[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
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Printed for the use of the Committee on Banking, Housing, and Urban
Affairs
[GRAPHIC NOT AVAILABLE IN TIFF FORMAT]
Available at: https: //www.govinfo.gov /
__________
U.S. GOVERNMENT PUBLISHING OFFICE
42-704 PDF WASHINGTON : 2021
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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
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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
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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.
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\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.
---------------------------------------------------------------------------
\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.
---------------------------------------------------------------------------
\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.
---------------------------------------------------------------------------
\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.
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\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.
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\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.
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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\
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\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.
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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\
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\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.
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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
[GRAPHICS NOT AVAILABLE IN TIFF FORMAT]
Digital Dollar Project Summary--July 2020
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