed investors and their 
activities should also be shared among America's strategic 
partners. At the same time, existing cooperation agreements and 
projects with Chinese entities in key emerging technology areas 
should be reviewed to identify potential vulnerabilities.
    The Treasury Department's Office of Investment Security and 
the State Department's Bureau of Economic and Business Affairs 
have limited capacity to spearhead a multilateral and 
collaborative approach to investment screening, for lack of a 
strategic process and insufficient staff. A critical deficit in 
both departments is the inability to provide the requisite 
technical assistance due to budget and manpower shortfalls.
    I thank my CNAS colleague Elizabeth Rosenberg for sharing 
insight to help craft this response.

Q.3. Through observing the ongoing human rights crisis against 
Uyghurs and other minorities in Xinjiang, we have seen how the 
Chinese Government harnesses cutting-edge technology in order 
to repress and surveil its citizens. We also know that last 
year, the Chinese Government was using equipment from a U.S. 
biotechnology company in order to conduct its DNA collection 
and surveillance of Uyghurs. How can the U.S. Government and 
companies ensure that U.S. technology is not being used for 
malign purposes? How can we ensure that U.S. allies also have 
safeguards in place to ensure that their innovation is not used 
to carry out human rights abuses?

A.3. Measures to address ethical and human rights risks of 
science and technology (S&T) cooperation with untrustworthy 
entities should be a priority, particularly with regard to 
frontier applications of AI and biotechnology.
    As my colleagues and I noted in the report the American AI 
Century:

        To prevent U.S. AI companies from enabling human rights 
        abuses, Congress should modernize P.L. 101-246, Title 
        IX, which ``restricts the U.S. licensing of exports and 
        reexports of crime control and crime detection 
        equipment and instruments listed in the Export 
        Administration Regulations to China.'' This 
        modernization should include hardware incorporating AI-
        enabled biometric identification technologies such as 
        facial, voice, and gait recognition. Additionally, the 
        White House should levy further sanctions on and expand 
        the Department of Commerce Entity List to include 
        businesses and entities that provide oppressive 
        technology, training, or equipment to authoritarian 
        regimes implicated in human rights abuses.

        Congress also should consider legislation to prevent 
        U.S. entities from investing in companies that are 
        building AI tools for oppression, such as Chinese AI 
        company SenseTime. The United States can exert further 
        pressure by invoking the Global Magnitsky Act to 
        sanction foreign individuals involved with human rights 
        abuses. These actions are necessary to provide 
        guardrails around legitimate U.S.-China AI cooperation 
        and ensure that U.S. organizations do not contribute 
        inadvertently to human rights abuses.

    The Administration has undertaken important action such as 
using the Entity List and sanctions authorities to expose 
companies supporting repression of Uyghurs and forbidding U.S. 
entities from dealing with them. The Xinjiang Supply Chain 
Business Advisory is also a useful resource. To strengthen U.S. 
policy, the Administration should work to fully implement the 
Uyghur Human Rights Policy Act of 2020.
    The United States should also launch a multinational 
dialogue with its allies on research integrity, aimed at 
developing common guidelines for universities, grantmaking 
institutions, businesses, and Government agencies engaged in 
foreign research collaboration with nondemocratic Nations. The 
exchange should be multistakeholder and focus on protecting 
sensitive technical information, IP, and national security 
while safeguarding the openness of scientific inquiry. Measures 
to address ethical and human rights risks of science and 
technology (S&T) cooperation with untrustworthy entities should 
be another priority.
    I thank my CNAS colleague Elizabeth Rosenberg for sharing 
insight to help craft this response.
                                ------                                


        RESPONSES TO WRITTEN QUESTIONS OF SENATOR SINEMA
                      FROM MARTIJN RASSER

Q.1. With the understanding that effective AML/CTF responses 
may require bilateral or multilateral cooperation, as such 
criminal activity is not geographically confined, what 
recommendations do you have for approaching these threats 
knowing that it may be necessary to cooperate with non-allied 
Nations?

A.1. The topic of AML/CTF is outside my areas of expertise. I'm 
afraid that I'm not in a position to offer an informed response 
to this question.

Q.2. China has added U.S. defense firms to its sanctions list. 
Is this a serious economic threat to the defense supply chain 
in the U.S.?

A.2. U.S. defense firms have limited exposure to China and 
generally would not be materially impacted by sanctions, which 
to date have only been announced for Lockheed Martin and remain 
unspecified. (An exception is Boeing, which builds both defense 
and commercial aircraft and has significant commercial airline 
sales to China. Chinese dependence on Boeing to maintain its 
fleet of commercial aircraft, however, make sanctions on Boeing 
unlikely.) There is, however, one defense area where Chinese 
sanctions could pose a serious risk to the U.S. defense supply 
chain: rare earth elements (REE).
    REE are essential materials for components such as optical 
fiber, missile guidance systems, and fin actuators. A single F-
35 aircraft produced by Lockheed Martin, for example, contains 
more than 900 pounds of REE. China currently dominates the 
global rare earths industry, accounting for most mining and 
having a near lock on global processing capacity. Should China 
cut off REE supplies to Lockheed Martin, as a Global Times 
article from July 14 suggested it would, it could disrupt F-35 
production. Other defense articles that rely on REE could 
similarly be impacted. China has threatened sanctions on 
various other defense firms, including Raytheon, General 
Dynamics, BAE, and Oshkosh.
    The U.S. Government should take urgent steps to mitigate 
the risk of disruption to rare earth element supplies. As my 
colleagues and I noted in the report Rising to the China 
Challenge:

        The U.S. Government can take a number of important 
        steps to help reduce U.S. reliance on China for rare 
        earths. The U.S. Department of Defense, for instance, 
        has already initiated efforts to expand mining and 
        processing of rare earths outside China, including in 
        Australia. To reduce dependence on overseas suppliers 
        more generally, Congress should ensure funding for the 
        Department of Commerce's plan to reinvigorate mining 
        and processing of rare earths in the United States, and 
        Department of Energy research into and scaling of rare 
        earth recycling from consumer products, which can 
        stretch existing U.S. supplies. Finally, Congress 
        should support Department of Energy efforts to develop 
        artificial substitutes, which have proved capable of 
        reducing dependence on rare earths altogether.
              Additional Material Supplied for the Record
  COMMON CODE: An Alliance Framework for Democratic Technology Policy

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               Digital Dollar Project Summary--July 2020

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