[Senate Hearing 116-423]
[From the U.S. Government Publishing Office]




                                                        S. Hrg. 116-423
 
                    CHINA'S BELT AND ROAD INITIATIVE

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

                                HEARING

                               before the

       SUBCOMMITTEE ON INTERNATIONAL TRADE, CUSTOMS, AND GLOBAL 
                            COMPETITIVENESS

                                 of the

                          COMMITTEE ON FINANCE
                          UNITED STATES SENATE

                     ONE HUNDRED SIXTEENTH CONGRESS

                             FIRST SESSION

                               __________

                             JUNE 12, 2019

                               __________
                               
                               
 [GRAPHIC(S) NOT AVAILABLE IN TIFF FORMAT]   
 
 
 

                                     
           Printed for the use of the Committee on Finance
                              ______                       


             U.S. GOVERNMENT PUBLISHING OFFICE 
43-886-PDF              WASHINGTON : 2021 
 
           



                          COMMITTEE ON FINANCE

                     CHUCK GRASSLEY, Iowa, Chairman

MIKE CRAPO, Idaho                    RON WYDEN, Oregon
PAT ROBERTS, Kansas                  DEBBIE STABENOW, Michigan
MICHAEL B. ENZI, Wyoming             MARIA CANTWELL, Washington
JOHN CORNYN, Texas                   ROBERT MENENDEZ, New Jersey
JOHN THUNE, South Dakota             THOMAS R. CARPER, Delaware
RICHARD BURR, North Carolina         BENJAMIN L. CARDIN, Maryland
JOHNNY ISAKSON, Georgia              SHERROD BROWN, Ohio
ROB PORTMAN, Ohio                    MICHAEL F. BENNET, Colorado
PATRICK J. TOOMEY, Pennsylvania      ROBERT P. CASEY, Jr., Pennsylvania
TIM SCOTT, South Carolina            MARK R. WARNER, Virginia
BILL CASSIDY, Louisiana              SHELDON WHITEHOUSE, Rhode Island
JAMES LANKFORD, Oklahoma             MAGGIE HASSAN, New Hampshire
STEVE DAINES, Montana                CATHERINE CORTEZ MASTO, Nevada
TODD YOUNG, Indiana

             Kolan Davis, Staff Director and Chief Counsel

              Joshua Sheinkman, Democratic Staff Director

                                 ______

                 Subcommittee on International Trade, 
                  Customs, and Global Competitiveness

                      JOHN CORNYN, Texas, Chairman

MIKE CRAPO, Idaho                    ROBERT P. CASEY, Jr., Pennsylvania
PAT ROBERTS, Kansas                  RON WYDEN, Oregon
JOHN THUNE, South Dakota             DEBBIE STABENOW, Michigan
JOHNNY ISAKSON, Georgia              MARIA CANTWELL, Washington
ROB PORTMAN, Ohio                    ROBERT MENENDEZ, New Jersey
PATRICK J. TOOMEY, Pennsylvania      BENJAMIN L. CARDIN, Maryland
TIM SCOTT, South Carolina            SHERROD BROWN, Ohio
BILL CASSIDY, Louisiana              MARK R. WARNER, Virginia
STEVE DAINES, Montana                CATHERINE CORTEZ MASTO, Nevada
TODD YOUNG, Indiana

                                  (ii)


                            C O N T E N T S

                              ----------                              

                           OPENING STATEMENTS

                                                                   Page
Cornyn, Hon. John, a U.S. Senator from Texas, chairman, 
  Subcommittee on International Trade, Customs, and Global 
  Competitiveness, Committee on Finance..........................     1
Casey, Hon. Robert P., Jr., a U.S. Senator from Pennsylvania.....     3

                               WITNESSES

Bartholomew, Carolyn, Chairman, U.S.-China Economic and Security 
  Review Commission, Washington, DC..............................     5
Kamphausen, Roy D., Commissioner, U.S.-China Economic and 
  Security Review Commission, Washington, DC.....................     7
Kliman, Daniel, Ph.D., senior fellow and director, Asia-Pacific 
  Security Program, Center for a New American Security, 
  Washington, DC.................................................     9
Scissors, Derek, Ph.D., resident scholar, American Enterprise 
  Institute, Washington, DC......................................    11

               ALPHABETICAL LISTING AND APPENDIX MATERIAL

Bartholomew, Carolyn:
    Testimony....................................................     5
    Prepared statement...........................................    29
    Responses to questions from subcommittee members.............    36
Casey, Hon. Robert P., Jr.:
    Opening statement............................................     3
    Prepared statement...........................................    44
Cornyn, Hon. John:
    Opening statement............................................     1
    Prepared statement...........................................    46
Kamphausen, Roy D.:
    Testimony....................................................     7
    Prepared statement...........................................    47
    Responses to questions from subcommittee members.............    54
Kliman, Daniel, Ph.D.:
    Testimony....................................................     9
    Prepared statement...........................................    56
Scissors, Derek, Ph.D.:
    Testimony....................................................    11
    Prepared statement...........................................    64

                             Communications

Center for Fiscal Equity.........................................    69
Rail Security Alliance...........................................    73

                                 (iii)


                    CHINA'S BELT AND ROAD INITIATIVE

                              ----------                              


                        WEDNESDAY, JUNE 12, 2019

                           U.S. Senate,    
           Subcommittee on International Trade,    
               Customs, and Global Competitiveness,
                                      Committee on Finance,
                                                    Washington, DC.
    The hearing was convened, pursuant to notice, at 3:20 p.m., 
in room SD-215, Dirksen Senate Office Building, Hon. John 
Cornyn (chairman of the subcommittee) presiding.
    Present: Senators Thune, Portman, Cassidy, Young, Cantwell, 
Menendez, Casey, Warner, and Cortez Masto.
    Also present: Republican staff: Jeffrey Wrase, Deputy Staff 
Director and Chief Economist; and Madison Smith, Legislative 
Assistant for Senator Cornyn. Democratic staff: Sally Laing, 
Senior International Trade Counsel; and Livia Shmavonian, 
Legislative Assistant for Senator Casey.

  OPENING STATEMENT OF HON. JOHN CORNYN, A U.S. SENATOR FROM 
TEXAS, CHAIRMAN, SUBCOMMITTEE ON INTERNATIONAL TRADE, CUSTOMS, 
        AND GLOBAL COMPETITIVENESS, COMMITTEE ON FINANCE

    Senator Cornyn. The Senate Committee on Finance 
Subcommittee on International Trade, Customs, and Global 
Competitiveness will come to order.
    Since its accession to the World Trade Organization, China 
has consistently engaged in unfair trade practices that bolster 
its domestic industries at the expense of free trade and global 
stability. China has weaponized foreign investment to force 
transfer of 
cutting-edge intellectual property to steal trade secrets, 
erode the technological gap, and create Chinese state-
controlled competitors for American companies.
    Last Congress I authored the Foreign Investment Risk Review 
Modernization Act, which gives an interagency body known as the 
Committee on Foreign Investment in the United States additional 
tools to combat these threats. I am proud that President Trump 
signed this important legislation into law last year as part of 
the National Defense Authorization Act.
    While we have taken this important step to defend Americans 
against predatory Chinese investment practices, China's 
ambitions are much more broad. In 2013, the Chinese Government 
announced the Belt and Road Initiative, through which it aims 
to construct billions of dollars of infrastructure projects in 
countries around the world. Since the creation of the Belt and 
Road Initiative, China has strategically invested hundreds of 
billions of dollars in ports, railways, roads, and digital 
infrastructure. To date, China has entered into Belt and Road 
agreements with more than 70 countries covering nearly two-
thirds of the world's population.
    Belt and Road is a cornerstone of the Chinese Communist 
Party's aggressive foreign policy goals and expansionist goals. 
It has been billed by its leaders as a way to modernize 
infrastructure corridors and to construct ``a community of 
common destiny.''
    Unfortunately, this community of common destiny referred to 
by the Communist Party members is one in which China reshapes 
the global order and imposes its authoritarian economic regime 
and controls on the rest of the world. China's Belt and Road 
Initiative poses three fundamental threats to the United States 
and our allies around the world: trade manipulation, economic 
exploitation, and security erosion.
    At its core, the Belt and Road Initiative is fueled by 
China's mission to manipulate and undermine the global rules-
based trading system for its own benefit. China's internal 
structures are predicated on the preferential treatment of its 
domestic industries, often at the expense of free and open 
competition.
    This is further evidenced by the Made in China 2025 plan, 
which strategically compliments Belt and Road and seeks to make 
China dominant in a number of high-tech sectors of interest to 
the United States, including rail infrastructure, 
telecommunications, and artificial intelligence.
    Belt and Road has not only exacerbated China's unfair trade 
practices, it is in clear violation of their commitments as a 
member of the World Trade Organization. That is because Belt 
and Road is rigged to empower and create monopolies for 
Chinese-owned entities like Huawei, ZTE, and CRRC to carry out 
these projects all over the world.
    But China's strategic vision goes far beyond empowering its 
state-controlled companies. It also seeks to bend unwitting 
countries through their economic exploitation and ``debt-trap'' 
diplomacy. In numerous countries, China has financed projects 
resulting in partner nations accruing crippling foreign debt 
from which they cannot escape.
    For example, when Sri Lanka was unable to service billions 
of dollars in Chinese-backed loans under Belt and Road, it had 
little choice but to grant China a 99-year lease allowing it to 
control a Sri Lankan port. In Venezuela, China reduced lending 
as the country's debt spiraled out of control. In order to 
renew China's interest, Venezuela agreed to sell nearly 10 
percent of an additional stake in its state-owned oil 
enterprise.
    But most concerning are the direct national security 
threats posed by Belt and Road. In 2017, China used 
construction of a Belt and Road seaport in the African nation 
of Djibouti as a Trojan horse to open its first overseas 
military base in the country. Because of Djibouti's strategic 
location on the Horn of Africa, it serves as a gateway to 
global shipping traffic through the Red Sea and the Middle 
East.
    It is not hard to see why the presence of the Chinese 
military near the Middle East could destabilize the region and 
threaten our own national security interests. But that is 
exactly the objective of the Belt and Road Initiative.
    A 2018 Department of Defense report highlighted the long-
term implication of China's attempt to manage civilian ports, 
stating that China has made requests for military access and 
basing agreements which could allow the People's Liberation 
Army to preposition necessary logistics to protect its 
interests. Equally concerning is China's recent shift in focus 
from port and rail infrastructure projects to strategic plays 
in the world's digital infrastructure.
    In Chile, the Chinese government is investing more than 
$650 million to build a subsea fiber-optic cable, which will 
become the largest data flow between Asia and Latin America. 
China has even begun providing certain countries, like 
Zimbabwe, with cutting-edge facial recognition software, which 
will give China control over additional troves of data.
    Given the grave threats posed by the Belt and Road 
Initiative, it is not enough for Congress to simply express 
concern or opposition to China's efforts. Congress and the 
executive branch must work together to develop and implement a 
coordinated long-term strategy to ensure American trade and 
security policy can prevent the Belt and Road Initiative from 
achieving its stated objectives.
    So I look forward to discussing the panel's perspectives on 
the Belt and Road Initiative and hope this hearing serves as a 
catalyst for the committee's efforts to address the threat.
    At this time, I want to recognize the ranking member, 
Senator Casey, for his opening statement.
    [The prepared statement of Senator Cornyn appears in the 
appendix.]

        OPENING STATEMENT OF HON. ROBERT P. CASEY, JR., 
                A U.S. SENATOR FROM PENNSYLVANIA

    Senator Casey. Thank you. I want to commend the 
administration for scheduling this hearing. It is a critically 
important set of issues.
    So many of us know that China's version of chess is a game 
called ``Go.'' The objective is to surround and control the 
most territory on the game board. Rather than being confined to 
set moves as they are in chess, pieces can be placed anywhere 
on the board. Often the strategy behind a move or a set of 
moves does not come to light until late in the game, by which 
time it is too late to respond.
    Now certainly, a two-person strategy game cannot be 
directly correlated with a complex set of global relationships, 
but it is a helpful frame in viewing and understanding the 
objectives behind China's Belt and Road Initiative. The 
strategy China is now employing globally is not so much a set 
of linear actions with set positions, but rather a multi-
faceted strategy to employ a set of tools available to 
influence the economic and geopolitical order in a manner that 
benefits its authoritarian and anti-competitive practices.
    China's regional and global objectives are creating both 
direct and indirect economic and security challenges. The 
United Nations Conference on Trade and Development estimates 
that roughly one-third--one-third--of global shipping goes 
through the South China Sea. Almost half of global trade ships 
through Asia itself. Their increasing control of port 
infrastructure in the region and globally is cause for concern 
for all of us.
    But the Belt and Road Initiative is not simply about ports 
and railroads--and we risk losing sight of the broader picture 
if we constrain our focus. Through the Belt and Road 
Initiative, China is employing a ``debt-trap'' strategy to 
ensure that developing countries are in a cycle of credit and 
deficit that only increases--increases--China's economic 
control over governments and minimizes opportunities for 
development that actually put countries on a path towards 
workers' rights, strong labor practices, rising standards of 
living, and participating meaningfully in the global economy 
and the broader, liberal democratic order.
    Debt begets dependency. And the United States and western 
powers are not doing enough to offer an alternative path toward 
economic development to the fast-cash and fast-growth approach 
that China is promoting.
    We know that June 4th marks 30 years since the Tiananmen 
Square protests, and the Chinese government has successfully 
continued to suppress democracy since that date. We have seen 
firsthand the cost of China's authoritarian practices, the cost 
of its surveillance state, disregard for human rights and human 
dignity, and efforts to undermine democracy in the rules-based 
order.
    The Department of State estimates that China has 
incarcerated somewhere between 800,000 to 2 million Uyghurs and 
other Muslims since April of 2017. Eleven million are residing 
in what is effectively a police state. To put that in 
perspective, that is the equivalent of almost the population of 
the State of Pennsylvania. Thinking about it this way, in a 
State that large, that many people--just imagine that number of 
people either incarcerated with no cause or under constant 
surveillance and repression by China.
    Through Belt and Road, China is exporting techniques for 
repression, their labor practices, and disregard for human 
rights. We have seen the consequences of China's assault on the 
rules-based order in its posture on trade, on intellectual 
property theft, on forced technology transfer, and of course at 
the World Trade Organization.
    China's theft of intellectual property has impacted 
numerous Pennsylvania firms, including others around the 
country, but just to mention a few: United States Steel, Alcoa, 
Allegheny Technologies, and Westinghouse. And their efforts are 
extending to our own academic research institutions, 
compromising U.S. national security.
    The cost of China's economic strategy and globalization, of 
course, has fallen most heavily on workers. Studies by the 
Economic Policy Institute and MIT economist David Autor and his 
co-authors David Dorn and Gordon Hanson, support the assertion. 
According to the study, 40 percent of the decline in U.S. 
manufacturing between 2000 and 2007 was due to a surge in 
imports from China--40 percent of the decline in U.S. 
manufacturing in just those 7 years, according to this study.
    China has made no secret about a strategy to push the rules 
to their limit and, when advantageous, to actually break them 
outright. They know that redress to injured parties often is 
not available until the damage is irreparable.
    China understands the central structures of our 
multilateral organizations: that they are based on the 
assumption that everyone intends to follow the rules, that 
guardrails are established to settle disputes between parties 
whose objective is to work within a rules-based system. The 
question for us today in going forward is, what do you do when 
a country with one-sixth of the world's population decides it 
does not want to play by the rules? Inaction is not an option. 
The economic and human consequences are too great.
    Thank you, Mr. Chairman.
    [The prepared statement of Senator Casey appears in the 
appendix.]
    Senator Cornyn. Thank you, Senator Casey.
    I want to take a minute to introduce our witnesses today. 
Our first is Carolyn Bartholomew, who currently serves as the 
Chair of the U.S.-China Economic and Security Review 
Commission.
    Our second witness is Mr. Roy Kamphausen. Mr. Kamphausen is 
also a member of the U.S.-China Economic and Security Review 
Commission.
    Our third witness is Dr. Daniel Kliman. Dr. Kliman is a 
senior fellow and the director of the Asia-Pacific Security 
Program at the Center for a New American Security.
    Our final witness is Dr. Derek Scissors. Dr. Scissors is a 
resident scholar at the American Enterprise Institute.
    I want to thank each of you for agreeing to be here today 
and to testify on this important topic. I would like to 
respectfully ask each of you to limit your opening statement to 
about 5 minutes. I know we want to have time for a lot of 
questions and a lot of answers. And as you can see, there is a 
significant interest in the topic we are discussing here today.
    So, Ms. Bartholomew, I will recognize you for your opening 
statement.

STATEMENT OF CAROLYN BARTHOLOMEW, CHAIRMAN, U.S.-CHINA ECONOMIC 
         AND SECURITY REVIEW COMMISSION, WASHINGTON, DC

    Ms. Bartholomew. Thank you very much, Mr. Chairman, Ranking 
Member Casey, members of the committee. Thank you for the 
opportunity to testify today. Thank you also for your work on 
FIRRMA, which is taking really important steps to help protect 
the national security of the United States.
    I am honored to appear alongside my Commission colleague 
Roy Kamphausen and the other distinguished witnesses on the 
panel. The views in this testimony are informed by the 
Commission's body of work on the subject, but they are, 
however, my own and do not necessarily reflect those of the 
full U.S.-China Commission.
    I would like to diverge briefly from my comments to 
acknowledge the people of Hong Kong who, for the past few days, 
over a million of them have protested peacefully because they 
are trying to protect their own rule of law from an extradition 
law that would punch a hole in the one country, two systems. 
Very determined, very brave young people are continuing this 
protest. I think it is important for us to acknowledge them and 
do what we can.
    The U.S.-China Commission was established by Congress when 
Congress voted to grant China Permanent Normal Trade Relations. 
We were created to advise Congress on the national security 
implications of the U.S.-China economic relationship, and each 
year we release an annual report. This was the 2018 Annual 
Report. The 2019 one will come out in November, which is based 
on our extensive research.
    I will speak today about China's broad objectives for the 
Belt and Road Initiative and focus more in depth on the 
economic and digital components. My colleague, Commissioner 
Kamphausen, will speak to the strategic and military 
components.
    The Commission first discussed China's Belt and Road 
Initiative--which was originally called One Belt, One Road--in 
our 2015 Annual Report in a section on China and Central Asia. 
Indeed, when BRI was first introduced, most of its focus was on 
Asia. But much has changed since then.
    China's vision for BRI now encompasses Latin America and 
the Caribbean, the Arctic, and even space and cyberspace, 
although plans for projects in these areas are less developed. 
I believe attached to my testimony is a map--the map needs to 
be constantly updated. But some of the locations there were 
Belt and Road projects.
    The Digital Silk Road, China's plans for integrating 
digital sectors like telecommunications, the Internet of 
Things, and e-
commerce into its vision for regional connectivity, is a less 
analyzed, but critically important component of BRI.
    The most visible manifestations of BRI--the deal 
announcements and the official Chinese communiques focus on 
economic objectives. These objectives include building hard and 
digital infrastructure; fueling domestic development; utilizing 
Chinese excess production capacity in, among other things, 
steel and cement; and increasing control in China's outer 
provinces as well as expanding markets and exporting standards, 
all to boost China's slowing economy.
    According to the Chinese government, it has signed 171 BRI 
cooperation agreements with 29 international organizations and 
123 countries. Projects just announced at the recent second 
Belt and Road forum were valued at around $64 billion, 
interestingly down from the $115 billion in funding announced 
at the first forum held in 2017.
    Telecommunications is a particularly notable example of 
China's effort to sell technology in BRI markets and beyond. In 
particular, China is promoting the implementation of its 
national standards for 5G and smart cities and countries along 
the Belt and Road. Huawei, China Mobile, and ZTE are closely 
involved in developing 5G technology and have increased their 
participation in international standard-setting bodies for 5G.
    The Digital Silk Road is China's plan for integrating 
digital sectors like telecommunications with ZTE, China Mobile, 
and Huawei, the Internet of Things, and e-commerce (Alibaba, 
and JD.com, for example), to create regional connectivity. The 
Digital Silk Road threatens U.S. businesses and market access 
in critical telecom and technology. Innovation, of course, is 
the driver of our economy we cannot afford to lose.
    The Digital Silk Road projects also give the Chinese 
Government more of a foothold to export its authoritarian 
values, control of information, and surveillance right 
alongside the digital infrastructure. We are currently seeing 
the most extreme manifestation--which you both have noted--of 
the Chinese Government's digital authoritarianism in Xinjiang 
where over a million Uyghurs are being held in internment 
camps. The repression in Xinjiang is increasingly enabled by a 
broad array of technology, including surveillance cameras, 
artificial intelligence, and biometrics such as voice samples, 
DNA, and facial recognition profiling.
    But all is not lost. There are steps the U.S. can and must 
take to address BRI's challenges to our economy and to the 
international order. We clearly cannot outspend the Chinese 
government in Belt and Road countries, but we can act to shape 
China's BRI efforts to meet international standards and offer 
targeted alternatives in key areas to counter emerging risks.
    I commend the U.S. Congress for the passage of the BUILD 
Act, which is an important tool to support private-sector 
investment abroad. Going forward, we must work with our allies 
and partners like Japan, which are engaging in comprehensive 
development assistance programs. And we must strengthen our 
relationships with countries in Africa and Latin America, in 
Southeast Asia, indeed even in Europe, to counter the Chinese 
government's propaganda and spread of its authoritarian norms.
    I speak more in my written testimony about opportunities 
for U.S. businesses with Belt and Road projects and how China 
uses investment in BRI projects as political and economic 
leverage in vulnerable countries.
    Thank you again for the opportunity to testify. I look 
forward to your questions.
    Senator Cornyn. Thank you very much.
    [The prepared statement of Ms. Bartholomew appears in the 
appendix.]
    Senator Cornyn. Mr. Kamphausen, you are now recognized.

   STATEMENT OF ROY D. KAMPHAUSEN, COMMISSIONER, U.S.-CHINA 
    ECONOMIC AND SECURITY REVIEW COMMISSION, WASHINGTON, DC

    Mr. Kamphausen. Chairman Cornyn, Ranking Member Casey, 
distinguished members of the committee, thank you for the 
opportunity to appear before you today to share my views on 
China's BRI, building on my colleague Chairman Bartholomew's 
statement. And might I add what a privilege it is to appear 
with our Chair before your subcommittee, as well as the two 
other distinguished panelists whose work I have admired for a 
long time.
    The views expressed are my own and do not necessarily 
reflect the views of the Commission, as the Chair noted. I am 
pleased to be a Commissioner and glad that my perspectives are 
informed by our body of past and ongoing work. The perspectives 
I offer reflect the studies we have undertaken, the National 
Bureau of Asian Research, including the seminal monograph on 
the BRI titled ``China's Eurasian Century,'' authored by my 
colleague Nadege Rolland.
    It is entirely fitting that the Senate Finance Committee's 
Subcommittee on Trade, Customs, and Global Competitiveness 
invite testimony on the strategic intentions and implications 
of the BRI to inform its own legislative policy work, given the 
enormous competitive issues at stake. To this end, the 
perspectives held by the Chinese leaders on the strategic and 
security dimensions of the BRI are thus as essential as 
perspectives on the economic trade and development dimensions 
of the BRI towards our understanding Beijing's overall 
strategic intent.
    By way of a bottom line up front, I am convinced that the 
Belt and Road Initiative is a strategic undertaking by the 
People's Republic of China defined in the broadest possible way 
to recast the international order in ways compatible and 
aligned with Chinese objectives and values, but which outcome 
is still ultimately in question.
    And while fully strategic in scope, that does not mean that 
the BRI was designed to achieve military and security 
objectives alone. But it will certainly have military and 
security implications.
    Let me focus briefly on strategic intent and then security 
implications. A year and a half ago in testimony before the 
House Committee on Foreign Affairs, I argued that the BRI 
represents a test case for China's vision for a new 
international order throughout Eurasia and possibly even the 
world. The contours of that desired order are now more clear 
and Beijing's ambitions even greater than they were even that 
short time ago.
    Today China has demonstrated that it intends for the BRI to 
be not merely a regional initiative, but a global one, as the 
administration just stated. While Beijing routinely denies any 
strategic motivation behind the BRI, the projects' geopolitical 
significance is apparent nonetheless. Chinese leaders view the 
BRI as evidence of Beijing's increasing global influence and as 
an instrument to promote China's political and economic 
development models as worthy of respect and even emulation.
    As such, Beijing uses promotion of the BRI to raise China's 
international status, enhance the legitimacy of the Chinese 
Communist Party both at home and abroad, and position China to 
lead global efforts to revise key features of the international 
order. Beijing has used the BRI to promote its influence in 
revising the rules of global economic governance.
    Just last August, Chinese Communist Party General Secretary 
Xi Jinping declared that the initiative ``serves as a solution 
for China to improve global economic governance and build a 
community of common human destiny,'' as referenced by the 
Chair, a term used by Chinese leaders with increasing frequency 
to refer to a global order aligned to Beijing's liking.
    Security implications have also begun to emerge. BRI was 
not designed to serve purely military objectives, but it does 
serve strategic ends that include military purposes. This is an 
important distinction, I think. And while Chinese intent to 
secure overseas projects is not new, the importance of this 
mission for China's army, the People's Liberation Army, has 
grown.
    One security aspect centers on the overseas facilities and 
infrastructure projects, ports and airfields, for instance, 
that might have dual military use. The PLA has also established 
at least one, and potentially more, overseas military bases 
including a naval base in Djibouti and a PLA-operated space 
station in Argentina. More 
Chinese-style overseas bases or facilities are likely.
    A second security aspect looks at the ways in which the PLA 
moves to secure its BRI projects, either through enhanced 
security cooperation and capacity building with host nation 
forces, even the hiring of private security forces, and 
ultimately perhaps the deployment of PLA forces themselves.
    In conclusion, China's BRI geographic and strategic 
ambition may make it seem like an insurmountable challenge to 
the global liberal order. While this is not yet true, the 
United States and its allies and partners must be vigilant in 
monitoring Chinese activities and relentless in protecting our 
interests. That is why the Commission in its report to Congress 
last year recommended that Congress require the Director of 
National Intelligence to produce a National Intelligence 
estimate that details the impact of existing and potential 
Chinese access in basing facilities along the Belt and Road and 
understand their implications for U.S. operations globally.
    Thank you, and I look forward to your questions.
    Senator Cornyn. Thank you very much.
    [The prepared statement of Mr. Kamphausen appears in the 
appendix.]
    Senator Cornyn. Dr. Kliman?

STATEMENT OF DANIEL KLIMAN, Ph.D., SENIOR FELLOW AND DIRECTOR, 
   ASIA-PACIFIC SECURITY PROGRAM, CENTER FOR A NEW AMERICAN 
                    SECURITY, WASHINGTON, DC

    Dr. Kliman. Chairman Cornyn, Ranking Member Casey, 
distinguished members of the subcommittee, I am grateful for 
this opportunity to address you.
    At the Center for a New American Security, I have led 
several major studies on China's Belt and Road. This research 
has underscored that the Belt and Road, though framed by China 
as an initiative to build a more connected world, is 
fundamentally a geopolitical enterprise.
    I want to highlight three key findings of this multi-year 
research. First, the Belt and Road will cement China's status 
as a global power as Beijing attains lasting diplomatic 
leverage over governments indebted to it, develops a network of 
overseas facilities that could support its future military 
operations, and expands its ability to manipulate global supply 
chains for geopolitical benefit.
    Second, the Belt and Road will strengthen China's ability 
to compete economically by creating a commercial playing field 
in large parts of the developing world that favors Chinese 
enterprises and enabling Beijing to set technical standards and 
online standards, as well as tap data and talent overseas 
through a growing focus on digital infrastructure.
    Third, the Belt and Road will radiate illiberalism as 
China's investment practices exacerbate ongoing corruption 
challenges in some countries. And under what it calls the 
Digital Silk Road, Beijing exports technologies for 
surveillance and censorship.
    Accordingly, the Belt and Road poses a challenge to U.S. 
security, prosperity, and values. It will sharpen the emerging 
choice countries confront between their military ties with the 
United States and economic dependence on China. It will place 
U.S. companies at a disadvantage in key markets, and it will 
undermine American ideals of democracy and human rights.
    The Belt and Road has encountered recent setbacks as 
countries voice growing concerns about the challenges 
associated with Chinese infrastructure projects. Yet Beijing 
still has momentum on its side, including support from the 
United Nations as well as some multilateral development banks, 
and China is unlikely to address the shortcomings of Belt and 
Road for recipient states.
    Its commitments at the recent forum in Beijing were largely 
a public relations exercise. Since 2018, the United States has 
made progress toward competing with China's Belt and Road while 
offering positive alternatives. But its current approach still 
falls short.
    Here are 10 steps that Congress could take to get America's 
approach right.
    (1) Congress should create a reporting requirement for the 
executive branch to put forward a blueprint for a public 
diplomacy capability for the 21st century. The lack of such a 
capability is a critical deficit of America's current approach, 
given that China has played up the size of its Belt and Road 
investments and the positive impact while linking the Belt and 
Road and placing it as a symbol of China's inexorable rise.
    (2) Congressional delegations should travel to countries 
where Beijing may parlay its Belt and Road projects into 
overseas military access and emphasize the downsides of a 
Chinese military presence to their counterparts.
    (3) The U.S. Congress should task the U.S.-China Security 
and Economic Review Commission to publish a report on the China 
supply chain exposure of 20 major global U.S. companies. This 
report would help to catalyze a discussion on the supply chain 
dependence of U.S. companies and how to mitigate the risk as 
well as elevate public discussion on this critical issue.
    (4) Congress should convene hearings to weigh the merits of 
a future high-quality multilateral trade and investment 
agreement.
    (5) Congress, through its oversight function, should 
encourage the executive branch to come together with U.S. 
allies and partners around an international certification for 
high-quality infrastructure.
    (6) Congress should appropriate resources to establish a 
U.S. digital development fund that would support information 
connectivity projects across the developing world. This fund, 
potentially through leveraging lines of credit, could drive 
down the price of American digital infrastructure in order to 
compete with Chinese enterprises.
    (7) Congress should ensure that the new U.S. Development 
Finance Corporation is positioned to backstop a competitive 
approach toward China through encouraging a new office of 
strategic investments.
    (8) Congress should convene a hearing on China's use of the 
UN to legitimize the Belt and Road as well as advance its 
broader geopolitical objectives.
    (9) Congress should sufficiently resource U.S. efforts to 
enhance technical capacities in countries receiving Chinese 
investment under the umbrella of the Belt and Road.
    (10) And lastly, Congress should appropriate additional 
resources for strengthening the rule of law, civil society, and 
freedom of the press in countries targeted by the Belt and 
Road. Even a modest increase in U.S. funding would go a long 
way to enabling countries to avoid the most negative impacts of 
Chinese investment.
    Thank you, and I look forward to your questions.
    Senator Cornyn. Thank you very much.
    [The prepared statement of Dr. Kliman appears in the 
appendix.]
    Senator Cornyn. Dr. Scissors?

STATEMENT OF DEREK SCISSORS, Ph.D., RESIDENT SCHOLAR, AMERICAN 
              ENTERPRISE INSTITUTE, WASHINGTON, DC

    Dr. Scissors. I want to start by associating myself 
strongly with the opening comments by the chairman and the 
ranking member with regard to predatory Chinese IP practices, 
subsidies, and other harmful practices China undertakes that 
hurt the United States and our partners. I will add a 
disclaimer. I am not an expert on U.S. security policy, and the 
following remarks concern U.S. economic and financial 
interests.
    With regard to the BRI, as a global economic and commercial 
program--as my written testimony states--the BRI is overrated. 
What is likely to happen going forward is that China simply 
will not have the money to make it a large global program. 
Further, the money that China does have now comes primarily 
from selling goods to the United States. So if the American 
government decided to curb the BRI, we have it directly within 
our power to do so.
    Those conclusions are drawn from data published by the 
American Enterprise Institute under the name China Global 
Investment Tracker, which is the only fully public data on 
China's global investment and construction. The construction 
part will be important.
    What qualifies as a BRI project is being left deliberately 
vague by the Chinese Government. And my testimony is intended 
to maximize the size of the BRI. Every figure I give you is too 
large on purpose, because we cannot tell what the Chinese 
actually designate as BRI projects. Their own goal is to keep 
that vague.
    The maximum possible BRI investment from 2014 to 2018 in 
all countries was $190 billion. That is actually considerably 
larger than the Chinese Government figure. Chinese investment 
over the same period in the U.S., Australia, and Britain 
combined was larger than that. So a total Chinese investment in 
the BRI is smaller than Chinese investment in the U.S., 
Australia, and Britain over the most recent period. The high 
year for BRI investment, using the maximum possible figures, 
was 2015.
    Construction is more important in the BRI than investment. 
And what I mean by construction is usually projects financed by 
Chinese lending, but there is no Chinese ownership of the 
project, so it does not qualify as investment. The maximum 
figure for BRI construction in the last 5 years is $388 
billion, all countries. The high year for construction was 
2016.
    Why am I already talking about peak in the BRI, 2015-2016? 
Because in the last 8 or 9 months we have seen a clear drop-off 
in investment globally by state-owned enterprises. State-owned 
enterprises dominate the BRI. They account for almost all the 
construction and three-quarters of the investment. They are not 
getting money from the Chinese government to invest, and we 
know why.
    When the BRI was launched, Chinese reserves had been rising 
for 20 years. Xi Jinping was told, ``You have a ton of money. 
You can do anything you want with it.''
    Since then, Chinese reserves are officially $900 billion 
lower than they were. They are supposed to be stable, but it is 
almost guaranteed that the Chinese are borrowing to support 
their foreign exchange reserves. And in fact, the drain is 
continuing, perhaps at the level of $70 to $90 billion a year.
    So summarizing the data, the data say that BRI is not that 
large. And more crucially, they say China does not have the 
money, because it launched the program when it was flush with 
foreign exchange. It is no longer flush with foreign exchange. 
That sets up U.S. policy.
    All of these numbers are prior to the larger U.S. tariffs 
hitting. They are not--they do not--show effect of major U.S. 
trade action.
    While China's reserves have dropped $900 billion, in the 
same period they ran a combined $1.5-trillion trade surplus 
with the United States, meaning they drew in on a net basis 
$1.5 trillion from us. But still the pile that they were 
drawing fell by $900 billion.
    When they say they want a trade balance with the United 
States in our trade negotiations, that is not true, because 
they cannot afford a trade balance with the United States.
    With regard to the BRI's future, if the President is 
successful in shrinking the bilateral trade balance, that could 
push the annual drain on China's foreign exchange reserves to 
about $200 billion annually. In those conditions, there is no 
global Belt and Road Initiative other than talk. They simply do 
not have the money.
    Now the PRC in that situation is not going to abandon the 
Belt and Road. It will still talk about it. And it will focus 
on a few countries that are most important. And in my written 
testimony I indicated where most of their money has gone to. To 
this point, Pakistan is an obvious example.
    The question then is, should we see our interest as similar 
to theirs in those countries? Our economic interests are quite 
different than China's. So I would argue that we should not be 
mirroring Chinese actions under any circumstances. And in 
particular, the point of U.S. policy is not to anticipate a 
giant BRI that is engulfing the world, it is to anticipate 
where it is actually going, which is going to be a few 
strategic countries where China sees its interest to be most 
important. And the U.S. has to evaluate, does this matter to us 
and how?
    Thank you.
    Senator Cornyn. Well, thank you very much for your opening 
statements. You have given us a lot to talk about.
    [The prepared statement of Dr. Scissors appears in the 
appendix.]
    Senator Cornyn. We will proceed with 5-minute rounds.
    Let me ask you, Mr. Kamphausen--because we talked about the 
intersection of security and economics. And I think one of the 
things that confuses people about China is, because they tend 
to view them as a country that is creating all these 
businesses, they do not realize that there is no separation 
between the economic and the military or security approach in 
China.
    For example, I understand they have a law on the books that 
says essentially if a state-owned or -operated enterprise gets 
access to certain intellectual property or information, they 
have to share that with their national security apparatus. 
Could you help us understand that a little bit better?
    Mr. Kamphausen. I think the law on the books--and I can 
double check and make sure I get it straight with your staff, 
sir--is that if requested, they are compelled to provide 
answers to the national security apparatus. So it is not that 
they would provide it on a kind of supply-driven basis, but on 
a demand-driven approach. So if they are asked for it, they 
have to give it up.
    I think it speaks more broadly to how the acquisition of 
foreign technology and IP is a fundamental component of China's 
suite of policies that make up the Made in China 2025 approach. 
They are inseparable. And so that speaks to the compellance 
nature of that law.
    Senator Cornyn. Well, in a way China has done us a favor by 
telling us ahead of time what they intend to do. And they 
appear to be pretty far down the road to implementing it, 
subject of course to the financial considerations that some of 
you have talked about, whether they can actually execute those.
    But at some point it seemed just that they were--I guess 
they do not have the same problems we have here in the U.S. 
Government appropriating taxpayer dollars for government 
programs. They seem to almost have an unlimited amount of money 
for these infrastructure projects in remote parts of the globe.
    Dr. Scissors, you said that that money is drying up, and a 
lot of their stated objectives in the Belt and Road Initiative 
will never be completed or executed. Is that right?
    Dr. Scissors. Yes it is. And the reason I think they made 
this mistake is when the Belt and Road was launched, they did 
seem to have an unlimited pile of money. That is, they had the 
world's largest foreign exchange reserve, which is what funds 
the Belt and Road, and it was rising every year.
    I make a joke that whoever gave Xi Jinping this advice got 
into trouble--a lot of trouble--8 months later, because their 
foreign exchange reserves began dropping. Foreign money, hard 
currency began leaving China.
    So they started off the Belt and Road plan with seemingly 
an unlimited amount of money. Now, they have less money, and 
the trend is entirely different. In particular, they are much 
more dependent on selling to the United States than they were 
when they started in 2013.
    Senator Cornyn. Ms. Bartholomew, Senator Romney the other 
day gave his maiden speech as a U.S. Senator on the Senate 
floor. He talked expansively about China, but he made the point 
that China obviously is a very large, populous country. One of 
the things that he alluded to was, the United States has 
friends and allies around the world.
    How important is it for the United States, in responding to 
the challenge of rising China, to make use of those friendships 
and those alliances around the world?
    Ms. Bartholomew. Mr. Chairman, thank you. I think those 
friendships and alliances are critically important. You know, 
we always do better when we have force multipliers, and our 
force multipliers are the people whom we work with. Whether 
that is at the WTO, whether that is in development assistance, 
whether that is in having a productive presence on the 
continent of Africa, we do not have enough resources to 
outspend the Chinese when they determine that they are going to 
do something. And so we have to figure out ways to work 
together with other countries in order to address what we think 
the most critical problems are.
    Mr. Chairman, if I could go back to one thing that you 
said, which is, sort of, the difference in the economies--
because I think it is really important for people to understand 
that the Chinese Government knows what it wants to accomplish 
and has strategies to do that. And they are indeed transparent.
    They do 5-year plans where they determine and talk about 
what their economic strategies are, the areas of the economy 
they want to grow, and of course Made in China 2025, which 
lists 10 different forward-leaning sectors where they intend to 
create indigenous companies. And we ignore that at our peril, I 
think. I mean they have a whole-of-government approach, and we 
do not necessarily do that.
    So, in addition to working with our friends and allies, I 
think it is really important for us to pull different pieces of 
our own government together to try to address a whole-of-
government approach to these challenges.
    Senator Cornyn. And of course they have an advantage, in a 
sense, that they do not have to invest a lot of money in 
research and development because----
    Ms. Bartholomew. Right, because they steal----
    Senator Cornyn. Because they steal it from the United 
States or other friends and allies.
    I want to ask one last question. Dr. Kliman, you alluded to 
your 10 steps of what the U.S. should do in response. You talk 
about trading arrangements, including TPP. And as you know, the 
administration says they prefer bilateral trading arrangements.
    But it strikes me that a unified effort in Asia under the 
TPP would serve a very useful purpose in terms of setting the 
rules of the road in Asia and counterbalancing China. Could you 
give us your views on that?
    Dr. Kliman. Absolutely, and thank you, Mr. Chairman. I 
think especially today--I mean, we all know that trade is a 
fraught political issue here. But I think if we separate out 
the impacts of trade with China, which, as was made quite 
apparent in some of the opening remarks has been massively 
dislocating for American workers and industry compared to trade 
and investment with allies and partners in which we all rise 
together, I think there is an opportunity now to make that case 
here in the United States, and certainly in Asia, when 
countries are looking for kind of a U.S. response to Belt and 
Road and the rise of China more generally. They are looking for 
more than bilateral agreements, even if those are a positive 
step forward. They are looking for high-quality trade and 
investment multilateral agreements. So whether it is TPP or 
called something else, I think at the end of the day, it will 
be a critical piece of any American approach.
    Senator Cornyn. Thank you.
    Senator Menendez?
    Senator Menendez. Thank you, Mr. Chairman.
    Thank you all for your testimony.
    Senator Cornyn. Senator Menendez, if you will pardon me, I 
ignored the ranking member.
    Senator Menendez. I thought maybe somehow I had missed 
something, and he had gone already. So that is why I hesitated, 
Mr. Chairman.
    Senator Cornyn. Thank you. If you would withhold, and I 
will recognize Senator Casey.
    Senator Casey. Do you need to go? Are you okay? Okay.
    I want to hear your erudite remarks.
    Senator Menendez. Thanks.
    Senator Casey. I will keep within my time.
    But I wanted to start with a principle enunciated, gosh, a 
century ago by the International Labor Organization: labor is 
not a commodity. We have heard that an individual has intrinsic 
value. They are not an entry in a balance sheet or anything of 
the kind. We know as well that, with these basic rights that 
workers have, they are not dependent upon a particular 
community's level of development and should not be up for 
debate.
    So while every nation has challenges and should continue to 
strive to improve labor rights and raise wages, it is clear 
that China has a different approach. That is an understatement, 
as we all know. China's posture both at home and around the 
world is that the treatment of workers is in direct conflict 
with improving workers' lives or their livelihoods.
    So, Chairman Bartholomew, I will start again with you. Can 
you discuss two things: (1) the ways in which China, number 
one, exports those labor practices; and (2) how that may 
further erode efforts to improve both labor rights and human 
rights in developing countries and actually do harm here in the 
United States in terms of both jobs and wages?
    I know that is a lot in two questions. But take a shot at 
it.
    Ms. Bartholomew. Senator Casey, thank you very much. And 
just a little bit of personal history as somebody who started 
working on U.S.-China policy on June 4, 1989, because of the 
Tiananmen Square massacre and lived through the 1990s and the 
fights over human rights and most-favored nation status.
    I can tell you that labor rights was there right at the 
very beginning. If you go back to Tiananmen, there were a lot 
of students, yes, but there were a lot of workers fighting for 
rights and for the very freedoms that we think about.
    So, I have spent a lot of time working on labor rights 
issues. It is important to recognize that China has no 
independent labor unions itself, which creates, of course, 
problems because there is no freedom of association and people 
cannot necessarily organize. That is changing a little bit in 
China, only because there are some labor shortages which give 
workers a little bit more leverage.
    I am very concerned about China's practices being exported 
through the BRI and other ways. Right now there are not any 
comprehensive statistics on the number of Chinese laborers who 
are being brought in for Chinese BRI projects.
    Prior to sort of the announcement of the BRI, a lot of 
Chinese projects overseas, particularly in Africa, were Chinese 
workers who were being brought in. Some of them stayed behind, 
and some of them got left.
    But there are other examples where China's labor practices 
have been very very difficult and destructive. There was a 
casino project on Saipan, for example, where Chinese companies 
brought in thousands of Chinese construction workers, hired 
very few for--there were very few Saipan residents. The FBI 
actually charged the head contractor for that project with 
illegally importing and employing Chinese workers, including 
one who died.
    So, hiring Chinese workers for that project--just as an 
example--allowed the employers to impose exploitative labor 
conditions that locals would never have tolerated. One of the 
more interesting ones, I think recently, is COSCO, the Chinese 
Maritime Company--its partial acquisition of two container 
terminals in Piraeus, Greece.
    When COSCO acquired one of the terminals, there was a 
collective agreement between the union of port workers and the 
Greek port authority which included provisions on wages, 
tenure, hiring family members, pensions, working hours, and 
health and safety standards. But as projects to upgrade the 
port infrastructure began, Chinese workers were brought in by 
specialized employment agencies on temporary contracts. Does 
this sound familiar?
    A number of senior managers were also brought in from China 
to supervise the projects. COSCO purposefully avoided hiring 
union workers.
    So we are going to have to watch these projects. I think we 
certainly cannot assume that China has any interest really in 
workers' rights. But I think that we have to watch them.
    And going back to the digital issues, I think that the 
digital authoritarianism and the export of that is a really 
serious problem for human rights and for human rights 
activists.
    Senator Casey. And how about--just if you can develop or 
delineate how that impacts us here at home in terms of jobs and 
wages.
    Ms. Bartholomew. Yes. Well, I think anytime that you have a 
workforce that does not have the ability to have freedom of 
association, and have a decent wage and all of the other 
conditions, you are making it more difficult for American 
companies to compete. You know, we are and we should be proud 
of the labor standards that we have in this country.
    I, as a Democrat here, am proud of the labor unions and the 
work that they have done in this country. And their work in 
American communities is being--they are undercut when Chinese 
companies are manufacturing goods with workers who are not 
getting paid on a wage scale that is sustainable, for example.
    You mentioned steel. I mean, you can go through these, 
industry after industry, and see what happened. It happened to 
our textile industry, it happened to our shoemaking industry, 
that Chinese workers were being paid so little that American 
workers, no matter how successful they were, how efficient they 
were, did not stand a chance.
    Senator Casey. Thank you very much.
    Senator Cornyn. Now, Senator Menendez. Thank you.
    Senator Menendez. Thank you, Mr. Chairman.
    I want to salute you and the ranking member for holding 
this hearing. At the Senate Foreign Relations Committee, we 
have been doing a fair amount of work on China as a challenge 
in our national interests.
    And I think as China's Belt and Road Initiative expands 
around the world and Beijing seeks a hegemonic role on the 
international stage, the United States and our allies have to 
work together to increase our own development capabilities, but 
also to leverage this giant investment project to benefit the 
public good, not just the Chinese Communist Party.
    But I often view--and I would like to hear from the 
panelists--that it is not nearly enough merely to confront 
China about its malign activities. We also have to compete with 
China at the end of the day, as well as be able to, at the same 
time, lecture about the dangers of debt-trap diplomacy.
    And that means we need to start at home in investments in 
education, research, training, and infrastructure for the 21st 
century. We have to work closely with the Belt and Road 
countries to strengthen their ability to negotiate Chinese 
investment on good terms. Otherwise, we will see the rule of 
law in developing countries washed away in a flood of Chinese 
cash.
    And I think we have to reinvigorate the instruments of our 
economic diplomacy so that all elements of the U.S. Government 
are working in tandem to promote best practices for workers and 
businesses. We are not going to be in a position to counter 
dollar for Yen to the investments of Chinese state-owned 
enterprises, but I do not think that is where our competitive 
advantage lies at the end of the day.
    So with that in mind, do you think that the BRI decisions 
by the PRC are driven primarily by commercial and economic 
considerations, or by strategic and geopolitical ones?
    Mr. Kamphausen. I will start. It is clear that BRI is 
motivated by geostrategic considerations. It is intended to 
create a suite of programs, projects, initiatives, and 
supporting capacities that raise China to a global leadership 
position. I think that is the best way to think about that.
    That means then that many projects are driven by political 
imperatives, not just whether there will be a globally 
competitive return on investment. And so I often say that, in 
15 years, Eurasia may well be littered with failed or 
incomplete or abandoned BRI projects precisely because the 
measure of success was whether the investment was made more so 
than whether the project became fully functioning.
    Senator Menendez. So that has many different elements to 
it: votes at the United Nations, position as it relates to the 
South China Sea. So that is, I think, a key focus for us to 
keep in mind, that this is not just a strategic competition on 
economics.
    How do we update our development tools and capabilities for 
this 21st century? The BUILD Act was an incredibly good 
bipartisan achievement and a great first step, but it is 
exactly that, in my mind: a first step. That is why I have been 
working on legislation that would strengthen our development 
finance institutions and give our diplomats the resources they 
need to not only champion American business abroad, but to work 
with the private sector to create a unified American investment 
strategy.
    In your view, what would legislation look like in order to 
respond to the BRI? What tools would you hope would be created? 
What existing tools need to be updated?
    Dr. Scissors. Senator, can I just--I do not have an answer 
to that. I wanted to make one important, very quick point about 
your first question, security versus commerce. The BRI--there 
is a third element. The BRI is very heavily associated with Xi 
Jingping personally. It matters to his domestic political 
position.
    And I agree, I think, with Roy's view that this is 
primarily geopolitical. It is certainly not to make money. We 
should all be clear about that. These are money-losing 
projects, largely.
    But I also would just add, it matters to Xi himself. That 
has not been true with previous Chinese global initiatives.
    And I do not want to sidetrack. So I will stop there.
    Senator Menendez. I appreciate that.
    Does somebody have an answer to my question? Anybody want 
to----
    Dr. Kliman. I am happy to jump in.
    Senator Menendez. Dr. Kliman.
    Dr. Kliman. So, starting on public diplomacy. I mean a 
major part of the Belt and Road is not only the economic and 
the security aspects, but the kind of narrative that China 
projects. So in my view, we need the ability to have a 
comprehensive counter-
narrative which centers on public diplomacy.
    So as a start, I do not have the answer to what a kind of 
21st-century public diplomacy tool kit looks like. But I think 
Congress could play a vital role in tasking the executive 
branch to develop a blueprint and then assess from there.
    On the Development and Finance Corporation, I concur it is 
a major bipartisan step, a real important step forward. I think 
a lot remains to be determined, whether it is legislation or 
oversight. But we should ensure, for example, that the new DFC 
has adequate resourcing to manage the larger portfolio it will 
have, ensure that it has an office of strategic investments, 
that it does not kind of devolve back to a general focus on 
pure development assistance without a strategic China 
competition lens.
    And exploring things like a fast-track authority for at 
least certain types of lending in cases where, perhaps, a 
government abroad wants to move away from China and there is an 
opening for the U.S., the DFC could move quickly.
    Other areas I think that are important to emphasize would 
be building essentially technical capacity. And to highlight 
one area in particular, the Infrastructure Transaction and 
Assistance Network, ITAN, plussing that up.
    My understanding now is, in theory there is about 25 
million allocated to it, and you can imagine growing that 
tenfold. And that would begin to meet the demand 
internationally.
    Senator Menendez. Thank you.
    Ms. Bartholomew. Can I just briefly add?
    Senator Menendez, I do not know how long it has been since 
we have--if ever--had a sort of a survey of where our 
development assistance has been extremely successful, because 
that would identify the strengths that we have. And indeed we 
do have some. And one of the ones I think of--of course--is 
technical assistance, assistance with these countries that are 
trying to go through BRI contracts or other contracts with 
China, assistance on ensuring that there are OECD standards 
that are being met, assistance on transparency and 
accountability.
    Just one short story. I have a friend who is Kenyan, and he 
spends 6 months of the year in Kenya. He came back about a 
month and a half ago, and he said to me he had never seen more 
billionaires in Nairobi. He said you cannot imagine how many 
billionaires there are. And it is Chinese money.
    So the projects themselves might not be happening. But 
because of corruption, there is money being scattered all over 
the place. And we are going to have to figure out a way to deal 
with that too.
    Senator Menendez. All right. Thank you very much.
    Senator Cornyn. I might add for committee members' 
awareness, one of the unique features of the Finance Committee 
is we do not go back and forth across the aisle based on the 
early bird rule. It is based on who gets here first on the 
entire committee. So that is the reason why we may follow up 
with a couple of Democrats succeeding each other, or a couple 
of Republicans, just by way of explanation. That is the only 
committee I am aware of where that happens. Usually we go back 
and forth across the aisle.
    But at this time, I will recognize Dr. Cassidy, Senator 
Cassidy.
    Senator Cassidy. Sometimes we go back and forth. I am never 
quite sure why we decide, but I am always noting it to my 
disadvantage. [Laughter.]
    Senator Cornyn. It is not personal.
    Senator Cassidy. This is like the Finance Committee of Belt 
and Road.
    We are actually hearing--I am hearing--two different 
stories from you all. You three see this as existential. You, 
Dr. Scissors, think the engine is about to run out of gas.
    With that context, it does seem that the legacy effect, 
even if it runs out of gas, is if there is institutional 
corruption, which has been established, that there might be 
future relationships that do not make meaningful economic sense 
to the host country, but because they have been corrupted, they 
point themselves in the direction of China, and therefore the 
relationship continues. Would you all four agree to that?
    [Affirmative nods.]
    Senator Cassidy. The other thing--I forget which of you 
suggested this, but I am interested in you, Dr. Scissors. 
Because, Dr. Scissors, I kept on wondering where that money is 
coming from, and my assessment has been kind of as yours has 
been, that their foreign reserves are going to 0, so how do 
they continue this?
    Nonetheless, one of you spoke about if they, in the digital 
Belt and Road, establish standards which their companies meet 
but ours do not--that, coupled with potentially them, the 
Chinese, integrating ways to monitor and survey the host 
country does seem to have an existential element to it.
    Dr. Scissors, would you agree with that?
    Dr. Scissors. I certainly agree that there are legacy 
effects. And I think you just identified an important one with 
regard to standards. I quite agree there, no hesitation.
    When I think about Chinese IP theft compared to legacy 
effects from the Belt and Road, I think of Chinese IP predation 
as existential. And I do not think of legacy effects from the 
Belt and Road as existential.
    Senator Cassidy. Except that--I understand there are two 
standards for 5G. We have one different than they have, and 
there is another being deployed abroad.
    I presume our companies--I do not know--easily adapt one to 
the other. You know the British, they still drive on the right 
side or the wrong side, and so do the Aussies. So I think they 
do--you see where I am going with that.
    Dr. Scissors. Yes, I do. And I think I would say 5G, of 
course, is developed out of Chinese IP theft. They would not be 
where they are without the IP theft. If we had curbed it, we 
would not have this 5G problem.
    The other part of it is, the Belt and Road does not extend, 
except in a very few cases, to our military allies. So the 
threat from 5G to our national security is there, but it is not 
really a Belt and Road threat. It is a----
    Senator Cassidy. I agree with that. There are some of the 
things you mentioned, Ms. Bartholomew, that are not part of 
Belt and Road. Low wages for Chinese laborers undermining ours 
is not part of BRI. That is just inherent in their economy. I 
get that.
    But on the other hand, the digital initiative, in which 
their standards might become the standard, does seem to be, if 
not integral, still so much a part of it that we have to 
address it part and parcel.
    Dr. Scissors. I do not mean to say there is nothing to 
address in Belt and Road. And I meant my disclaimer on the 
security side to cover that.
    I agree with your point. Even if the Belt and Road dies 
next year, there are legacy effects--and it is not going to. 
But even if it did, there would be legacy effects. And I think 
the digital standards element of this is the most important.
    Senator Cassidy. Now, Dr. Scissors, because I agree with 
you so much, I am going to attack you, okay? [Laughter.]
    And I say this only to learn. They are doing a currency 
swap with Argentina----
    Dr. Scissors. Right.
    Senator Cassidy [continuing]. In which case they kind of 
bypass the law, the lack of foreign currency reserves. I can 
see this being set up with other countries. Does this pose a 
workaround on the absence of foreign currency reserves?
    Dr. Scissors. Not for the foreseeable future. For the 
foreseeable future, the Chinese--first, I mentioned this in my 
written testimony. The Chinese renminbi is very unimportant 
globally.
    Senator Cassidy. Yes, but if you do a currency swap, it is 
just the Argentinean peso with their renminbi----
    Dr. Scissors. But people do not want to hold yuan. They do 
not want to hold renminbi.
    Senator Cassidy. But does that matter in a currency swap? 
Because now the Argentines are going to sell their commodities 
and----
    Dr. Scissors. Well, that is if you think you are going to 
be able to sell whatever you swap to the Chinese. The Chinese 
are not renowned for having an open market.
    It will work in commodities producers, right? The Chinese 
want to buy commodities. Everywhere else, the countries are 
going to say, what can I do with this money?
    So I do think it is a factor. I do not think it saves them 
from their foreign exchange problem.
    Senator Cassidy. Got it.
    And, Ms. Bartholomew, I was specifically told by somebody 
in the State Department that they are not using Chinese 
concrete and steel in these overseas projects. And you 
specifically say that they are.
    Ms. Bartholomew. Well, I think certainly, as the projects 
were moving through Central Asia, there was a lot of use of 
steel and cement.
    Senator Cassidy. And they were specifically referencing a 
Latin American project. So it is in Central Asia, but not in, 
say, Latin America?
    Ms. Bartholomew. I think it was in Central Asia and not 
Latin America. I mean, your economic costs, of course, go up if 
you are having to use the freight costs of shipping things. But 
certainly in Central Asia that was a part of it. When the 
Chinese had extreme overcapacity in a lot of these products, 
they had to do something with that capacity other than just 
drive down the world cost, which of course had an adverse 
impact on our industries too.
    Senator Cassidy. Thank you all very much for your 
testimony.
    Ms. Bartholomew. Thank you.
    Senator Cassidy. I yield back.
    Senator Cornyn. Senator Portman?
    Senator Portman. Thank you, Mr. Chairman, and thank you for 
this really important hearing and all our witnesses today. You 
have all been very informative.
    I came earlier and got to hear some of your testimony. 
Sorry we are running between hearings today.
    Let me just tell you a story. Yesterday I was meeting with 
the U.S. Ambassador to Italy, and I thought we would be talking 
more about EU matters, but in fact that topic shifted to China. 
And he told me that China is very involved in Italy, and that 
Italy has recently chosen to sign over 20 separate BRI deals 
with China totaling over $2.8 billion.
    I am also hearing that Switzerland--again, I met with a 
Swiss representative from the business community this week, 
talking about doing a trade agreement with Switzerland. I am 
told that Switzerland is also working with China on projects in 
third countries.
    A comment was made earlier that our strategic partners are 
not really part of Belt and Road, and our military partners are 
not--and Italy is certainly a strategic partner and a military 
partner. And so, I just say this only to add to the litany of 
concerns that we should have about even some of our strongest 
allies engaging on this.
    The Global Engagement Center, which is from legislation 
that we wrote in the Foreign Relations Committee, has given us 
some new information recently. And that is that China has been 
supplying video surveillance equipment to Belarus and had been 
doing it since 2011.
    Back to Europe--in Europe alone, 17 countries have had 
Chinese telecommunications investments, 14 have had Chinese 
energy project investments, and 20 have had Chinese 
transportation and logistics investments.
    So I appreciate the comments that were made today about how 
we push back on that, and how we reassert American investment 
and try to help set standards. In particular, the DFC I support 
strongly. The BUILD Act--I was one of the original six co-
sponsors of that bill. I believe it is an important 
counterpoint to what is going on around the world.
    And yet the BUILD Act is limited to lower- and middle-
income countries, as you know. And that excludes some of those 
middle-income countries in southern and eastern Europe we have 
been talking about today that are part of Belt and Road.
    So my question for you is--and maybe Ms. Bartholomew and 
Dr. Kliman, you might respond. Given that southern and eastern 
Europe have emerged as the strategic battleground between the 
United States and China, and I would also say vis-a-vis Russia, 
where there is significant influence of course, do you believe 
the BUILD Act should be expanded to include some of those 
countries and some of those regions as well?
    Ms. Bartholomew. On that, I have to say I am giving my 
personal opinion rather than anything to do with what the 
Commission has done. I think it would be a great idea to expand 
it. I hope that any expansion is not done at the expense of the 
low- and 
middle-income countries though, so that it is an expansion, not 
a substitution.
    A couple of other things you mentioned, if I may. One is, 
the Russia-China issues, of course. We actually held a hearing 
a month ago, 2 months ago, on Russia-China issues and watching 
the growth of the Russia-China alliance. It is something that 
is of real concern.
    You mentioned surveillance in Belarus. Of course there is 
surveillance equipment being sold all over the place. We even 
had Chinese surveillance equipment cameras at--they are gone 
now--but outside some of our military bases and at the U.S. 
embassy in Kabul.
    So there are supply chain issues that go along with that. 
But I think, you know, Russia--there was just this recent 
incident where a Russian Navy ship came very dangerously close 
to a U.S. Navy ship. Watching that Russia-China expanding 
relationship is going to be something very important that 
people focus on.
    One more thing on Europe--two, actually. One is, I think it 
really----
    Senator Portman. Let me get on to my next question. I want 
to be sure to get an answer from you on this as well: 
standards.
    Dr. Kliman, we can perhaps hear from you later on that 
first question.
    A key non-tariff barrier, of course, for our exporters is 
standards. And we talked about that some today. Dr. Scissors 
talked a little about the importance of standards. They make it 
easier for businesses to do business overseas, particularly in 
familiar export markets; otherwise, regulations and so on make 
it very difficult for us to sell into some of those markets.
    The World Trade Organization's Technical Barriers to Trade 
Agreement, in part, encourages governments to adopt 
international standards for that reason. So there are 
international standard-
setting bodies, and we support that.
    What I am troubled by is seeing China take such a keen 
interest in the standard-setting process. Next generation 
telecom technology, like 5G, is an instructive place to look. 
In 2018, China had 8 of the 39 available leadership positions 
in those standard-setting bodies, the most of any country, the 
International Telecommunications Union 5G-related bodies. So 
that is the ITU 5G-related bodies, 8 of the 39. The United 
States, by the way, has a single representative.
    At the International Standards Organization last year, 
China was in third place among the representatives there. The 
United States was tied for 16th place with Finland for the most 
participants.
    China also leads in standard-essential patents or SEPs for 
5G. These SEPs are patents that are--for technology, they are 
essential for compliance with any given standard and can 
provide the owner global market share licensing revenues and 
advantage in tech development.
    Unfortunately, Chinese companies now own 36 percent of all 
5G SEPs, with Huawei alone leading with over 1,500 of these 
patents.
    So the question for anyone of you, given that the private-
sector technologies are so important and that the private 
sector manages U.S. membership in these standard-setting 
bodies, what should we be doing differently? Should the U.S. 
Government get involved in this? We allow the private sector to 
take the lead, and yet we are not represented.
    Dr. Kliman. I am happy to jump in on that as well as the 
other question.
    So I think the U.S. Government has to play a much more 
muscular and centralizing role and that the private sector, I 
think, is looking for, certainly, more resources on the USG 
side to plug into these convenings where the Chinese are 
flooding the zone. And it is very hard for the U.S. Government, 
without the resources and kind of the top-down direction, to 
compete on equal footing.
    Very quickly on your Europe questions, I mean I do think it 
is--you could consider, again, having kind of a strategic 
mandate for the DFC where, in select cases, they could plug 
into maybe middle-income countries in south and eastern Europe.
    I think one area that would really move the needle in these 
countries is U.S. support for NGOs that are focused on Chinese 
influence. This can really expose a lot of Chinese activities 
and bring, especially in countries that are democratic, 
increased scrutiny.
    Lastly, in general for south Europe and eastern Europe, and 
more generally, I think, Congress could play a role in 
encouraging a new definition of diplomacy, so the State 
Department focusing much more on commercial diplomacy rather 
than more of a kind of reporting function.
    Senator Portman. Well, thank you. My time has expired. I 
just appreciate the hearing. And I am one of those who believes 
that we need a constructive relationship with China. It can be 
done; it should be done. But that is not the direction we are 
headed right now.
    Senator Cornyn. Thank you.
    Senator Casey?
    Senator Casey. I am jumping ahead a little bit because I 
have to go to the floor, but I want to--if I do not return, I 
want to thank the panel.
    I just have one question, one broad question. It is really 
for the panel, anyone who wants to chime in.
    Can you kind of walk through or discuss ways that China--
and you have alluded to this in various ways--is currently 
exercising influence over either decisions or outcomes of 
international organizations, multilateral organizations, and 
how their efforts through the Belt and Road Initiative may tilt 
the balance in favor of their world view of either government 
or governance? Does anyone have a view on that?
    Mr. Kamphausen. Senator, I will jump in.
    First, let me say I grew up in Philadelphia.
    Senator Casey. Great.
    Mr. Kamphausen. And so let me thank you and your family for 
your service to the Commonwealth.
    Senator Casey. Wow, thanks. You get extra time. [Laughter.]
    Mr. Kamphausen. And I would be remiss if I did not say on 
my son's behalf, ``Go Eagles.''
    Senator Casey. Well said.
    Mr. Kamphausen. China responds to the international system 
in at least three ways, right? One is, it breaks the rules that 
it encounters that were made before its rise was significant. 
And we have alluded to some of its functions in the WTO.
    Let me focus on two other areas. In another set of 
circumstances, it takes the rules, meaning it says the existing 
system can be beneficial to its own aims. But it has to either 
co-opt it or take leadership.
    And so this points to the point made just a minute ago by 
Senator Portman. I want to highlight a great study that our 
staff at the Commission has done on PRC representation in 
international organizations. It points to the ways in which the 
Chinese leadership says, ``If we lead an organization, we can 
tilt its outcomes to our own interests.''
    The third way is when China makes rules, meaning the 
existing rules are not broken or they are not adjusted, but 
they have to create new systems or new structures. And here I 
think they have chosen an institutional approach. The Asian 
Infrastructure and Investment Bank, AIAB, is an important 
Chinese effort to address the $27 trillion in infrastructure 
needs that the ADB says Asia has before 2030.
    But the BRI is a concept. It is not a program. But as a 
broader concept, it is also intended to create new norms which 
China can be the leader of.
    So these are three ways in which they can respond.
    Ms. Bartholomew. But there are some examples of Chinese 
leverage influencing decisions that are being made. Of course, 
China is using its influence in Southeast Asia to affect 
people--the countries' responses to the South China Sea.
    We were just actually in Asia and heard a lot of concern in 
Australia about what is happening with the Pacific islands. In 
2018, China's ambassador to Vanuatu actually said that China 
expects its Pacific island diplomatic partners to support 
Chinese positions at the UN in return for its assistance. And I 
am quoting him, noting ``there is no free lunch.''
    Greece has actually done it by itself. I mean, there are 
very few examples you can point to where the Chinese are 
saying, ``Do this.'' But because of so much money that has been 
invested in Greece, the head of the Foreign Affairs and Defense 
Committee and the Greek Parliament actually said, ``If you are 
down and someone slaps you and someone else gives you an alm, 
when you can do something in return, whom will you help, the 
one who helped you, or the one who slapped you?''
    So there are influences that are happening because of 
Chinese investment in countries, BRI and other investment.
    Senator Casey. Dr. Kliman, you had something?
    Dr. Kliman. Sure. So kind of a flipside example is how 
China is essentially leveraging international multilateral 
organizations to advance the Belt and Road. And to give one 
very concrete example, the UN Department of Economic and Social 
Affairs, which China has populated with many of its senior 
officials, has become essentially a cheerleader for the Belt 
and Road and tried to conflate the Belt an Road with the UN's 
own sustainable development goals for 2030.
    So you essentially see a pattern in the UN or at large with 
China taking the organization, often pieces of it that are, 
sort of, distressed or less well-known, and leveraging them to 
give legitimacy and enhance its Belt and Road and larger 
agenda. So you definitely see this at play.
    Senator Casey. Thanks so much. Doctor?
    Dr. Scissors. Just quickly, connecting this to a larger 
issue, we even have with very close U.S. friends major debates 
over the extent of Chinese influence over their domestic 
policy. And I am thinking of Australia, which had a huge 
problem where they were tapping into university students and 
apparently trying to buy influence through the political 
system.
    I want to reinforce your point by saying Australia is an 
extremely vigorous society. Most international organizations 
are not nearly as vigorous. And if the Chinese can, you know, 
affect policymaking in a country like Australia even to a small 
extent, they are undermining what should be the process of 
international organizations. We should just take that for 
granted. That is the starting point of what the U.S. should do.
    Senator Casey. Thanks very much.
    Mr. Chairman, Thank you very much for your indulgence and 
courtesy.
    Senator Cornyn. Certainly.
    I just have a couple more things I would like to ask about. 
You touched on--some of you touched on this, but the 
administration is currently making WTO reform a priority. And 
China's practices are a major reason why that change is needed. 
What specific actions should the U.S. Government take through 
the WTO, other multilateral regimes, bilaterally, or on our own 
to help elevate the market access conversion and to drive 
structural change in China?
    Ms. Bartholomew. All right; I will start with one thing, 
then give my colleagues a chance to----
    Senator Cornyn. It is not a true or false question.
    Ms. Bartholomew. No. No, I know it would be easier if it 
were.
    First, I want to note, of course, that the U.S. ambassador 
to the WTO, Dennis Shea, was a longstanding member of this 
Commission. So we have confidence that he is very aware of 
China's practices and how the WTO rules are not up to it.
    I would say that one of the major weaknesses has to do with 
addressing state-owned enterprises. And I cannot give you right 
now any specific language about what needs to be done, but the 
WTO is not prepared to deal with the kinds of economies like 
China where state-owned enterprises play such a significant 
role as is being done. So I would highlight that as one of the 
issues that needs to be addressed.
    Dr. Scissors. Let me just follow, because it is directly 
connected. A big thing in U.S. policy in terms of market access 
is also not being done by the WTO.
    The Chinese will not even disclose their list of subsidies. 
They do not commit to saying, ``This is all our subsidies.'' 
They will disclose some subsidies. And they say, ``Those are 
not all our subsidies.''
    If we act, if we negotiate those subsidies, they just 
replace them with something else. As you know, sir, they have a 
lot of instruments to intervene in the economy. So saying, 
``Hey, we stopped subsidy A and subsidy B'' does not do any 
good.
    It is, in fact, a WTO principle that you should disclose 
all these subsidies, which is how they support their state-
owned enterprises. We cannot even get them to do that, either 
on a multilateral basis or a bilateral basis.
    So I know people have sweeping goals for WTO reform. I 
would just start with the transparency that is required of WTO 
members.
    Ms. Bartholomew. Mr. Chairman, could we submit an answer to 
the record?
    Senator Cornyn. That would be welcome.
    Ms. Bartholomew. We have some trade experts who are not 
here at the table with us.
    Senator Cornyn. No, that would be welcome. And there will 
be an opportunity for committee members to ask written 
questions of you. And there will be a period of time for you to 
respond. Some of this gets pretty technical, and so we need to 
get the best minds and the best answers we can possibly get. So 
certainly that would be fine.
    Dr. Scissors, let me start with you. I am just curious. 
This is not necessarily directly on topic, but we are all very 
much aware of the negotiations that are underway with China on 
the tariffs, and not only the tariffs being issued by the 
United States, but the retaliatory actions by China on certain 
sectors of the U.S. economy, particularly the agriculture 
sector and some anxiety about that.
    I am curious what your assessment is of the Chinese 
economy. You talked about the reduction of $900 billion in 
reserves, and they may be writing checks they cannot cash, more 
or less, on the Belt and Road Initiative.
    But I also read that, because of the uncertainty of the 
trading relationship between the United States and China and 
how long these negotiations or this tit-for-tat will go on, 
literally companies are leaving China as part of the supply 
chain because they cannot predict what sort of disruption might 
occur and they just want to play it safe, which I understand is 
by going to Taiwan or Vietnam, for example.
    Could you comment on that and what the impact is, 
generally, on the Chinese economy?
    Dr. Scissors. My colleagues on the panel are all saying, 
``Oh God. We are going to be here for another hour.'' 
[Laughter.]
    I will comment very briefly, sir. Thank you.
    The Chinese economy is structurally weakening on the 
reserve side. They are running down their reserves. At home, 
they are running up enormous debt, right? So they have already 
written checks they cannot cash, and they are just borrowing 
the necessary money. They are an aging society. That is a long-
term effect.
    With regard to trade in particular, if the administration 
has the strategy--I do not know how to say this. I am not sure 
of the administration's strategy, and I feel like I talk to 
them every day. I am still not sure.
    If they have a strategy of creating uncertainty with regard 
to U.S.-China trade and pushing production out of China, that 
to me is a welcome strategy, in my personal opinion. That is 
having some effect. That strategy is undermined if we pick 
fights with our other trade partners and create uncertainty 
about where you might relocate.
    So I would break your question up into two parts. The 
Chinese economy is absolutely weakening. It is a medium-term 
threat to Xi Jinping's position in the trade negotiations. 
Trade then, itself, is creating uncertainty in China to add to 
that. If we want more leverage, we want the uncertainty to be 
confined to China, not to extend to Mexico, to Europe, to 
Japan, and so on.
    Mr. Kamphausen. Mr. Chairman, if I may?
    Senator Cornyn. Please.
    Mr. Kamphausen. There are political realities that ensue 
from the economic realities that Dr. Scissors talked about. By 
virtue of the anti-corruption campaign and the consolidation of 
power that Xi Jinping has brought about, he now stands alone as 
responsible for these economic circumstances and the fragility 
of the trade relationship with the United States.
    I was struck, as a participating member in the Commission's 
trip to Asia 3 weeks ago, including several days in Beijing, 
with the perspectives offered by a number of interlocutors in 
China who say he has a politically vulnerable position by 
virtue of the fact that this--he has put this trading 
relationship with the U.S. at stake. And there are many of the 
elites behind the scene who say he is potentially the leader 
who has killed the goose that lays the 500-billion-dollar-a-
year golden egg with the United States.
    And so there is enormous domestic pressure on him as well, 
for political reasons, that arise or ensue from the economic 
ones.
    Ms. Bartholomew. Just to put a fine point on it, we were 
surprised how much we heard that Xi is not as strong as people 
outside like to think he is. But people were also very careful 
to say, it is not as though there is any impending coup. He is 
politically shaky, but there is no organized opposition to him 
that would be pushing him out. So he is on a balancing act, but 
it is not as though anything is necessarily going to happen 
that would push him out and make some sort of change. So I just 
wanted to be clear about that.
    Senator Cornyn. Well, I always assume that for 
authoritarian governments, the most important thing for them is 
staying in power. And to the extent the economy is weakening, 
people are feeling uncertain, there is political unrest, that 
would seem to me to threaten or at least cause some concern 
about maintenance of that authoritarian position of power.
    So it is hard for me to imagine that, in the negotiations 
with China, we are going to get China to change its stripes. 
Maybe there will be some marginal changes. I hope there are 
changes that benefit the United States, and this is one area 
where there do not seem to be a lot of political differences 
between Republicans and Democrats on the Hill. We all recognize 
China has had its way for a long time. It does not treat us, or 
investors, or employers that are reciprocal in a way in which 
we would treat them here in the United States.
    But of course in a country headed by the Communist Party, 
where the state-owned enterprises have the members of the Party 
in their boardroom, they are not like American companies, as 
you pointed out. And the WTO, if they are not prepared to deal 
with those, that strikes me as a real challenge.
    Well, you have all been very very helpful, and thank you 
for offering your expertise. This is obviously a topic that is 
going to continue to be of interest. We want to make sure that 
we elevate the discussion and the visibility of the China 
rivalry.
    The Rand Corporation recently, in a publication I saw, said 
that China is a rival, not a rogue. Russia is a rogue, not a 
rival, or as Senator John McCain liked to say, Russia is a gas 
station masquerading as a country. That is another topic 
altogether.
    But I have shared Senator Portman's hope that we do not--
our future does not necessarily guarantee conflict with China, 
but we do have to manage this relationship, particularly the 
trading relationship, in a better way that benefits the 
American people and the American economy. And that is our goal.
    So with that, the hearing will be adjourned.
    [Whereupon, at 4:45 p.m., the hearing was concluded.]

                            A P P E N D I X

              Additional Material Submitted for the Record

                              ----------                              


         Prepared Statement of Carolyn Bartholomew, Chairman, 
           U.S.-China Economic and Security Review Commission
    Senator Cornyn, Ranking Member Casey, members of the committee, 
thank you for the opportunity to testify at today's hearing on China's 
Belt and Road Initiative. I am honored to appear today with my 
Commission colleague, Roy Kamphausen, and the other distinguished 
witnesses. The views in this testimony are informed by the Commission's 
body of work on this subject. They are, however, my own and do not 
necessarily reflect those of the full U.S.-China Economic and Security 
Review Commission.
           i. overview of the commission and its study of bri
    The U.S.-China Commission was established by Congress when Congress 
voted to grant China Permanent Normal Trade Relations (PNTR). We were 
created to advise Congress on the national security implications of the 
U.S.-China economic relationship. We are bipartisan, with 12 
Commissioners, three each appointed by the House and Senate Democratic 
and Republican leaders.

    Our Annual Report to the Congress, released each November, is based 
on the hearings we hold (generally around six to eight each year), 
roundtables, contracted research, staff papers, and responses to 
requests for information and analysis from congressional offices. We 
generally travel to the region once each year and recently returned 
from 2 weeks in Asia where we held meetings in Canberra, Sydney, 
Singapore, Hong Kong, and Beijing.

    We first discussed China's Belt and Road Initiative (BRI), 
originally called One Belt One Road (OBOR), in our 2015 Annual Report 
in a section on China and Central Asia. Indeed, when BRI was first 
introduced, most of its focus was on Asia. Much has changed since then.
   ii. the history and current state of the belt and road initiative
    BRI, President Xi Jinping's signature foreign policy initiative, 
was formally launched in 2013 during a speech by Xi at Kazakhstan's 
Nazarbayev University. The BRI is not a new concept. It is a 
culmination and rebranding of previous policies and projects aimed at 
linking China with its trading partners.\1\ It is, however, so 
important now that Chinese leaders call it the ``Project of the 
Century'' and have written it into China's constitution.
---------------------------------------------------------------------------
    \1\ Kazakhstan Ministry of Investment and Development, discussion 
with Commission, Astana, Kazakhstan, July 27, 2015; U.S.-China Economic 
and Security Review Commission, Hearing on Looking West: China and 
Central Asia, written testimony of S. Frederick Starr, March 18, 2015; 
U.S.-China Economic and Security Review Commission, Hearing on Looking 
West: China and Central Asia, written testimony of Raffaello Pantucci, 
March 18, 2015.

    With BRI, China has made a definitive break from Deng Xiaoping's 
era of ``hide your capabilities and bide your time.'' BRI is an 
important pillar in the foundation of China's move on to the global 
stage with economic, diplomatic, geopolitical, and national security 
---------------------------------------------------------------------------
implications for the United States.

    Broadly, BRI's land-based ``Belt'' crosses from China to Central 
and South Asia, to the Middle East, and then to Europe. The sea-based 
``Road'' connects China with South Asia, the Middle East, East Africa, 
and Europe via sea lanes that traverse the South China Sea, Indian 
Ocean, Red Sea, Suez Canal, and eastern Mediterranean.\2\ (See map in 
Appendix 1.)
---------------------------------------------------------------------------
    \2\ National Development and Reform Commission, China's Ministry of 
Foreign Affairs, and China's Ministry of Commerce, Vision and Actions 
on Jointly Building Silk Road Economic Belt and 21st-Century Maritime 
Silk Road, March 28, 2015.

    However, BRI's ambitions are not confined to just two geographic 
paths. China's vision for BRI includes Latin America and the Caribbean, 
the Arctic, and even space and cyberspace--although plans for projects 
in these areas are less developed.\3\ The Digital Silk Road--China's 
plans for integrating digital sectors like telecommunications, the 
Internet of Things, and e-commerce into its vision for regional 
connectivity--is a less analyzed but critically important component of 
BRI.
---------------------------------------------------------------------------
    \3\ China's Ministry of Foreign Affairs, Remarks by Foreign 
Minister Wang Yi at the Opening Ceremony of China-CELAC Economic and 
Trade Cooperation Forum and China-LAC Business Council Annual Meeting 
2018, January 23, 2018; China's State Council Information Office, 
China's Arctic Policy, January 2018; China's State Council Information 
Office, Full Text of White Paper on China's Space Activities in 2016, 
December 28, 2016.

    The most visible manifestations of BRI--the deal announcements and 
official Chinese communiques--focus on economic objectives. These 
objectives include building hard and digital infrastructure, fueling 
domestic development (utilizing Chinese excess production capacity in, 
among other things, steel and cement) and increasing control in China's 
outer provinces, as well as expanding markets, and exporting standards, 
---------------------------------------------------------------------------
all boosting China's slowing economy.

    And, indeed, the needs are great. The Asian Development Bank 
estimates that developing countries in Asia--and in Asia alone--will 
need $26 trillion in infrastructure development through 2030.\4\ 
Hundreds of billions of dollars have been invested so far in BRI 
projects, but a large proportion of the projects remains in planning 
and will take years to complete.
---------------------------------------------------------------------------
    \4\ Asian Development Bank, ``Meeting Asia's Infrastructure 
Needs,'' February 2017.

    But BRI has clear strategic intent. The strategic benefits for 
China include securing energy supplies, broadening the reach of the 
PLA, which Commissioner Kamphausen will address, and increasing China's 
---------------------------------------------------------------------------
influence over global politics and governance.

    Chinese leaders want to use BRI to revise the global political and 
economic order to align with Chinese strategic interests. In an often-
cited quote, in a speech marking BRI's fifth anniversary in August 
2018, President Xi emphasized that the initiative ``serves as a 
solution for China to participate in global opening up and cooperation, 
improve global economic governance, promote common development and 
prosperity, and build a community of common human destiny.''\5\
---------------------------------------------------------------------------
    \5\ Xinhua, ``Xi Pledges to Bring Benefits to People Through Belt 
and Road Initiative,'' August 27, 2018.

    According to the Chinese government, it has signed 171 BRI 
cooperation agreements with 29 international organizations and 123 
countries.\6\ Others estimate between 70 and 90 participating 
countries. The second Belt and Road Forum took place in Beijing in late 
April. A reported 5,000 delegates, including leaders from 37 countries, 
delegations from more than 150 countries and 90 international 
organizations, participated. One-third of the participating heads of 
state were from Europe.\7\ Projects announced at the second Belt and 
Road Forum were valued at around $64 billion, down from the $115 
billion in funding announced at the first Forum.\8\
---------------------------------------------------------------------------
    \6\ China Daily, ``China Has Signed 171 B&R Cooperation 
Documents,'' March 7, 2019. https://eng.yidaiyilu.gov.cn/qwyw/rdxw/
81686.htm.
    \7\ Shannon Tiezzi, ``Who Is (and Who Isn't) Attending China's 2nd 
Belt and Road Forum?'', Diplomat, April 27, 2019. https://
thediplomat.com/2019/04/who-is-and-who-isnt-attending-chinas-2nd-belt-
and-road-forum/; Diplomat, ``Belt and Road Attendees List,'' May 12, 
2017. https://thediplomat.com/2017/05/belt-and-road-attendees-list/; 
China Tibet News, ``List of Results of the `Belt and Road' 
International Cooperation Summit Forum,'' May 16, 2017. Translation. 
http://epaper.chinatibetnews.com/xzrb/page/1/2017-05/16/04/
2017051604_pdf.pdf.
    \8\ Shannon Tiezzi, ``What Does the Belt and Road Forum Say about 
the Health of China's Initiative?'', Diplomat Asia Geopolitics Podcast, 
Podcast, May 3, 2019.

    In the month leading up to the second Belt and Road Forum, four 
---------------------------------------------------------------------------
countries announced major Chinese investments.

          Italy officially ``joined'' BRI, the first G7 member and 
        western country to do so. Italian firms signed deals with 
        Chinese counterparts worth $2.8 billion.\9\ Among the BRI 
        projects in Italy are Chinese investments in the ports of Genoa 
        and Trieste.
---------------------------------------------------------------------------
    \9\ Miles Johnson, ``Italy Endorses China's Belt and Road 
Initiative,'' Financial Times, March 23, 2019. https://www.ft.com/
content/fda398ac-4d72-11e9-b401-8d9ef1626294.
---------------------------------------------------------------------------
          Kenya announced at the second Belt and Road Forum three 
        agreements and two MOUs on education, science, technology and 
        innovation.\10\
---------------------------------------------------------------------------
    \10\ Daily Active Kenya, ``Kenya and China to Sign Three Agreements 
and Two MOUs Worth Shs.300 Million Dollars,'' March 25, 2019.
---------------------------------------------------------------------------
          Argentina (a ``member'' of BRI) and China renewed talks on 
        Chinese financing for a stalled nuclear power plant and 
        announced a $28-million deal with ZTE to help build fiber-optic 
        cable systems.\11\
---------------------------------------------------------------------------
    \11\ Shen Weiduo and Bai Yunyi, ``Argentina Secures ZTE Deal Amid 
U.S. Assault Against Chinese Tech Companies,'' Global Times, March 27, 
2019.
---------------------------------------------------------------------------
          Interestingly, President Macron of France announced 15 
        business deals worth about $45 billion including 300 Airbus 
        planes, but carefully noted France was not ``joining'' the BRI 
        and, in fact, pushed back against it, noting that Silk Road 
        cooperation must work in both directions and meet international 
        norms.\12\
---------------------------------------------------------------------------
    \12\ Noemie Bisserbe, ``In Delicate Courtship, France and China 
Make Deals,'' Wall Street Journal, March 26, 2019. https://www.wsj.com/
articles/in-delicate-courtship-france-and-china-make-deals-11553542187.

    It is difficult to quantify the full impact of BRI on U.S. 
companies and workers because there is no official definition of a BRI 
project, there is a lack of information about projects and it may be 
too early for impacts to be observable. However, we can identify 
looming economic challenges and problems. One major economic challenge 
---------------------------------------------------------------------------
for American companies is lost opportunity and lost market share.

    A major goal of BRI is to open more markets for Chinese goods, 
displacing goods currently provided by the U.S. and other countries, 
particularly in higher-end manufactured goods. While BRI is 
characterized as a boon to global development, it is, in large part, 
designed to boost the competitiveness and innovative capacity of 
Chinese companies. BRI is aligned with China's economic development 
plans, such as the 13th Five-Year Plan and the Made in China 2025 
initiative. For example, BRI directly targets at least half of ten key 
high-technology sectors in the Made in China 2025 strategy: aerospace 
equipment, power equipment, new information technology, rail equipment, 
and marine technologies.\13\
---------------------------------------------------------------------------
    \13\ U.S.-China Economic and Security Review Commission, Hearing on 
China's Belt and Road Initiative: Five Years Later, written testimony 
of Nadege Rolland, January 25, 2018, 5.
---------------------------------------------------------------------------
                       iii. the digital silk road
    Telecommunications is a particularly notable example of China's 
effort to sell technology in BRI markets and beyond. Chinese 
telecommunications companies are expanding their efforts to build 
telecommunications infrastructure, provide network services, and sell 
communications equipment in BRI countries. In particular, China is 
promoting the implementation of its national standards for 5G and smart 
cities in countries along the Belt and Road.* Huawei, China Mobile, and 
ZTE are closely involved in developing 5G technology and have increased 
their participation in international standard-setting bodies for 
5G.\14\ According to research by the Australian Strategic Policy 
Institute (ASPI), as of April 2019, Chinese companies were involved in 
52 5G initiatives in 34 countries.\15\
---------------------------------------------------------------------------
    * For discussion of Chinese entity participation in 5G standards-
setting bodies, see U.S.-China Economic and Security Review Commission, 
2018 Annual Report to Congress, November 2018, 453-455.
    \14\ U.S.-China Economic and Security Review Commission, Hearing on 
China, The United States, and Next-Generation Connectivity, written 
testimony of Doug Brake, March 8, 2018, 5-6.
    \15\ Danielle Cave et al., ``Mapping China's Technology Giants,'' 
Australian Strategic Policy Institute, April 18, 2019, 3. https://
www.aspi.org.au/report/mapping-chinas-tech-giants.

    The issue of standards is important. BRI is intended to advance the 
adoption of Chinese technology standards. BRI can create new barriers 
to U.S. exports and investment to the extent that China is able to get 
participating countries to accept Chinese technical standards, for 
example in high-speed rail, telecommunication, and energy. If these 
efforts are successful, they will create long-term reliance on Chinese 
intellectual property and technology, while disadvantaging U.S. and 
---------------------------------------------------------------------------
other foreign companies.

    The Digital Silk Road is China's plan for integrating digital 
sectors like telecommunications (ZTE, China Mobile, and Huawei), the 
Internet of Things, and e-commerce (Alibaba and JD.com) to create 
regional connectivity. The Digital Silk Road threatens U.S. businesses 
and market access in critical telecom and technology. The plan calls 
for construction of cross-border optical cables and other 
communications networks. According to Chen Zhaoxiong, China's Vice 
Minister of Industry and Information Technology, the Digital Silk Road 
will help ``construct a community of common destiny in cyberspace,'' a 
phrase mirroring language China uses to describe its preferred vision 
for a global order aligned to Beijing's liking.\16\
---------------------------------------------------------------------------
    \16\ Andrew Moody and Cheng Yu, ``Digital Silk Road Forges Strong 
Links,'' China Daily, December 5, 2017. http://www.chinadaily.com.cn/
business/4thwic/2017-12/05/content_35207841.
htm.

    President Xi said at the first Belt and Road Forum in May 2017, 
``We should advance the development of big data, cloud computing, and 
smart cities.''\17\ In addition to creating obstacles for U.S. 
technology companies in BRI countries, the Digital Silk Road raises 
serious concerns about both information security and the expansion of 
the surveillance state. The Chinese government's plans and activities 
undermine the broader expansion of free markets and democratic 
governance.
---------------------------------------------------------------------------
    \17\ Xinhua, ``Full Text of President Xi's Speech at Opening of 
Belt and Road Forum,'' May 14, 2017. http://www.xinhuanet.com/english/
2017-05/14/c_136282982.htm

    Digital Silk Road projects give the Chinese government more of a 
foothold to export its authoritarian values, control of information, 
and surveillance right alongside the digital infrastructure. We are 
currently seeing the most extreme manifestation of the Chinese 
government's digital authoritarianism in Xinjiang, where over a million 
Uyghurs are being held in internment camps. The repression in Xinjiang 
is increasingly enabled by a broad array of technology, including 
surveillance cameras, artificial intelligence, biometrics (such as 
---------------------------------------------------------------------------
voice samples and DNA), and facial recognition profiling.

    According to a 2018 Freedom House report, of 65 countries surveyed, 
18 had purchased surveillance equipment, including AI-enabled facial 
recognition systems, from China. Freedom House found that 38 countries 
have purchased internet and mobile network equipment from China. Many 
African countries depend on China for network equipment and other high-
tech products.\18\ Huawei and ZTE have reportedly built most of 
Africa's telecommunications infrastructure.\19\ China's activities 
don't stop there. In Latin America, Bolivia, Panama, Venezuela, and 
Argentina have purchased Chinese surveillance systems or other 
technology to identify and collect data on their populations.\20\
---------------------------------------------------------------------------
    \18\ Freedom House, Freedom on the Net 2018, October 2018, 8.
    \19\ McKinsey and Company, ``Dance of the Lions and Dragons,'' June 
2017, 17. https://www.mckinsey.com//media/McKinsey/
Featured%20Insights/Middle%20East%20and%20
Africa/
The%20closest%20look%20yet%20at%20Chinese%20economic%20engagement%20in%2
0
Africa/Dance-of-the-lions-and-dragons.ashx.
    \20\ Evan Ellis, ``Chinese Surveillance Complex Advancing in Latin 
America,'' Newsmax, April 12, 2019.
---------------------------------------------------------------------------
                    iv. opportunities for u.s. firms
    On a more positive note, some U.S. companies see sizable BRI-
related opportunities. As noted earlier, the infrastructure needs in 
the developing world are vast. If structured in accordance with 
international standards for transparency, accountability and 
sustainability, including environmental protection and workers' rights, 
China's BRI projects could make a real contribution. Yet, most Chinese-
financed BRI infrastructure projects are not open tender and are 
awarded to Chinese contractors.\21\ The lion's share of the contracts 
is going to Chinese state-owned enterprises (SOEs) and U.S. companies 
are facing an unlevel playing field.\22\ Nonetheless, some U.S. 
companies predominantly in engineering, procurement, and construction, 
as well as financial services are participating in BRI projects--mostly 
as sub-contractors to Chinese companies. (See Appendix 2 for examples 
of some U.S. firms participating in BRI.)
---------------------------------------------------------------------------
    \21\ Financial Times, ``China's Belt and Road Initiative Is Falling 
Short,'' July 29, 2018; Jonathan E. Hillman, ``The Belt and Road's 
Barriers to Participation,'' Center for Strategic and International 
Studies, February 7, 2018.
    \22\ U.S.-China Economic and Security Review Commission, Hearing on 
China's Belt and Road Initiative, written testimony of Randy Phillips, 
January 25, 2018, 5.

    Through financing BRI projects, Beijing is creating leverage over 
loan recipients in a number of ways. Some of that leverage can be used 
to pressure participating countries to purchase Chinese-made high-end 
industrial goods (power generation equipment, telecommunications 
---------------------------------------------------------------------------
equipment) where U.S. companies are currently competitive.

    The U.S. has sizable manufacturing exports to major BRI countries. 
For example, in 2017:

          Malaysia: U.S. goods exports totaled almost $13 billion. Top 
        exports were aerospace products, machinery, and electrical 
        equipment;
          Indonesia: U.S. goods exports were almost $6.9 billion. Top 
        exports were aircraft and machinery;
          Pakistan: U.S. goods exports totaled $2.8 billion. Top 
        exports were machinery, iron and steel, and railway vehicles 
        and equipment.\23\
---------------------------------------------------------------------------
    \23\ MIT Atlas of Economic Complexity. https://atlas.media.mit.edu/
en/profile/country/usa/.
---------------------------------------------------------------------------
               v. china's political and economic leverage
    China's projects may not come with explicit requirements for 
transparency and human rights protections, but there are conditions 
nonetheless. China often expects recipient countries to source from 
Chinese companies, employ Chinese workers, and support China's 
diplomatic and political positions. For example, China is using is 
influence in the South Pacific * to garner ``support for China's 
position in the South China Sea and, in some cases, support for 
Beijing's One China Policy.''\24\ In a 2018 interview with the Vanuatu 
Daily Post, China's ambassador to Vanuatu Liu Quan said that China 
expects its Pacific Island diplomatic partners to support Chinese 
positions at the UN in return for its assistance, noting, ``There is no 
free lunch.''\25\
---------------------------------------------------------------------------
    * For an in-depth discussion of China's activities in the South 
Pacific, see Ethan Meick, Michelle Ker, and Han May Chan, ``China's 
Engagement in the Pacific Islands: Implications for the United 
States,'' U.S.-China Economic and Security Review Commission, June 14, 
2018.
    \24\ Graeme Smith, ``Should Pacific Island Nations Be Wary of 
Chinese Influence?'', ChinaFile, February 1, 2018. http://
www.chinafile.com/conversation/should-pacific-island-nations-be-wary-
of-chinese-influence; Glenda Willie, ``Vanuatu Reaffirms Stand on South 
China Sea,'' Daily Post, August 31, 2017. http://dailypost.vu/news/
vanuatu-reaffirms-stand-on-south-china-sea/article_94a1c49d-f82d-59d3-
86ef-f2ad89dc541e.html.
    \25\ Anthony Klan, ``Chinese Envoy Tells Vanuatu it Expects Support 
in Return for Aid,'' Australian, January 31, 2018. https://
www.theaustralian.com.au/national-affairs/foreign-affairs/chinese-
envoy-tells-vanuatu-it-expects-support-in-return-for-aid/news-story/
44fd8ded4a475a2a24
7e54d9dcf46344.

    In another example, Greece, struggling with debt and eager to 
attract Chinese investment, has scuppered the European Union's efforts 
to put out joint statements condemning China's aggression in the South 
China Sea or human rights conduct.\26\ According to Costas Douzinas, 
the head of the foreign affairs and defense committee in the Greek 
parliament, Beijing never made explicit requests for support; instead, 
Greece backed China's positions proactively. Mr. Douzinas said, ``If 
you're down and someone slaps you and someone else gives you an alm . . 
. when you can do something in return, whom will you help, the one who 
helped you or the one who slapped you?''\27\
---------------------------------------------------------------------------
    \26\ Jason Horowitz and Liz Alderman, ``Chastised by E.U., a 
Resentful Greece Embraces China's Cash and Interests,'' New York Times, 
August 26, 2017.
    \27\ Jason Horowitz and Liz Alderman, ``Chastised by E.U., a 
Resentful Greece Embraces China's Cash and Interests,'' New York Times, 
August 26, 2017.

    The Chinese government seems to have become particularly sensitive 
recently to the issue of debt distress. The sovereign debt of 27 BRI 
countries is regarded as ``junk'' while another 14 have no rating at 
all.\28\ This lending raises concerns about necessary debt relief down 
the road, as well as the use of leverage to take over sovereign assets, 
including ports in critical chokepoints. I believe my colleague will 
focus more on this issue.
---------------------------------------------------------------------------
    \28\ Deloitte, ``Embracing the BRI Ecosystem in 2018,'' February 
12, 2018.
---------------------------------------------------------------------------
                           vi. the next steps
    All is not lost. There are steps the United States can and must 
take to address BRI's challenges to our economy and to the 
international order. We clearly cannot outspend the Chinese government 
in Belt and Road countries, but we can act to shape China's BRI efforts 
to meet international standards and offer targeted alternatives in key 
areas to counter emerging risks.

    I commend the U.S. Congress for the passage of the BUILD Act, which 
is an important tool to support vitally needed private-sector 
investment in low- and lower-middle-income countries, particularly to 
small and medium-size enterprises. We have expertise in technical 
assistance to ensure transparency and accountability in BRI lending and 
in the construction of BRI projects. We must work with our allies and 
partners, like Japan, which are engaging in comprehensive development 
assistance programs. And we must strengthen our relationships with 
countries in Africa, in Latin America, in Southeast Asia, indeed in 
Europe, to counter the Chinese government's propaganda and spread of 
its authoritarian norms.

    Thank you, again, for the opportunity to testify. I look forward to 
your questions.

[GRAPHIC(S) NOT AVAILABLE IN TIFF FORMAT] 



           Appendix 2: Select U.S. Firms Participating in BRI
------------------------------------------------------------------------
            Firm                            Participation
------------------------------------------------------------------------
AECOM                        Partnerships in engineering, procurement,
(Engineering, procurement,    and construction (EPC): In May 2017, AECOM
 and construction)            signed a memorandum of understanding with
                              Chinese construction 3-D printing company
                              WinSun. Under the agreement, the companies
                              will explore opportunities to collaborate
                              on 3D printing for building design and
                              construction projects, particularly in the
                              Middle East, for a 3-year period.
 
----------------------------
Black and Veatch             Partnerships in EPC: In October 2017, Black
(Engineering, procurement,    and Veatch and China Tianchen Engineering
 and construction)            Corporation (TCC) signed a memorandum of
                              understanding to cooperate on developing
                              gas, chemical, and fertilizer
                              infrastructure projects throughout Asia,
                              including in Indonesia, Thailand, Vietnam,
                              Singapore, Burma, Bangladesh, Pakistan,
                              Kazakhstan, and Tajikistan.
----------------------------
Caterpillar                  Supplying construction machinery: In 2016,
(Engineering, procurement,    Caterpillar released a white paper on its
 and construction)            ``vision and commitment for the shared
                              success of [BRI]'' in which the company
                              outlined potential areas of cooperation
                              with Chinese companies in BRI countries,
                              including partnering on infrastructure
                              projects and providing project finance. In
                              September 2017 Caterpillar CEO Jim Umpleby
                              said the company ``[is] working with
                              Chinese SOEs in 20 [BRI] countries on
                              projects ranging from roads, ports, mines
                              and oil fields.'' This includes supplying
                              machinery, training, and maintenance
                              services to China Communications
                              Construction Company for the renovation of
                              the Zhrobin-Bobruisk expressway in
                              Belarus, which was completed in July 2016.
 
 
----------------------------
Fluor                        Partnerships in EPC: Lu Yaming, general
(Engineering, procurement,    manager of Fluor China, noted in a May
 and construction)            2017 interview with an energy industry
                              publication that Fluor and a Chinese EPC
                              company were recently awarded a project
                              for a gas-fired power plant in the Middle
                              East. ``We're also working on a project in
                              Indonesia that has been fueled by [BRI]
                              and we have a number of very exciting
                              prospects in the pipeline in other
                              countries. All of these projects have
                              Chinese investment or use Chinese
                              financing,'' he said. Information on these
                              projects is not available on the company's
                              website or in other news reports.
----------------------------
Honeywell                    Partnerships in EPC: In May 2017, Honeywell
(Engineering, procurement,    signed a partnership agreement with
 and construction)            China's Wison Engineering Ltd. to jointly
                              provide methanol-to-olefin technologies
                              and EPC services to customers outside of
                              China, particularly in countries included
                              in BRI.
----------------------------
General Electric (GE)        Supplying power equipment: In 2016, GE
(Engineering, procurement,    received $2.3 billion in orders for
 and construction)            natural gas turbines and other power
                              equipment from Chinese EPC firms to
                              install overseas, including in Pakistan,
                              Bangladesh, Kenya, and Laos. In 2014, GE
                              received $400 million in orders from
                              Chinese firms for equipment to install
                              overseas. According to GE China CEO Rachel
                              Duan, ``Africa is the market offering the
                              greatest market potential for GE and
                              Chinese EPC firms, followed by the Middle
                              East, South Asia, Southeast Asia, and
                              Latin America.''
 
----------------------------
Citigroup                    Financial services: Citigroup provides a
(Financial services)          range of financial services (i.e., mergers
                              and acquisitions, cash management, trade
                              finance, and hedging) to Chinese firms and
                              multinational corporations operating in 58
                              BRI countries.
 
----------------------------
Goldman Sachs                Financing: In September 2016, Goldman
(Financial services)          Sachs--along with Bank of China, DBS Bank,
                              and Standard Chartered--formed a working
                              group to support the development of a
                              standardized ``Silk Road bond'' that can
                              be traded internationally to help BRI
                              countries tap a wider source of funds.
------------------------------------------------------------------------
Source: Various;\29\ compiled by Commission staff.


---------------------------------------------------------------------------
    \29\ Citigroup, ``Citigroup Continues Momentum for Supporting 
Clients on Belt and Road Initiative,'' April 20, 2018; William 
Hennelly, ``Caterpillar's Tractors Helping Power Belt and Road,'' China 
Daily, March 10, 2018; Rajesh Kumar Singh and Brenda Goh, ``Caterpillar 
Drives Sales on China's New Silk Road,'' Reuters, March 4, 2018; AECOM, 
``AECOM to Provide Site Supervision Services for Malaysia's East Coast 
Rail Link Project,'' January 8, 2018; Reuters, ``General Electric, 
China's Silk Road Fund to Launch Energy Investment Platform,'' November 
9, 2017; Caterpillar, ``Caterpillar Set to Fly With its Chinese 
Partners,'' China Daily, April 25, 2017; Yang Ziman, ``Caterpillar 
Seeks to Deepen Ties With Chinese Companies,'' China Daily Asia, 
December 9, 2016; Cai Xiao, ``GE Reaps Belt and Road Dividend,'' China 
Daily, October 25, 2016; Brian Spegele, ``GE Rides the Coattails of 
China's Global Dream,'' Wall Street Journal, October 16, 2016; Liz Mak, 
``Global Bankers Pledge Expertise to Foster Standardized Silk Road 
Bond,'' South China Morning Post, September 9, 2016; Caterpillar, ``The 
Belt and Road Ahead: Caterpillar's Vision and Commitment for Shared 
Success,'' 2016; Frances Yoon, ``Update 1-Bank of China Raises USD 3.55 
Bn for Silk Road Push,'' Reuters, June 25, 2015; Jennifer Hughes, 
``Bank of China Set for Four-Currency Bond Sale,'' Financial Times, 
June 23, 2015.

                                 ______
                                 
       Questions Submitted for the Record to Carolyn Bartholomew
                Questions Submitted by Hon. John Cornyn
    Question. The administration is currently making WTO reform a 
priority, and China's practices are major reason that change is needed. 
What specific actions should the U.S. Government take through the WTO, 
other multilateral regimes, bilaterally or on our own to help elevate 
the market access conversation and drive change?

    Answer. The administration's approach to WTO reform has been driven 
by broad concerns, including its ineffectiveness in meeting the 
challenges posed by China. Ambassador Lighthizer has been working to 
address the concern, shared by many members of Congress, that the WTO's 
Appellate Body has overreached in terms of its decision making, often 
deciding cases not simply on the facts presented, but by imposing 
obligations on the parties that were never agreed to as part of the WTO 
negotiations. The U.S. Ambassador to the WTO, Dennis Shea, served on 
the China Commission for a number of years and is well-versed on the 
China challenges.

    There is clearly a need for the WTO's approach to non-market 
economies like China to be revised and reformed. The stated goal of 
allowing China to accede to the WTO was that it would accelerate the 
reform of the Chinese economy and advance its adherence to market-based 
principles. That simply has not happened.

    China's state-capitalist model is antithetical to many of the rules 
and strictures of the WTO. The consensus-based approach for reform at 
the WTO limits any opportunity to have a negotiated approach to 
addressing China's subsidies, state-owned enterprise-led and industrial 
policy-based competitive challenges. China's predatory and 
protectionist policies, to date, have only been addressed in limited 
``surgical'' case-based challenges.

    Last year, in the USCC's annual report, the Commission recommended 
that:

        Congress examine whether the Office of the U.S. Trade 
        Representative should bring, in coordination with U.S. allies 
        and partners, a ``non-violation nullification or impairment'' 
        case--along-side violations of specific commitments--against 
        China at the World Trade Organization under Article 23(b) of 
        the General Agreement on Tariffs and Trade.

    Such an effort would allow for a broader examination of whether the 
Chinese model is compatible with the underlying tenets of the WTO and, 
if the case were to be successful, what the remedy would be.

    In addition, accelerated efforts on cases such as the joint effort 
between the U.S., EU, and Japan to address Chinese subsidies via action 
at the WTO should be a high priority. Eighteen years have passed since 
China's accession to the WTO and the Chinese government has still 
failed to abide by its original WTO protocol of accession on subsidies.

    In terms of other institutions and venues, there are a variety of 
initiatives that should be advanced. Most important would be to expand 
and enhance multilateral efforts via the OECD Steel Committee and the 
G20's Global Steel Forum to address global overcapacity in steel, 
largely fueled by Chinese industrial policies. Despite repeated 
commitments by China that it would reduce productive capacity in this 
sector, production and exports continue to rise. The effort to reduce 
global overcapacity in steel should be coupled with efforts to impose 
disciplines on other critical sectors that are also in overcapacity 
including aluminum, solar, glass, rubber, shipbuilding, cement and a 
variety of other sectors. Overcapacity, again largely fueled by China's 
industrial policies, has undermined the operation of global markets.

    Question. Do you believe that the WTO has been an effective 
multilateral forum to combat China's anti-competitive behavior?

    Answer. After 18 years of membership in the WTO, it is clear that 
the Chinese government has failed to faithfully live up to its 
commitments. The original terms of its protocol of accession and the 
rules of the WTO itself are insufficient to meet the challenge of 
China's predatory and protectionist policies.

    The recent decision by China to withdraw its non-market economy 
dispute with the EU at the WTO has, unfortunately, eliminated the 
opportunity to review the decision by that body and means that the 
decision will be kept secret. China has sought to impose market-economy 
methodologies in the context of other country's laws against unfair 
trade (primarily antidumping and countervailing duty laws) despite the 
fact that it continues to engage in non-market economic activities and 
policies. The ability to block the broader debate about this threat to 
world trade rules highlights a WTO deficiency.

    The WTO must find ways to address the China challenge through 
multilateral efforts or we will continue to see unilateral efforts, 
such as those utilized by our own country, to ensure that domestic 
producers and workers have a fair chance to compete. To date, the WTO 
has had limited impact in this arena.

                                 ______
                                 
              Questions Submitted by Hon. Robert Menendez
    Question. Which BRI projects, or types of projects, pose the 
biggest threat to U.S. interests? Which are the ones that we can 
leverage for the common good?

    Answer. Generally, BRI projects that are not financially viable 
(e.g., the Kunming-Vientiane Railway connecting Laos to China's 
southern Yunnan province), facilitate corruption (e.g., Malaysia's East 
Coast Rail Link), or have strategic, rather than economic goals (e.g., 
Sri Lanka's Hambantota Port and Myanmar's Kyaukpyu Port) pose the 
greatest threats to U.S. interests. Projects under China's Digital Silk 
Road (e.g., telecommunications, smart city, and e-commerce projects) 
can also threaten U.S. interests by expanding China's influence over 
the global digital economy and exporting China's digital 
authoritarianism. The United States can leverage BRI projects that 
address real infrastructure needs and are subject to fair and open 
competition.

    Question. What do you assess the real infrastructure financing 
needs are in countries where BRI is active?

    Answer. China is developing BRI in regions with enormous 
infrastructure needs. The Asian Development Bank estimates developing 
countries in Asia collectively will need $26 trillion in infrastructure 
investment from 2016 through 2030. The African Development Bank 
estimates Africa faces an infrastructure funding gap of $87 billion to 
$112 billion a year.\1\ The Inter-American Development Bank estimates 
Latin America and the Caribbean have an infrastructure financing gap of 
$150 billion per year.\2\
---------------------------------------------------------------------------
    \1\ Rene Vollgraaff and Ntando Thukwana, ``AfDB Seeks to Plug 
Africa $170 Billion Infrastructure Needs,'' Bloomberg, May 8, 2018.
    \2\ Inter-American Development Bank, ``IDB Study Estimates Big GDP 
Impacts From Low Infrastructure Investments in Latin America,'' April 
15, 2019. https://www.iadb.org/en/news/idb-study-estimates-big-gdp-
impacts-low-infrastructure-investments-latin-america.

    Question. What is the level of economic statecraft and economic 
engagement that the U.S. and our allies and partners are bringing to 
---------------------------------------------------------------------------
bear to address these needs?

    Answer. The BUILD Act is an important step toward strengthening and 
modernizing U.S. international development finance, notably more than 
doubling our development finance lending capacity Technical assistance 
is another important element of the U.S. economic toolkit.

    As noted in testimony, U.S. allies and partners--including Japan, 
India, and European countries--have increased their economic engagement 
to provide countries in need of infrastructure assistance with 
alternatives to BRI. For example, Japan--a longtime infrastructure 
player in Asia with decades of experience investing in Southeast and 
Central Asia--has increased funding to expand ``high-quality and 
sustainable infrastructure'' in the region through its Partnership for 
Quality Infrastructure.

    The United States is working with our allies and partners to offer 
high-quality development financing to developing countries. Following 
the passage of the BUILD Act, the U.S. Overseas Private Investment 
Corporation signed multilateral cooperation agreements with the 
development finance agencies of Australia, Canada, the European Union, 
and Japan to support high standard projects that drive growth in 
emerging markets and provide alternatives to ``unsustainable state-led 
models.''\3\
---------------------------------------------------------------------------
    \3\ Overseas Private Investment Corporation, ``OPIC Signs MOU 
Establishing DFI Alliance With Key Allies,'' April 11, 2019; Overseas 
Private Investment Corporation, ``U.S., Japan, Australia Sign First 
Trilateral Agreement on Development Finance Collaboration,'' November 
12, 2018.

    Question. If the U.S. is not providing an alternative, is it 
---------------------------------------------------------------------------
sufficient to merely tell others not to accept BRI?

    Answer. It is not sufficient to tell others not to accept BRI 
funding. Many of the countries targeted by BRI have significant 
infrastructure needs. Projects that are sustainable and transparent can 
provide important benefits to the citizens of those countries. Instead 
of saying ``no'' to involvement and development assistance, the United 
States must take important steps such as fully funding the BUILD Act, 
providing technical support, and aid where it can provide the most 
good. We cannot outspend the Chinese government. We must target our 
efforts and work with our allies and friendly countries to maximize our 
success and increase the value of our assistance.

    Question. BRI has gotten lots of blowback for inflating debt, 
damaging the environment, not creating local jobs, and the like. Should 
we assume its going to fail? What if the Chinese clean up their act--
can we relax?

    Answer. In response to growing pushback to BRI, Beijing says that 
it has been rethinking how it selects and implements projects and 
presents BRI to overseas audiences. For example, there has been a 
recent announcement by Beijing that it will place anti-corruption 
officers in BRI projects. Such a step could be effective, but must be 
monitored to ensure these officers are targeting all possible 
corruption, not just corruption by Chinese officials involved in the 
projects. Moreover, controls must be in place to ensure the anti-graft 
officials will not be tempted to enrich themselves.

    At a world summit for BRI participants in April 2019, President Xi 
sought to assuage countries' concerns over BRI, announcing the creation 
of a debt sustainability assessment framework, multiple initiatives to 
improve the environmental sustainability of BRI projects, and seminars 
on anticorruption and business integrity. However, he also restated 
China's view of the project's significance as a new model for global 
economic governance. With the continued addition of new signatories to 
the BRI, Beijing may have grounds to remain confident in the prospects 
for the project's viability. Despite protests over their BRI debts, 
countries have refrained from canceling projects outright and opted 
instead to renegotiate better terms. This suggests the ultimate fate of 
China's model may hinge on the ability of the United States and its 
allies and partners to reinvigorate alternative programs to address the 
vast global development needs, as well as to provide technical 
assistance to help recipient countries evaluate and implement 
infrastructure projects that uphold sound fiscal, economic, and 
environmental standards.

    We cannot afford to relax no matter the success level of BRI. As I 
noted in my testimony, Beijing does not appear to have fundamentally 
altered BRI's most problematic components nor has it diminished its 
efforts to gain acceptance of BRI as a legitimate model for extending 
China's political, economic, and military influence abroad.

    Question. What sort of risk does a ``clean'' BRI pose to U.S. 
interests? If our strategy is for a ``free and open indo-Pacific,'' 
what is the response to a ``free and open BRI''?

    Answer. Greater transparency and fair competition would certainly 
be welcome, but BRI demonstrably has not been ``free and open.'' 
Chinese state-owned enterprises are winning the lion's share of 
contracts, despite Beijing's rhetoric about BRI being open and 
inclusive. CSIS's Reconnecting Asia Project examined the degree to 
which BRI projects are subject to fair competition and found that 89 
percent of Chinese-funded transportation infrastructure projects are 
awarded to Chinese contractors, compared to 29 percent in multilateral 
development bank-funded projects.\4\
---------------------------------------------------------------------------
    \4\ U.S.-China Economic and Security Review Commission, Hearing on 
China's Belt and Road Initiative: Five Years Later, written testimony 
of Jonathan Hillman, January 25, 2018, 3.

    A ``clean'' BRI would allow Beijing to more effectively promote 
Chinese standards and norms while increasing Beijing's political 
influence in regions that are strategically important to the United 
States. It remains a platform for the export of the surveillance state 
and for a Chinese model of economic growth with authoritarian 
---------------------------------------------------------------------------
government.

    The response to a ``free and open BRI'' remains a ``free and open 
Indo-Pacific'' featuring ``connectivity that advances national 
sovereignty, regional integration, and trust.''\5\
---------------------------------------------------------------------------
    \5\ Michael R. Pompeo, ``Remarks on `America's Indo-Pacific 
Economic Vision,' '' Indo-Pacific Business Forum, U.S. Chamber of 
Commerce, Washington, DC, July 30, 2018.

    Question. Just recently, we saw the failure of the Baoshang Bank 
and its subsequent takeover by the government. For years, the 
commercial banking industry in China has been fueled by an implicit 
guarantee of repayment in the event of failure, allowing banks to 
finance large scale, high risk investment projects. What does the 
failure of the Baoshang Bank signal about the state of China's banking 
sector? What is the commercial banking system's exposure to the BRI? 
What is the possibility that other banks may wake up to the risks 
associated with the Belt and Road, and do they believe that the failure 
---------------------------------------------------------------------------
of Baoshang Bank is a warning?

    Answer. The takeover of Baoshang Bank (``Baoshang'') signals the 
high degree of complexity that now characterizes China's banking and 
financial system, which will challenge Chinese policymakers' ability to 
identify and control systemic risk. Small and mid-sized banks are 
playing a growing role in China's financial system, comprising 43 
percent of total banking system assets in 2018.\6\ Regional banks have 
less access to deposit funding since they are not allowed to operate 
outside of their local area, so they often act as intermediary lenders, 
borrowing from larger banks to lend to local governments, property 
developers, and other nonbank financial actors. Larger banks have been 
willing to lend to smaller banks because of implicit government 
guarantees on the liabilities of small banks. While Beijing says it 
wants to see a reduction in debt, it also compels local banks to lend 
to local governments and other entities--often without regard to their 
creditworthiness--to keep the economy afloat.
---------------------------------------------------------------------------
    \6\ Gabriel Wildau and Yizhen Jia, ``Regional Lenders: China's Most 
Dangerous Banks,'' Financial Times, July 30, 2018.

    As a private city commercial bank, Baoshang was a central-to-local 
intermediary: it borrowed from larger banks to lend to local non-bank 
financial institutions, funding property developers and local 
government projects. As such, it does not appear to have played a 
significant role in BRI projects or financing. As the Commission noted 
in its 2018 Annual Report, China's policy banks and major state-owned 
commercial banks have ``shouldered the brunt of financing for BRI.''\7\ 
Though it is challenging to know with certainty as Baoshang has not 
released financial statements since late 2016, the takeover of Baoshang 
is unlikely to indicate any warning about BRI to other financial 
actors.
---------------------------------------------------------------------------
    \7\ U.S.-China Economic and Security Review Commission, Chapter 3, 
Section 1, ``Belt and Road Initiative,'' in 2018 Annual Report to 
Congress, November 2018, 276.

    Chinese economic policymakers' response to Baoshang's weakness 
highlights the contradictory nature of China's current deleveraging 
efforts. On the one hand, they have sought to mitigate systemic risk in 
interbank lending by stepping in to support Baoshang and another 
regional actor, Jinzhou Bank. On the other hand, economic policymakers 
seek control over credit growth, which means by necessity reducing the 
size of the ``shadow banking'' activities Baoshang and other local 
banks engage in (i.e., financial activities that do not appear on bank 
balance sheets and so are challenging to identify and monitor). 
Policymakers also see this circumstance as a way to force financial 
actors to accept losses on risky investments. Baoshang creditors had to 
accept ``haircuts,'' or markdowns in asset value such that creditors 
will not recoup their expected returns. In other words, the PBOC would 
like to allow enough risk to dent financial actors' expectation of an 
``implicit guarantee'' that all credit is backstopped by the 
government, forcing market actors to better evaluate and price risk, 
while also mitigating risks with the potential to cause systemic 
problems. The question for international observers remains whether the 
---------------------------------------------------------------------------
PBOC can successfully manage this balance.

    Question. How can the U.S. work to counter the impact of BRI on 
medium-sized countries like Greece, where the China Ocean Shipping 
Company has a majority ownership stake in the Port of Piraeus and the 
Chinese government has expressed interest in other projects across the 
country?

    Answer. The United States can pursue several strategies to counter 
BRI's impact on medium-sized countries.\8\ As I noted in my testimony, 
Beijing has sometimes used debts, including those incurred by BRI 
projects, to pressure host countries into ceding sovereign control over 
territory or even hosting a Chinese military presence. The United 
States can mitigate this pressure by offering medium-sized countries 
alternatives to BRI, particularly through private sector-led 
development projects backed by the U.S. International Development 
Finance Corporation,\9\ technical assistance \10\ and multilateral 
agreements with the development finance agencies of our allies and 
partners.\11\ Congress can also create a fund to provide bilateral 
economic assistance for countries vulnerable to Chinese economic or 
diplomatic pressure, as recommended in the Commission's 2018 Annual 
Report.\12\ Steps to reduce BRI's economic and military impact on 
medium-sized countries must be accompanied by measures to mitigate its 
political effect. For example, Beijing has sought to stifle 
international criticism and ``tell China's story'' by using BRI 
projects to expand its involvement in local media markets, according to 
a 2019 Reporters Without Borders report.\13\ The United States can 
oppose such efforts to export Chinese censorship and propaganda 
practices to medium-sized countries by countering Chinese messaging 
about BRI with its own alternative, fact-based narrative.\14\
---------------------------------------------------------------------------
    \8\ ``Medium''-sized countries can be defined either with reference 
to their population and landmass, or to their classification as a 
lower-middle-income (GNI per capita of $1,026 to $3,995) or upper-
middle-income (GNI per capita of $3,996 to $12,375) economy. For the 
first approach see as Joao Antonio Brito, Defining Country Size: A 
Descriptive Analysis of Small and Large States, February 2015, p. 6-10. 
For the second, see the World Bank's classification of economies by 
size: ``World Bank Country and Lending Groups,'' World Bank. https://
datahelpdesk.worldbank.org/knowledgebase/articles/906519-world-bank-
country-and-lending-groups.
    \9\ ``USIDFC Plan,'' Overseas Private Investment Corporation, March 
8, 2019. https://www.opic.gov/sites/default/files/files/
Shelby_Letter_USIDFC_Reorg_Plan_08032019.pdf.
    \10\ Ben Kesling and Jon Emont, ``U.S. Goes on the Offensive 
Against China's Empire-Building Funding Plan,'' Wall Street Journal, 
April 9, 2019. https://www.wsj.com/articles/u-s-goes-on-the-offensive-
against-chinas-empire-building-megaplan-11554809402.
    \11\ ``U.S., Japan, Australia Sign First Trilateral Agreement on 
Development Finance Collaboration,'' Overseas Private Investment 
Corporation, November 12, 2018.
    \12\ U.S.-China Economic and Security Review Commission, Chapter 3, 
Section 1, ``Belt and Road Initiative,'' in 2018 Annual Report to 
Congress, November 2018, 260.
    \13\ Reporters Without Borders, ``China's Pursuit of a New World 
Media Order,'' March 22, 2019.
    \14\ U.S.-China Economic and Security Review Commission, Chapter 3, 
Section 1, ``Belt and Road Initiative,'' in 2018 Annual Report to 
Congress, November 2018, 260.

    Question. As many of you pointed out in your testimonies, many 
recipient countries may struggle to service their BRI debt. When that 
happens, international financial institutions like the IMF or World 
Bank may be called upon to rescue countries from a payments crisis. How 
should we encourage recipient countries to disclose the terms of 
China's BRI financing to make sure that U.S. taxpayers aren't one day 
---------------------------------------------------------------------------
called upon to bail out a country who can't repay a Chinese loan?

    Answer. The United States can leverage its influence in the IMF and 
World Bank to ensure that IMF and World Bank loans are not used to 
repay Chinese loans.\15\ For example, in the case of Pakistan, which is 
facing a balance of payments crisis, U.S. Secretary of State Mike 
Pompeo has warned that any potential IMF bailout should not be used to 
repay Chinese loans.\16\ Pakistan has borrowed heavily from China to 
fund the China-Pakistan Economic Corridor, a flagship BRI project. In 
May 2019, Pakistan reached a deal with the International Monetary Fund 
to borrow $6 billion over 3 years, pending formal approval from the 
IMF's management and executive board.\17\ A condition of IMF lending is 
that recipient countries have to fully disclose all borrowing; 
accordingly, Pakistan has disclosed the financing terms of existing 
foreign loans, including Chinese loans.\18\
---------------------------------------------------------------------------
    \15\ International Monetary Fund, ``IMF Executive Directors and 
Voting Power,'' June 27, 2019. https://www.imf.org/external/np/sec/
memdir/eds.aspx.
    \16\ Reuters, ``U.S.' Pompeo Warns Against IMF Bailout for Pakistan 
That Aids China,'' July 30, 2018. https://www.reuters.com/article/us-
imf-pakistan/us-pompeo-warns-against-imf-bailout-for-pakistan-that-
aids-china-idUSKBN1KK2G5.
    \17\ Farhan Bokhari, ``Pakistan and IMF Negotiators Reach $6 
Billion Loan Deal,'' Financial Times, May 12, 2019. https://www.ft.com/
content/8b666bcc-74d5-11e9-bbad-7c18c0ea0201.
    \18\ Shahbaz Rana, ``China Leads With 75 Percent of Share in Total 
Foreign Loans,'' Express Tribune, May 23, 2019. https://tribune.com.pk/
story/1978533/2-pakistan-discloses-borrowing-china/#.

    In addition to working through international financial 
institutions, the United States can provide technical assistance to 
---------------------------------------------------------------------------
help countries negotiating with China over BRI projects and funding.

                                 ______
                                 
               Questions Submitted by Hon. Johnny Isakson
    Question. I'm concerned with China's continued use of ``debt 
diplomacy,'' or the practice of coercing developing countries into 
increased dependence on China through large loans and unsustainable 
debt. Through debt diplomacy, China is able to obtain strategic assets 
and resources, such as access to mineral deposits, ports, and land 
rights for military installations. Though these practices are certainly 
nefarious, they aren't necessary illegal. What can the United States do 
in response to these actions?

    Answer. The United States can best respond by reinvigorating 
efforts--in collaboration with our allies and partners--to offer 
developing countries high quality development financing. The BUILD Act 
has been a hugely positive step in that direction. In addition, the 
United States can provide technical assistance to countries 
participating in BRI to help them vet, negotiate, and implement 
infrastructure projects through programs like the Infrastructure 
Transaction Assistance Network and Indo-Pacific Transaction Advisory 
Fund launched in July 2018. One recent example of U.S. technical 
assistance's positive impact can be found in Myanmar. As I noted in my 
testimony to the committee, in 2018 USAID provided a team of technical 
experts to assist Myanmar in renegotiating the cost and scope of a 
major BRI port deal from $7.3 billion to $1.3 billion, helping the 
country avoid falling into a debt trap.\19\
---------------------------------------------------------------------------
    \19\ Ben Kesling and Jon Emont, ``U.S. Goes on the Offensive 
Against China's Empire-Building Funding Plan,'' Wall Street Journal, 
April 9, 2019. https://www.wsj.com/articles/u-s-goes-on-the-offensive-
against-chinas-empire-building-megaplan-11554809402.

    Question. One area in which China has had a surprising level of 
success with BRI is the European Union. Do China's efforts in the EU 
threaten the United States' hopes of negotiating new trade deals with 
---------------------------------------------------------------------------
the EU?

    Answer. While many European countries welcome BRI in principle, 
some major European states and the EU as a supranational entity remain 
concerned about BRI's commercial feasibility, transparency, and 
environmental impact, as well as its strategic implications for the 
EU's economic, political, and security interests abroad. Notably, in 
April 2018, 27 of 28 EU ambassadors to Beijing signed an internal EU 
report saying BRI ``runs counter to the EU agenda for liberalizing 
trade and pushes the balance of power in favor of subsidized Chinese 
companies.''\20\ In March 2019, the European Commission released a 
landmark paper on EU-China relations that labeled China an ``economic 
competitor'' and a ``systemic rival promoting alternative models of 
governance.''\21\
---------------------------------------------------------------------------
    \20\ Dana Heide et al., ``EU Ambassadors Band Together Against Silk 
Road,'' Handelsblatt Global, April 17, 2018. https://
www.handelsblatt.com/today/politics/china-first-eu-ambassadors-band-
together-against-silk-road/23581860.html.
    \21\ Joint Communication to the European Parliament, the European 
Council, and the Council, ``EU-China--A Strategic Outlook,'' 
JOIN(2019), 1. https://ec.europa.eu/commission/sites/beta-political/
files/communication-eu-china-a-strategic-outlook.pdf.

    China's efforts in the EU do raise some concern that certain EU 
member states could be more supportive of Chinese policies abroad. 
However, U.S.-EU trade talks remain in the early stages and Chinese 
---------------------------------------------------------------------------
efforts in the EU do not yet appear likely to sway the negotiations.

                                 ______
                                 
            Questions Submitted by Hon. Robert P. Casey, Jr.
    Question. If you could provide Congress and the administration one 
or two top-line recommendations on appropriately addressing the 
challenges outlined in this hearing, what would those be?

    Answer. In the Commission's 2018 Annual Report to Congress, the 
Commission recommended:

          Congress create a fund to provide bilateral economic 
        assistance for countries that are a target of or vulnerable to 
        Chinese economic or diplomatic pressure, especially in the 
        Indo-Pacific region. The fund should be used to promote digital 
        connectivity, infrastructure, and energy access. The fund could 
        also be used to promote sustainable development, combat 
        corruption, promote transparency, improve rule of law, respond 
        to humanitarian crises, and build the capacity of civil society 
        and the media.

          Congress require the U.S. Department of State to prepare a 
        report to Congress on the actions it is taking to provide an 
        alternative, fact-based narrative to counter Chinese messaging 
        on BRI. Such a report should also examine where BRI projects 
        fail to meet international standards and highlight the links 
        between BRI and China's attempts to suppress information about 
        and misrepresent reporting of its human rights abuses of 
        Uyghurs in Xinjiang.

          Congress require the Director of National Intelligence to 
        produce a National Intelligence Estimate (NIE), with a 
        classified annex, that details the impact of existing and 
        potential Chinese access and basing facilities along the Belt 
        and Road on freedom of navigation and sea control, both in 
        peacetime and during a conflict. The NIE should cover the 
        impact on U.S., allied, and regional political and security 
        interests.

    Question. The State Department 2018 Human Rights Report documents 
continuing abuses against China's ethnic and religious minorities, 
highlighting internment of Uyghurs, often subject to forced labor and 
other abuses. Congress is speaking out--I am a proud co-sponsor of 
Senator Rubio's Uyghur Human Rights Policy Act, which promotes high-
level U.S. engagement on the continuing mass internment of Uyghurs in 
Xinjiang province in China. How does China's treatment of ethnic and 
religious minorities fit into its broader doctrine underlying BRI?

    Answer. Beijing is particularly interested in reinforcing its 
control over its western Xinjiang region due in large part to its 
important location as the hub of the BRI's land-based ``belt'' economic 
corridors. The wholesale imprisonment of Uyghurs and other ethnic 
minorities in the region has been documented. China has had significant 
success in persuading other countries to at minimum not oppose--and in 
many cases, openly support--its Xinjiang policy. In July, responding to 
a letter from mostly Western countries criticizing the CCP's treatment 
of Muslims, 37 African, Eurasian, and Middle Eastern countries--
including several Muslim-majority countries--sent a letter to the UN 
parroting Beijing's justification of its policies, vividly 
demonstrating China's ability to leverage economic ties to achieve its 
preferred geopolitical outcomes.\22\, \23\ For example, 
Pakistan, which signed the letter defending Beijing, has never been 
more dependent on continued good relations with China, since the China-
Pakistan Economic Corridor component of the BRI remains central to 
Pakistan's economic growth and infrastructure plans.\24\ China has also 
invested significantly in Saudi Arabia, another Muslim-majority country 
that signed the letter defending Beijing; Beijing and Riyadh agreed in 
2017 to establish a $20 billion joint investment fund, and Saudi 
Arabia's $300 billion Public Investment fund plans to open a new office 
in Asia specifically to focus on courting funds from China.\25\ General 
Secretary Xi Jinping originally announced the BRI during a speech in 
Kazakhstan in 2013, and Kazakhstan has continued to participate in it 
since then, despite the fact that Chinese authorities have detained 
Kazakh citizens in the Xinjiang camps.\26\ In March 2019, based on 
questionable charges, Kazakhstan placed under house arrest Serikzhan 
Bilash, a prominent Kazakh human rights activist, silencing a major 
source of information on the conditions in the camps.\27\
---------------------------------------------------------------------------
    \22\ Signatories of the letter defending Beijing's policies 
included: Algeria, Angola, Bahrain, Belarus, Bolivia, Burkina Faso, 
Burundi, Cambodia, Cameroon, Comoros, Congo, Cuba, Democratic Republic 
of the Congo, Egypt, Eritrea, Gabon, Kuwait, Laos, Myanmar, Nigeria, 
North Korea, Oman, Pakistan, Philippines, Qatar, Russia, Saudi Arabia, 
Somalia, South Sudan, Sudan, Syria, Tajikistan, Togo, Turkmenistan, 
United Arab Emirates, Venezuela, and Zimbabwe. Signing the original 
letter criticizing China's policy in Xinjiang were: Australia, Austria, 
Belgium, Canada, Denmark, Estonia, Finland, France, Germany, Iceland, 
Ireland, Japan, Latvia, Lithuania, Luxembourg, the Netherlands, New 
Zealand, Norway, Spain, Sweden, Switzerland, and the UK.
    \23\ Catherine Putz, ``Which Countries Are For or Against China's 
Xinjiang Policies?'', Diplomat, July 15, 2019. https://thediplomat.com/
2019/07/which-countries-are-for-or-against-chinas-xinjiang-policies/; 
Tom Miles, ``Saudi Arabia and Russia Among 37 States Backing China's 
Xinjiang Policy,'' Reuters, July 12, 2019. https://www.reuters.com/
article/us-china-xinjiang-rights/china-says-almost-40-states-openly-
back-its-xinjiang-policy-idUSKCN1U721X.
    \24\ U.S.-China Economic and Security Review Commission, 2018 
Annual Report to Congress, November 2018, 167.
    \25\ Natasha Turak, ``Massive Saudi Wealth Fund Zeros in on China, 
Plans to Open New Asia Office,'' CNBC, May 1, 2019. https://
www.cnbc.com/2019/05/01/saudi-public-investment-fund-zeros-in-on-china-
despite-us-investments.html; Sarah Zheng, ``China and Saudi Arabia to 
Team up on US$20 Billion Investment Fund,'' South China Morning Post, 
August 24, 2017. https://www.scmp.com/news/china/diplomacy-defence/
article/2108175/china-and-saudi-arabia-team-us20-billion-investment.
    \26\ Reid Standish and Aigerim Toleukhanova, ``Kazakhs Won't Be 
Silenced on China's Internment Camps,'' Foreign Policy, March 4, 2019. 
https://foreignpolicy.com/2019/03/04/961387-concentrationcamps-china-
xinjiang-internment-kazakh-muslim/; Xinhua, ``China, Kazakhstan Agree 
to Work Together for Respective National Rejuvenation,'' June 8, 2018. 
https://eng.yidaiyilu.gov.cn/qwyw/rdxw/57403.htm.
    \27\ Massimo Introvigne, ``Kazakhstan: Serikzhan Bilash Remains 
Under House Arrest,'' Bitter Winter, June 8, 2019. https://
bitterwinter.org/kazakhstan-serikzhan-bilash-remains-under-house-
arrest/; Daniel Balson, ``Who Will Speak for Serikzhan Bilash? Not 
Washington,'' Diplomat, May 20, 2019. https://thediplomat.com/2019/05/
who-will-speak-for-serikzhan-bilash-not-washington/.

    BRI projects are intended to promote stability and help combat what 
Beijing calls extremism that the Chinese government fears could spill 
over its own borders or influence its domestic population.\28\ As a 
component of these partnerships, and especially through its Digital 
Silk Road initiatives, Beijing is exporting the systematic, technology-
enabled repression it has used in Xinjiang--to include surveillance 
cameras, artificial intelligence, biometrics, and facial recognition 
profiling--to other countries around the world such as Kazakhstan, 
Pakistan, Venezuela, and Zimbabwe.\29\
---------------------------------------------------------------------------
    \28\ See U.S.-China Economic and Security Review Commission, 
Chapter 3, Section 1, ``Belt and Road Initiative,'' in 2018 Annual 
Report to Congress, November 2018, 271.
    \29\ Freedom House, Freedom on the Net 2018, October 2018, 8-10. 
https://freedomhouse.org/sites/default/files/
FOTN_2018_Final%20Booklet_11_1_2018.pdf.

    These developments led the Commission to recommend in its 2018 
Annual Report to Congress that Congress require the U.S. Department of 
State to prepare a report to Congress on the actions it is taking to 
provide an alternative, fact-based narrative to counter Chinese 
messaging on BRI. Such a report should also examine where BRI projects 
fail to meet international standards and highlight the links between 
BRI and China's attempts to suppress information about and misrepresent 
---------------------------------------------------------------------------
reporting of its human rights abuses of Uyghurs in Xinjiang.

             Questions Submitted by Hon. Benjamin L. Cardin
    Question. Israel has a flourishing start-up business and 
entrepreneurial community. In particular, the country generates 
companies that are innovators in surveillance products and service, 
aircraft parts, electronic components for land, air and sea military 
platforms, electro-mechanical devices, microwave components and 
sensors. Many of these technologies are inherently dual-use. Some 
Israeli officials have suggested that they are open to easing the 
restrictions on dual-use and defense technology exports, while Israel's 
Ministry of Defense have resisted thus far, even though its bilateral 
military ties with China have been increasing. China has taken an 
interest in acquiring Israeli surveillance start-ups. Some estimate 
China has bought into as much as 25 percent of Israel's technology 
sector over the past decade. Investment can help Israel diversify its 
sources of capital, and links with Chinese businesspeople can help 
Israeli companies enter the rapidly growing Chinese market. 
Collaboration on technology and innovation can accelerate discoveries 
and technology improvements. However, Chinese investment and 
construction activity in Israel could lead to transfers of military or 
dual-use technologies to China, threats to Israeli IP and potentially 
to the competitive advantage of Israel's tech companies, and 
surveillance opportunities and threats to consumer data privacy. What 
are the major concerns regarding the potential transfer of key Israeli 
dual-use technologies--such as semiconductors, AI, satellite 
communications, cybersecurity, and robotics--and how can those concerns 
be mitigated?

    Answer. The Commission has not recently looked at Israel-China 
technology cooperation. The views expressed in this answer are 
therefore my own. Two key concerns regarding Chinese investment in the 
Israeli high-tech sector are the ties that certain Chinese firms have 
to the Chinese government and the potential for these firms to transfer 
sensitive, dual-use technologies to the Chinese government or 
adversaries of Israel or the United States, such as Iran. The goal of 
knowledge transfer is openly spoken of by Chinese business leaders; for 
example, Li Kashing, Hong Kong's richest man and the main figure behind 
Horizon Ventures Ltd.--a firm invested heavily in the Israeli tech 
sector--has said that his goal is to ``foster knowledge transfer 
between China and Israel.'' Other companies investing in Israel such as 
China Communications Construction Company (engaged in military 
construction projects in the South China Sea), Tencent (ties to China's 
censorship regime), and Huawei (ties to the Chinese government and 
military and accused of violating sanctions on Iran by selling it 
surveillance and other restricted equipment) all raise particular 
concerns that Israeli technology may ultimately benefit the Chinese 
Communist Party.

    In order to mitigate such concerns, Israel could follow the United 
States' lead and create a mechanism modeled on the Committee on Foreign 
Investment in the United States (CFIUS) designed to screen foreign 
investment in sensitive sectors, something currently under 
consideration by the Israeli government. A panel commissioned by 
Israeli Prime Minister Benjamin Netanyahu has studied the viability and 
value of forming a CFIUS-like organ, and according to reports might 
advise against establishing a formal entity modeled on CFIUS, though 
the government has not yet rendered a final judgment on the issue.\30\
---------------------------------------------------------------------------
    \30\ Efron, Shira, Howard J. Shatz, Arthur Chan, Emily Haskel, Lyle 
J. Morris, and Andrew Scobell. The Evolving Israel-China Relationship. 
Santa Monica, CA: Rand Corporation, 2019. Pages 86-90. Harel, Amos. 
``Israel Is Giving China the Keys to Its Largest Port--and the U.S. 
Navy May Abandon Israel.'' Haaretz. September 17, 2018. https://
www.haaretz.com/us-news/.premium-israel-is-giving-china-the-keys-to-
its-largest-port-and-the-u-s-navy-may-abandon-israel-1.6470527. Peretz, 
Sami. ``Israel Won't Vet Chinese Investment, Risking U.S. Ire.'' 
Haaretz. May 20, 2019. https://www.haaretz.com/israel-news/.premium-
resisting-u-s-israel-won-t-form-body-to-vet-foreign-investment-
1.7269239?=&ts=_1562079891930.

    The Senate version of the National Defense Authorization Act for 
Fiscal Year 2020, passed on June 27th, contains a provision noting 
security concerns about the leasing arrangements at the Port of Haifa, 
without specifically mentioning China. A Chinese state-owned enterprise 
has a long-term contract to operate the port. The provision also states 
``the United States should urge the Government of Israel to consider 
the security implications of foreign investment in Israel.'' Congress 
might want to consider urging the administration to discuss cooperation 
on investment screening and export controls during U.S.-Israel 
---------------------------------------------------------------------------
bilateral exchanges.

                                 ______
                                 
           Prepared Statement of Hon. Robert P. Casey, Jr., 
                    a U.S. Senator From Pennsylvania
    Before we begin today's hearing, I want recognize the current 
unrest in Hong Kong. Tens of thousands of demonstrators are protesting 
an extradition bill under review by Hong Kong's Legislative Council 
which would potentially result in democracy activists and journalists 
being forced to stand trial in China, where due process protections are 
lacking. Violence is escalating, and as of this hearing, over 20 people 
have been injured. I urge all parties to exercise restraint and respect 
the people of Hong Kong's right to peaceful protest.

    The events in Hong Kong are a stark reminder of the reign of fear 
and oppression China has imposed on its own people, and the potential 
it has to export this abroad. Which brings us to today's hearing.

    China's version of chess is a game called ``Go.'' The objective is 
to surround and control the most territory on the game board. Rather 
than being confined to set moves, as they are in chess, pieces can be 
placed anywhere on the board.

    Often the strategy behind a move, or a set of moves, does not come 
to light until late in game play, by which time it's too late to 
respond.

    While a two-person strategy game cannot directly correlate with 
complex global relationships, it is a helpful frame in viewing and 
understanding the objectives behind China's Belt and Road Initiative.

    The strategy China is employing globally is not so much a set of 
linear actions with set positions, rather a multifaceted strategy to 
employ the suite of tools available to influence the economic and 
geopolitical order in a manner that benefits its authoritarian and 
anti-competitive practices.

    China's regional and global objectives are creating both direct and 
indirect economic and security challenges. The United Nations 
Conference on Trade and Development (UNCTAD) estimates that roughly 
one-third of global shipping goes through the South China Sea.\1\
---------------------------------------------------------------------------
    \1\ https://chinapower.csis.org/much-trade-transits-south-china-
sea/#easy-footnote-bottom-1-3073.

    Almost half of global trade ships through Asia.\2\ Their increasing 
control of port infrastructure in the region and globally is cause for 
concern to all of us.
---------------------------------------------------------------------------
    \2\ https://unctad.org/en/PublicationsLibrary/rmt2018_en.pdf.

    But BRI is not simply about ports or railroads, and we risk losing 
---------------------------------------------------------------------------
sight of the broader picture if we constrain our focus.

    Through BRI, China is employing a ``debt-trap'' strategy to ensnare 
developing countries in a cycle of credit and deficit that only 
increases China's economic control over governments and minimizes 
opportunities for development that actually put countries on a path 
toward worker rights, strong labor practices, rising standards of 
living, and participating meaningfully in the global economy and the 
broader, liberal democratic order.

    Debt begets dependency, and the United States and western powers 
are not doing enough to offer an alternative path toward economic 
development to the fast-cash, fast-growth approach China is promoting.

    June 4th marked 30 years since the Tiananmen Square protests, and 
the Chinese government has successfully continued to suppress democracy 
since.

    We have seen firsthand the cost of China's authoritarian practices, 
the cost of its surveillance state, disregard for human rights and 
human dignity, and efforts to undermine democracy and the rules-based 
order.

    The Department of State estimates that China has incarcerated 
somewhere between 800,000 to 2 million Uighurs and other Muslims since 
April 2017.\3\ Eleven million Uighurs living in Xinjiang are residing 
in what is effectively a police state.
---------------------------------------------------------------------------
    \3\ https://www.cfr.org/backgrounder/chinas-crackdown-uighurs-
xinjiang, https://www.foreign
.senate.gov/imo/media/doc/120418_Busby_Testimony.pdf.

    To put that in perspective, the equivalent of almost the population 
of Pennsylvania is either incarcerated with no cause or under constant 
surveillance and repression by China. Through Belt and Road, China is 
exporting techniques for repression, their labor practices, and their 
---------------------------------------------------------------------------
disregard for human rights.

    We have seen the consequences of China's assault on the rules-based 
order in its posture on trade, on IP theft, on forced technology 
transfer, and at the WTO.

    China's theft of intellectual property has impacted numerous 
Pennsylvania firms, including U.S. Steel, Alcoa, Allegheny 
Technologies, and Westinghouse, and their efforts are extending to our 
own academic research institutions--compromising U.S. national 
security.

    The costs of China's economic strategy and globalization have 
fallen heavily on workers.

    Studies by the Economic Policy Institute and MIT economist David 
Autor, and his coauthors David Dorn and Gordon Hanson, lend support to 
the assertion. According to the MIT study, roughly 40 percent \4\ of 
the decline in U.S. manufacturing between 2000 and 2007 was due to a 
surge in imports from China.
---------------------------------------------------------------------------
    \4\ https://www.nytimes.com/2018/03/13/opinion/trump-trade-
china.html.

    China has made no secret about its strategy to push the rules to 
their limit and, when advantageous, break them outright. They know that 
redress to injured parties often doesn't arise until after the damage 
---------------------------------------------------------------------------
is irreparable.

    China understands that the central structures of our multilateral 
organizations are based on the assumption that everyone intends to 
follow the rules, that guardrails are established to settle disputes 
between parties whose objective is to work within a rules-based system.

    The question for all of us today, and going forward, is what do you 
do when a country with one-sixth of the world's population decides it 
doesn't want to play by the rules?

    Inaction is not an option. The economic and human consequences are 
too great.

                                 ______
                                 
                Prepared Statement of Hon. John Cornyn, 
                       a U.S. Senator From Texas
    Since its accession to the World Trade Organization, China has 
consistently engaged in unfair trade practices that bolster its 
domestic industries at the expense of free trade and global stability. 
China has weaponized foreign investment to force the transfer of 
cutting-edge IP, steal trade secrets, erode the technological gap, and 
create Chinese state-controlled competitors for American companies.

    Last Congress, I authored the Foreign Investment Risk Review 
Modernization Act, which gives an interagency body known as the 
Committee on Foreign Investment in the United States additional tools 
to combat these threats. I am proud that President Trump signed this 
important legislation into law last year as part of the National 
Defense Authorization Act.

    While we have taken this important step to defend Americans against 
predatory Chinese investment practices, China's ambition is much more 
broad. In 2013, the Chinese Government announced the ``Belt and Road 
Initiative,'' through which it aims to construct billions of dollars of 
infrastructure projects in countries around the world.

    Since the creation of the Belt and Road, China has strategically 
invested hundreds of billions of dollars in ports, railways, roads, and 
digital infrastructure. To date, China has entered into Belt and Road 
agreements with more than 70 countries, covering nearly two-thirds of 
the world's population.

    Belt and Road is a cornerstone of the Chinese Communist Party's 
aggressive foreign policy goals and expansionist goals. It has been 
billed by their leaders as a way to modernize infrastructure corridors 
and construct a ``community of common destiny.'' Unfortunately, this 
``community of common destiny'' referred to by Chinese Communist Party 
members is one in which China reshapes the global order and imposes its 
authoritarian economic regime and controls on the world.

    China's Belt and Road plan poses three fundamental threats to the 
United States and our allies around the world: trade manipulation, 
economic exploitation, and security erosion. At its core, the Belt and 
Road Initiative is fueled by China's mission to manipulate and 
undermine the global rules-based trading system for its own benefit.

    China's internal structures are predicated on the preferential 
treatment of its domestic industries, often at the expense of free and 
open competition. This is further evidenced by the Made in China 2025 
plan, which strategically complements Belt and Road and seeks to make 
China dominant in a number of high-tech sectors of interest to the 
United States, including rail infrastructure, telecommunications, and 
artificial intelligence.

    Belt and Road has only exacerbated China's unfair trade practices, 
in clear violation of their commitments as a member of the WTO. That's 
because the Belt and Road is rigged to empower and create monopolies 
for Chinese-controlled entities like Huawei, ZTE, and CRRC to carry out 
these projects all over the world.

    But China's strategic vision goes far beyond empowering its state-
controlled companies--it also seeks to bend unwitting countries through 
their economic exploitation and ``debt-trap'' diplomacy. In numerous 
countries, China has financed projects resulting in ``partner'' nations 
accruing crippling foreign debt from which they cannot escape.

    For example, when Sri Lanka was unable to service billions of 
dollars of Chinese-backed loans under Belt and Road, it had little 
choice but to grant China a 99-year lease allowing it to control a Sri 
Lankan port. In Venezuela, China reduced lending as the country's debt 
spiraled out of control. In order to renew China's interest, Venezuela 
agreed to sell a nearly 10-percent additional stake in its state-owned 
oil enterprise.

    But most concerning are the direct national security threats posed 
by the Belt and Road. In 2017, China used construction of a Belt and 
Road seaport in the African nation of Djibouti as a Trojan horse to 
open its first overseas military base in the country. Because of 
Djibouti's strategic location on the Horn of Africa, it serves as a 
gateway to global shipping traffic through the Red Sea and the Middle 
East.

    It is not hard to see why the presence of the Chinese military near 
the Middle East could destabilize the region and threaten our national 
security interests--but that is exactly the objective of the Belt and 
Road Initiative. A 2018 Department of Defense report highlighted the 
long-term implications of China's attempt to manage civilian ports, 
stating that China ``has made requests for military access and basing 
agreements . . . which could allow the [People's Liberation Army] to 
pre-position necessary logistics to protect its interests.''

    Equally as concerning is China's recent shift in focus from port 
and rail infrastructure projects to strategic plays in the world's 
digital infrastructure. In Chile, the Chinese Government is investing 
more than $650 million to build a subsea fiber-optic cable, which will 
become the largest data flow between Asia and Latin America. China has 
even begun providing certain countries, like Zimbabwe, with cutting-
edge facial recognition software, which will give the Chinese control 
over additional troves of data.

    Given the grave threats posed by the Belt and Road Initiative, it 
is not enough for Congress to simply express concern or opposition to 
China's efforts. Congress and the executive branch must develop and 
implement a coordinated long-term strategy to ensure American trade and 
security policy can prevent the Belt and Road Initiative from achieving 
its objectives.

    I look forward to discussing this panel's perspectives on the Belt 
and Road Initiative and hope this hearing can serve as a catalyst for 
the committee's efforts to address this threat.

                                 ______
                                 
        Prepared Statement of Roy D. Kamphausen, Commissioner, 
           U.S.-China Economic and Security Review Commission
    Chairman Cornyn, Ranking Member Casey, distinguished members of the 
committee, thank you for the opportunity to appear before you today to 
share my views on the strategic as well as military and security 
components of China's Belt and Road Initiative (BRI), building on my 
colleague's statement. I want to recognize the committee's vigilance 
for bringing to the public's attention this important issue, which is 
the subject of my testimony today. These views are my own and do not 
necessarily reflect those of the U.S.-China Economic and Security 
Review Commission, where I serve as a Commissioner, although they are 
informed by the Commission's body of past and ongoing work on this 
subject.*
---------------------------------------------------------------------------
    * The U.S.-China Commission published a chapter on the BRI in its 
2018 Annual Report to Congress. The research and findings from that 
chapter are central to arguments made in this testimony, which draws 
heavily on that and other ongoing Commission analysis.

    The perspectives I offer also reflect the studies we have 
undertaken at the National Bureau of Asian Research (NBR), including 
the seminal monograph on the BRI, titled China's Eurasian Century, 
authored by my colleague Nadege Rolland.
                    i. overview of the belt and road
    It is entirely fitting that the Senate Finance Committee 
Subcommittee on Trade, Customs, and Global Competitiveness invite 
testimony on the strategic intentions and implications of the BRI. The 
Chinese response to Trump administration arguments that the U.S. is 
fully engaged in a strategic competition with China decry ``Cold War'' 
thinking on the part of the U.S. but do not deny that a competition is 
underway. Indeed, Beijing seems to have been waiting for the U.S. to 
join this competition well before our own acknowledgment of the process 
already underway. The perspectives held by Chinese leaders on the 
strategic and security dimensions of the BRI, as are readily available 
from their public statements and speeches, are thus as essential as PRC 
perspectives on the economic, trade and development dimensions of the 
BRI to grasping Beijing's overall intent. This understanding then is a 
necessary first step to informing Congress's own policy responses to 
maintaining American competitiveness.

    A year and a half ago, in testimony before the House Committee on 
Foreign Affairs, I argued that the BRI represents a test case for 
China's vision for a new international order throughout Eurasia, and 
possibly even the world. The contours of that desired order are now 
more clear, and Beijing's ambitions even greater, than they were even 
that short time ago.

    Today, China has demonstrated that it intends for the BRI to be not 
merely a regional initiative, but a global one, as the chairman just 
stated. China has extended the BRI into the Western Hemisphere, Europe, 
and the Arctic, and has launched what it calls a ``Digital Silk Road'' 
and a ``Space Silk Road,'' seeking influence not only around the world, 
but also in the key domains of cyberspace and outer space.

    More broadly, China has used the BRI to promote its influence in 
revising the rules of global economic governance and, even more 
fundamentally, the international order itself. In a speech marking the 
fifth anniversary of the BRI in August 2018, Chinese Communist Party 
(CCP) General Secretary Xi Jinping declared that the initiative 
``serves as a solution for China to improve global economic governance 
[. . .] and build a `community of common human destiny' ''--a term used 
by Chinese leaders with increasing frequency to refer to a global order 
aligned to Beijing's liking.\1\ Beijing has also used the BRI to 
support its ambition to construct a ``new world media order'' to stifle 
independent journalism and criticism of China around the world.\2\
---------------------------------------------------------------------------
    \1\ Xinhua, ``Xi Pledges to Bring Benefits to People Through Belt 
and Road Initiative,'' August 27, 2018.
    \2\ Reporters Without Borders, ``China's Pursuit of a New World 
Media Order,'' March 22, 2019.

    From the available evidence, it seems apparent that Beijing is 
trying to restructure the global governance system by realigning global 
supply chains, financial networks, technical standards, and Internet 
---------------------------------------------------------------------------
networks and governance to conform to China's preferences.

    Military implications of the BRI have also begun to emerge. In 
recent years, Beijing has tasked its military to protect China's 
overseas interests and spoken openly about the military utility of BRI 
investments and the need to extend its military reach to protect these 
commitments. Ports and airfields constructed by Chinese state-owned 
enterprises span the globe, which Beijing has used in conjunction with 
other debts, including those incurred from BRI projects, to pressure 
host nations to cede sovereign control over territory or even host a 
Chinese military presence.\3\ For these reasons, it is likely that 
China will continue to increase its global engagement; People's 
Liberation Army (PLA) bases in Djibouti and Argentina are unlikely to 
be their last.
---------------------------------------------------------------------------
    \3\ Maria Abi-Habib, ``How China Got Sri Lanka to Cough Up a 
Port,'' New York Times, June 25, 2018; David Hutt and Shawn W. Crispin, 
``Cambodia at Center of a New Cold War,'' Asia Times, November 14, 
2018; U.S.-China Economic and Security Review Commission, ``China's 
Engagement in the Pacific Islands: Implications for the United 
States,'' June 14, 2018; Elizabeth Economy, ``China's Strategy in 
Djibouti: Mixing Commercial and Military Interests,'' Council on 
Foreign Relations, April 13, 2018.

    While China has signaled it may be willing to make some rhetorical 
or tactical adjustments to the BRI in response to the mounting global 
criticism it has received, there is no indication it will fundamentally 
alter the project's most problematic practices. As China continues to 
add new BRI signatories and reinforces the scheme's centrality to 
Chinese foreign policy, we should expect instead that China will only 
redouble efforts to establish the BRI, along with the political, 
economic, and military implications of the scheme, as enduring and 
---------------------------------------------------------------------------
accepted features of the international order.

    For the purposes of this hearing, I will focus on the strategic 
component of the BRI, especially how Beijing is using the BRI to extend 
its political and military influence around the world.
               ii. bri as an instrument of grand strategy
    While China routinely denies any strategic motivation behind the 
BRI, the project's geopolitical significance is apparent. Chinese 
leaders view the BRI as evidence of Beijing's increasing global 
influence and as an instrument to promote China's political and 
economic development models as worthy of respect and even emulation. As 
such, Beijing uses its promotion of the BRI to raise China's 
international status, enhance the legitimacy of the Chinese Communist 
Party (CCP) both at home and abroad, and position China to lead global 
efforts to revise key features of the international order.

    At its core, the BRI functions as a strategic instrument to shape 
and accelerate changes to the international order and balance of power. 
In Beijing's view, the world is currently experiencing epochal changes 
``not seen in a century,'' and the CCP is presently and must continue 
to play a central role in driving, and even leading, these changes.\4\ 
According to CCP leaders, the BRI is a primary component of the ``great 
struggle'' China must carry out as it assumes a central role in global 
affairs and ``takes the wheel'' and provides a ``Chinese approach'' to 
revising global governance structures and norms.\5\ The BRI is 
therefore both an important vehicle for China to promote these changes 
and a validation itself of China's progress toward achieving its goals.
---------------------------------------------------------------------------
    \4\ Xinhua, ``Xi Jinping: Promote the Successful Implementation of 
One Belt, One Road to Benefit the People,'' August 27, 2018. 
Translation; Xinhua, ``Xi Jinping: Work Hard to Pioneer a New Phase for 
`Major Power Diplomacy with Chinese Characteristics,' '' June 23, 2018. 
Translation.
    \5\ Yang Jiechi, ``Take `Xi Jinping Diplomatic Thought' as the 
Guide, Deepen the Promotion of Foreign Affairs Work for the New Era,'' 
Qiushi, August 1, 2018. Translation; Xinhua, ``Xi Jinping: Promote the 
Successful Implementation of One Belt, One Road to Benefit the 
People,'' August 27, 2018. Translation.

    In moves reflecting the project's strategic importance, the CCP 
enshrined the BRI in its constitution and as an official pillar of 
China's more assertive diplomacy under Xi Jinping.\6\ The CCP traces 
the origins of the BRI to Xi's ``profound reflections on the future of 
human destiny,'' which also produced the other signature component of 
China's foreign policy under Xi Jinping, the aforementioned ``community 
of common human destiny.'' CCP leaders describe the BRI as the key test 
bed for the latter effort, which derives in turn from what the CCP 
identifies as its ``historic mission'' to not only govern China, but to 
profoundly influence global governance as well.\7\ In a speech marking 
the fifth anniversary of the BRI in August 2018, Xi Jinping described 
the BRI both as a platform for economic cooperation and an ``avenue [. 
. .] for perfecting the global development model and global 
governance.''\8\ In a further turn of phrase that could be considered 
absurd had it not come from China's highest leader, Xi went on to claim 
that the BRI ``occupies the commanding height of international morality 
and justice.''\9\ As such, it should be clear that Beijing views the 
BRI not only as providing other countries with an economic and 
political model worth emulating, but as a morally justified endeavor.
---------------------------------------------------------------------------
    \6\ Yang Jiechi, ``Take `Xi Jinping Diplomatic Thought' as the 
Guide, Deepen the Promotion of Foreign Affairs Work for the New Era,'' 
Qiushi, August 1, 2018. Translation.
    \7\ Xinhua, ``Xi Jinping: Promote the Successful Implementation of 
One Belt, One Road to Benefit the People,'' August 27, 2018. 
Translation; Wang Yi, ``Take `Xi Jinping Thought on Socialism With 
Chinese Characteristics for a New Era' to Lead the Opening of New 
Frontiers for Chinese Diplomacy,'' People's Daily, December 19, 2017. 
Translation.
    \8\ Xinhua, ``Xi Jinping: Promote the Successful Implementation of 
One Belt, One Road to Benefit the People,'' August 27, 2018. 
Translation.
    \9\ Xinhua, ``Xi Jinping: Promote the Successful Implementation of 
One Belt, One Road to Benefit the People,'' August 27, 2018. 
Translation.

    In tandem with the BRI's problematic economic components, a number 
of the political and social initiatives China has advanced through the 
BRI offer a troubling preview of what a world reflecting the interests 
of China's political system might resemble. For instance, China has 
used the BRI to advance the CCP's broader and longstanding effort to 
export its state-controlled, authoritarian model for media and 
political discourse. In countries from Africa to Europe and the Western 
Hemisphere, China--ranked 176th out of 180 countries in the 2018 World 
Press Freedom Index compiled by Reporters Without Borders (RSF)--has 
used BRI partnerships to expand its influence into local media markets 
to establish what it has termed a ``new world media order.''\10\ 
According to a landmark 2018 RSF study, this effort represents 
Beijing's determination to stifle independent journalism and 
international criticism of China while legitimizing China's own 
``repressive vision of how media should function.''\11\ In April, China 
hosted the inaugural meeting of the Belt and Road News Network--an 
association consisting of 182 media outlets from South Africa to 
France--where Xi Jinping exhorted countries involved in the BRI to 
produce news stories boosting public support for the project.\12\ The 
establishment of this network builds on the investments described in 
the RSF study that China has made to fund foreign journalists traveling 
to China for training in Chinese state-run media practices, purchase 
controlling stakes in foreign Chinese-language and other media, and 
promote China's concept of cyber sovereignty that would give 
governments the right to control Internet users and content within its 
territory.\13\ The new media order is just part of a broader united 
front strategy--including in foreign academic circles--to shape the 
mindsets and perspectives of elites in the developing world and even in 
developed countries.
---------------------------------------------------------------------------
    \10\ Reporters Without Borders, ``China's Pursuit of a New World 
Media Order,'' March 22, 2019.
    \11\ Reporters Without Borders, ``China's Pursuit of a New World 
Media Order,'' March 22, 2019.
    \12\ Abdi Latif Dahir, ``China Wants to Use the Power of Global 
Media to Dispel Belt and Road Debt Risks,'' Quartz Africa, April 25, 
2019.
    \13\ U.S.-China Economic and Security Review Commission, 2018 
Annual Report to Congress, November 2018, 314-317; U.S.-China Economic 
and Security Review Commission, 2017 Annual Report to Congress, 
November 2017, 482-484.
---------------------------------------------------------------------------
            iii. military and security component of the bri
    On the military and security side, while the BRI was not conceived 
to serve purely military objectives, it does serve strategic ends that 
include military purposes. Beijing has made clear it intends to 
guarantee the security of BRI projects, although the exact methods it 
might employ to do so remain under development. In private discussions, 
PLA officers have told me that the responsibility for security lies 
solely with the state owned enterprises which develop the projects. 
Such an argument rings hollow, however, when contrasted with the 
statements and acts of a PLA that is much more outwardly focused on 
defending Chinese interests and personnel abroad.

    What is not known at present is whether China intends to protect 
the BRI through enhanced security cooperation with partner militaries, 
capacity building of host nation security forces, outsourcing of 
security to private security providers, or potentially through the 
deployment of active PLA forces in certain circumstances. Still, recent 
statements and writings from Chinese leaders reinforce the military 
significance of the BRI and suggest that serious deliberations are now 
underway about extending formal military protection for the BRI and 
China's other overseas commitments.

    In recent years, Beijing has been increasingly open about its 
intent to regularize overseas military deployments to protect its 
expanding global interests. In its 12th Five-Year Plan issued in 2011, 
China publicly obligated the state to protect its ``overseas 
interests,'' which built on the CCP's instructions since the discussion 
in the early 2000s of ``new historic missions'' for the PLA so as to 
assume a more active global role. Beijing formally codified this 
mission for the PLA in its defense white paper issued in 2015.\14\ The 
PLA has also established at least one, and potentially more, overseas 
military bases, including a naval base in Djibouti and a PLA-
operated space station in Argentina.\15\ In so doing, China has shut 
the door firmly on its previous claim--notably expressed in its first 
defense white paper, issued in 1998--that China ``does not station any 
troops or set up any military bases in any foreign country'' as a 
matter of policy.\16\ In addition, authoritative publications on 
China's military strategy have discussed the need for the PLA to 
achieve effective ``forward defense'' to protect China's expanding 
national interests and extend the country's strategic depth.\17\
---------------------------------------------------------------------------
    \14\ Ryan D. Martinson, ``The 13th Five-Year Plan: A New Chapter in 
China's Maritime Transformation,'' China Brief, January 12, 2016.
    \15\ Ernesto Londono, ``From a Space Station in Argentina, China 
Expands its Reach in Latin America,'' New York Times, July 28, 2018; 
Cassandra Garrison, ``China's Military-Run Space Station in Argentina 
is a `Black Box,' '' Reuters, January 31, 2019.
    \16\ Information Office of the State Council, ``China's National 
Defense,'' July 1998.
    \17\ Shou Xiaosong, ed., The Science of Military Strategy, Military 
Science Press, 2013, 103-107. Translation.

    In January, Xi Jinping called on China to improve the protection of 
its overseas economic interests, including through building what he 
called a ``system of security guarantees'' for the BRI. While he did 
not specify a role for China's military in this effort, the language Xi 
used was similar to a statement from China's minister of defense in 
2018 announcing the PLA's interest in working with Pakistan to provide 
a security guarantee for BRI projects.\18\ In publications in military 
journals, the PLA has described the BRI as itself an effort to expand 
China's strategic depth, which has generated new requirements and 
options for Beijing to use and station military forces overseas. In a 
recent article by several PLA Air Force officers, the authors reveal 
the existence of a military ``going global'' strategy that requires the 
PLA to routinize military activities outside China's borders while 
encouraging the use of BRI investments--especially in ports, airports, 
and railways--to support overseas power projection.\19\ By developing a 
force that can rapidly deploy overseas, the authors claim, the PLA will 
be able to provide the ``national security conditions for the ultimate 
fulfillment of the strategic objective of the BRI.''\20\ In an article 
published in 2018, a high-ranking PLA Navy officer similarly described 
the BRI as a justification for China to increase its overseas military 
presence and expand its strategic depth, including by establishing 
additional overseas military bases.\21\
---------------------------------------------------------------------------
    \18\ Xinhua, ``Xi Urges Major Risk Prevention to Ensure Healthy 
Economy, Social Stability,'' January 22, 2019; China Military Online, 
``Chinese Defense Minister Meets Pakistani Naval Chief of Staff,'' 
April 29, 2018.
    \19\ Chen Yu, Liang Si, and Zeng Yu, ``Research on the Development 
of Overseas Strategic Airlift Capability,'' Military Transportation 
University Journal, February 2019. Translation.
    \20\ Chen Yu, Liang Si, and Zeng Yu, ``Research on the Development 
of Overseas Strategic Airlift Capability,'' Military Transportation 
University Journal, February 2019. Translation.
    \21\ Jiang Ping, ``Advancing Transformation of Naval Aviation With 
Forward-Looking Planning,'' Renmin Haijun, August 20, 2018. 
Translation.

    Not all BRI projects have dual civilian and military purposes, and 
many provide some necessary resources for urgent infrastructure 
shortfalls in countries around the world. Still, certain BRI 
investments do hold potential military value for China, and others 
provide Beijing with leverage over host countries to potentially 
establish a future military presence. For instance, China secured 
rights to establish its military presence in Djibouti and Argentina 
through secret negotiations following major deals for infrastructure 
investments and other financial assistance with both countries.\22\ In 
the case of Djibouti, the country has received financing from China 
worth nearly $1.4 billion, or around 75 percent of Djibouti's GDP, 
which almost certainly played a role in its agreement to approve the 
Chinese base.\23\ Media reports suggest China may have pressured a 
number of other countries that have received significant BRI or other 
Chinese financing, including Cambodia, Vanuatu, and Namibia, to allow 
China to establish a similar military presence, and at least six 
African ports China has invested in have been visited by Chinese naval 
vessels or are dual-use civilian-military ports.\24\ According to the 
U.S. Department of Defense, Beijing may believe that ``a mixture of 
military logistics models, including preferred access to overseas 
commercial ports and a limited number of exclusive PLA logistics 
facilities, probably collocated with commercial ports, most closely 
aligns with China's overseas military logistics needs.''\25\
---------------------------------------------------------------------------
    \22\ The Maritime Executive, ``AFRICOM Chief Warns of Chinese 
Control at Port of Djibouti,'' March 15, 2018; Ernesto Londono, ``From 
a Space Station in Argentina, China Expands its Reach in Latin 
America,'' New York Times, July 28, 2018. 
    \23\ John Hurley, Scott Morris, and Gailyn Portelance, ``Examining 
the Debt Implications of the Belt and Road Initiative From a Policy 
Perspective,'' Center for Global Development Policy Paper, March 2018, 
16.
    \24\ David Hutt and Shawn W. Crispin, ``Cambodia at Center of a New 
Cold War,'' Asia Times, November 14, 2018; U.S.-China Economic and 
Security Review Commission, ``China's Engagement in the Pacific 
Islands: Implications for the United States,'' June 14, 2018; Robert C. 
O'Brien, ``China's Next Move: A Naval Base in the South Atlantic?'', 
RealClear Defense, March 24, 2015.
    \25\ U.S. Department of Defense, ``Annual Report to Congress: 
Military and Security Developments Involving the People's Republic of 
China 2019,'' May 2, 2019, 16.

    Concerns have also arisen over the potential for host countries to 
cede sovereign control to Beijing over territory hosting Chinese-built 
infrastructure projects. While leasing arrangements would not 
necessarily enable China to use this infrastructure for military 
purposes, Beijing could potentially install dual-use support facilities 
on leased territory during peacetime or pressure host nations to allow 
the PLA to make use of their lease during an emerging crisis or 
conflict. For instance, China's 99-year lease over Hambantota Port in 
Sri Lanka--the most notable example of Beijing converting debt into a 
controlling equity stake on a Chinese-built infrastructure project--
forbids China from using the port for military purposes without 
permission. Still, Beijing could conceivably leverage Sri Lanka's 
remaining debt to China, which totaled approximately $8 billion in 2018 
by one estimate, to persuade Colombo to grant Beijing this consent 
under duress.\26\
---------------------------------------------------------------------------
    \26\ U.S.-China Economic and Security Review Commission, 2018 
Annual Report to Congress, November 2018, 174, 273-274; Kai Schultz, 
``Sri Lanka, Struggling With Debt, Hands a Major Port to China.'' New 
York Times, December 12, 2017.
---------------------------------------------------------------------------
        iv. examples of pushback to the bri and china's response
    Almost from its inception, BRI has raised concerns about debt 
sustainability in recipient countries. China does not follow 
international development finance standards, and does not disclose the 
amounts or the terms for loans it offers.\27\ Analysis by Aid Data, a 
research lab at the College of William and Mary, shows that most of 
China's state lending overseas is based on commercial, nonconcessional 
terms.\28\ A March 2018 report from the Center for Global Development 
assessed the current debt vulnerabilities of countries identified as 
potential BRI borrowers. Out of 23 countries determined to be 
significantly or highly vulnerable to debt distress, the authors 
identified eight countries--one of these being Djibouti--``where BRI 
appears to create the potential for debt sustainability problems, and 
where China is a dominant creditor in the key position to address those 
problems.''\29\
---------------------------------------------------------------------------
    \27\ John Hurley, Scott Morris, and Gailyn Portelance, ``Examining 
the Debt Implications of the Belt and Road Initiative From a Policy 
Perspective,'' Center for Global Development Policy Paper, March 2018, 
4; David Dollar, ``Is China's Development Finance a Challenge to the 
International Order?'', Brookings Institution, October 2017, 6; U.S.-
China Economic and Security Review Commission, Hearing on China's Belt 
and Road Initiative: Five Years Later, written testimony of Daniel 
Kliman, January 25, 2018, 3; AidData, ``How to Use Global Chinese 
Official Finance Data.''
    \28\ Axel Dreher et al., ``Aid, China, and Growth: Evidence From a 
New Global Development Finance Dataset,'' Aid Data Working Paper, 
October 2017, 14.
    \29\ John Hurley, Scott Morris, and Gailyn Portelance, ``Examining 
the Debt Implications of the Belt and Road Initiative From a Policy 
Perspective,'' Center for Global Development Policy Paper, March 2018, 
8, 11.

    Although China often makes deals with countries vulnerable to 
economic distress and political coercion due to poor governance, weak 
financial regulations, and corruption, a number have spoken out about 
their concerns over the debt and sovereignty risks associated with BRI 
loans.\30\ In a notable example of pushback, Malaysian Prime Minister 
Mahathir Mohamad spoke out during a trip to Beijing last year about his 
concern over the exorbitant costs of BRI projects in his country, 
warning against BRI partnerships giving way to a ``new version of 
colonialism.''\31\ As a result of this pushback, Malaysia successfully 
lowered the price tag of its largest BRI project by a third, while it 
was revealed that in 2018 a team of U.S. experts dispatched by the U.S. 
Agency for International Development assisted Myanmar in renegotiating 
the cost of a major BRI port deal from $7.3 billion to $1.3 billion, 
suggesting other BRI recipients may be interested in similar outside 
assistance.\32\ During Mr. Mahathir's campaign in 2018, the then 
candidate specifically connected Malaysia's growing indebtedness to 
China with a potential loss of sovereignty, obliquely referring to the 
case of Sri Lanka while warning that Malaysia did not want to similarly 
``lose chunks of [its] country.''\33\ Recognizing the need to reinforce 
global norms and best practices for development aid and investment, a 
number of countries--including the United States, Japan, India, and 
European countries--have announced new projects to provide countries in 
need of infrastructure assistance with alternatives to the terms of 
China's BRI.\34\ More recently, following the passage of the BUILD Act, 
Australia, Canada, the European Union, and Japan signed multilateral 
cooperation agreements with the revitalized U.S. Overseas Private 
Investment Corporation to drive growth in emerging markets that adhere 
to high standards and provide alternatives to ``unsustainable state-led 
models.''\35\
---------------------------------------------------------------------------
    \31\ Hannah Beech, `` `We Cannot Afford This': Malaysia Pushes Back 
Against China's Vision,'' New York Times, August 20, 2018.
    \32\ Channel News Asia, ``The Belt and Road Initiative Is Great: 
Malaysia PM Mahathir,'' April 26, 2019; Ben Kesling and Jon Emont, 
``U.S. Goes on the Offensive Against China's Empire-Building Funding 
Plan,'' Wall Street Journal, April 9, 2019.
    \33\ James Hookway and Yantoultra Ngui, ``Malaysia's Mahathir 
Mohamad Is Sworn in, Signals Tougher Line on China,'' Wall Street 
Journal, May 10, 2018.
    \34\ U.S.-China Economic and Security Review Commission, 2018 
Annual Report to Congress, November 2018, 282-287.
    \35\ Overseas Private Investment Corporation, ``U.S., Japan, 
Australia Sign First Trilateral Agreement on Development Finance 
Collaboration,'' November 12, 2018; Overseas Private Investment 
Corporation, ``OPIC Signs MOU Establishing DFI Alliance With Key 
Allies,'' April 11, 2019.

    Still, while China has been sensitive to the growing backlash 
against the BRI, it does not appear to have fundamentally altered the 
initiative's most problematic components or diminished its efforts to 
gain acceptance of the BRI as a legitimate model for extending China's 
political, economic, and military influence abroad. At a world summit 
for BRI participants in April, Xi Jinping sought to assuage countries' 
concerns over the BRI but restated China's view of the project's 
significance as a new model for global economic governance.\36\ With 
the continued addition of new signatories to the BRI, including Italy's 
accession over the strong protests of the United States and European 
Union, Beijing may have grounds to remain confident in the prospects 
for the project's viability. Despite protests over their BRI debts, 
countries have refrained from canceling projects outright and opted 
instead to renegotiate better terms, suggesting the ultimate fate of 
China's model may hinge on the ability of the United States and its 
allies and partners to reinvigorate alternative programs to address the 
vast global development needs.
---------------------------------------------------------------------------
    \36\ Xinhua, ``Xi's Keynote Speech at the Opening Ceremony of the 
Second Belt and Road Forum for International Cooperation,'' April 27, 
2019.

    Similar to the ways in which countries have responded to the 
economic dimensions of the BRI, there have been different reactions to 
the military dimensions of BRI investments, ranging from working more 
closely with China to strengthening partnerships with the United States 
and its allies and partners. For instance, BRI recipients Thailand and 
Cambodia have both increased military cooperation with Beijing in 
recent years, and Pakistan launched a 15,000-strong security force in 
2016 dedicated to protecting BRI investments along the China-Pakistan 
Economic Corridor.\37\ At the same time, countries in receipt of BRI 
investments, including many in South and Southeast Asia, have also 
opted to enhance their security partnerships with the United States and 
its partners in the Indo Pacific.\38\
---------------------------------------------------------------------------
    \37\ China Military Online, ``Chinese-Thai Marines Conduct Joint 
Beach-landing Operation.'' May 13, 2019; Prashanth Parameswaran, 
``China and Cambodia Hold Their Biggest Military Exercise Yet,'' 
Diplomat, March 21, 2019; Sarah Zheng, ``China Seeks Security 
Guarantees for Pakistan Belt and Road Projects After Terror Attacks,'' 
South China Morning Post, May 28, 2019.
    \38\ Shishir Upadhyaya, ``Australia Expands its Maritime Power in 
the Indian Ocean,'' Diplomat, March 19, 2019; Marwaan Macan-Markar, 
``Thailand Mends US Military Ties After Post-Coup Tilt to China,'' 
Nikkei Asian Review, July 30, 2018.
---------------------------------------------------------------------------
                   v. conclusion and recommendations
    BRI's geographic ambition and variety and scale of projects may 
make it seem like an insurmountable challenge to the global liberal 
order. While this is not yet true, the United States and its allies and 
partners must be vigilant in monitoring Chinese activities and 
relentless in protecting our interests. More than anything, we should 
be proactive--not reactive--when formulating the U.S. response to the 
BRI. The first step is to ensure that we have a clear-eyed view of 
Chinese strategic intent in its promotion of the BRI and formulate a 
comprehensive response ourselves spanning the political, economic, and 
security components of U.S. national power. Central to this response 
must be a recognition that the BRI is not a stand-alone project that 
can be isolated, but an embodiment of China's broader strategic aims.

    The U.S.-China Commission made 26 recommendations in its 2018 
Annual Report to Congress to help bolster U.S. economic, security, and 
diplomatic capabilities pertinent to our relationship with China. 
Excerpted below is a key recommendation from the Commission that is 
particularly relevant to understanding Chinese intent:

          Congress require the Director of National Intelligence to 
        produce a National Intelligence Estimate (NIE), with a 
        classified annex, that details the impact of existing and 
        potential Chinese access and basing facilities along the Belt 
        and Road on freedom of navigation and sea control, both in 
        peacetime and during a conflict. The NIE should cover the 
        impact on U.S., allied, and regional political and security 
        interests.

                                 ______
                                 
        Questions Submitted for the Record to Roy D. Kamphausen
            Questions Submitted by Hon. Robert P. Casey, Jr.
    Question. Can you discuss some of the ways China is currently 
exercising influence over decisions and outcomes at multilateral 
organizations and how their efforts through BRI may tilt the balance in 
favor of their own worldview of government and governance?

    Answer. China has secured leadership positions in a number of 
multilateral organizations and sought to use its leadership influence 
in these bodies, including at the United Nations, to downplay the 
importance of human rights and internationally accepted development 
norms to better align with its views. For instance, Beijing has 
attempted to increase these organizations' emphasis on state 
sovereignty, in keeping with the Chinese priority to diminish foreign 
interference in PRC domestic affairs and shift the UN Human Rights 
Council's focus on human rights from emphasizing ``political and 
individual rights'' to ``economic and social rights.''\1\ (See USCC 
Report on PRC leadership of multilateral organizations.) The BRI is one 
of Beijing's primary instruments to recast elements of the rules-based 
international order, including reshaping the structure and norms of 
global governance. To this end, Beijing has tied the BRI to existing 
international institutions and established new, BRI-related 
institutions such as the Belt and Road Forum and Asian Infrastructure 
Investment Bank. Chinese officials have also successfully lobbied to 
incorporate references to BRI or establish formal linkages with several 
UN organizations, including the UN Department of Economic and Social 
Affairs, the UN Development Program, and the World Health 
Organization.\2\ For example, the statements by some UN officials, 
including Secretary-General Antonio Guterres, have echoed Chinese 
government talking points that BRI will be a vital pillar in the UN's 
effort to solve global poverty by 2030.\3\
---------------------------------------------------------------------------
    \1\ Maaike Okano-Heijmans, Frans-Paul Van Der Putten, and Louise 
Van Schaik, ``Welcoming and Resisting China's Growing Role in the UN,'' 
Clingendael, February 8, 2019. https://www.clingendael.org/publication/
welcoming-and-resisting-chinas-growing-role-un; U.S.-China Economic and 
Security Review Commission, Chapter 3, Section 1, ``Belt and Road 
Initiative,'' in 2018 Annual Report to Congress, November 2018, 274.
    \2\ U.S.-China Economic and Security Review Commission, Chapter 3, 
Section 1, ``Belt and Road Initiative,'' in 2018 Annual Report to 
Congress, November 2018, 274; Colum Lynch, ``China Enlists UN to 
Promote its Belt and Road Project,'' Foreign Policy, May 10, 2018. 
https://foreignpolicy.com/2018/05/10/china-enlists-u-n-to-promote-its-
belt-and-road-project/; Xinhua, ``China Signs Cooperation Agreements 
With 69 Entities Under Belt and Road,'' August 18, 2017. 
www.xinhuanet.com/english/2017-08/17/c_136534087.htm.
    \3\ United Nations, `` `United Nations Poised to Support Alignment 
of China's Belt and Road Initiative With Sustainable Development 
Goals,' Secretary-General Says at Opening Ceremony,'' April 26, 2019. 
https://www.un.org/press/en/2019/sgsm19556.doc.htm; Colum Lynch, 
``China Enlists UN to Promote its Belt and Road Project,'' Foreign 
Policy, May 10, 2018. https://foreignpolicy.com/2018/05/10/china-
enlists-u-n-to-promote-its-belt-and-road-project/.

    Question. What are some specific examples that raise distinct 
concern, and how should China's actions inform our own posture and 
---------------------------------------------------------------------------
strategy going forward?

    Answer. BRI, in addition to providing China a tool for political 
influence, constitutes the leading edge of a more assertive, global 
Chinese foreign policy intended to revise--if not replace--the U.S.-led 
rules-based international order. Some potential areas of concern 
include:

          Investment and influence: Beijing is increasingly using 
        infrastructure investments as a tool of geopolitical influence 
        around the globe. In Greece, Beijing has used its investment in 
        the port of Piraeus as well as developed relationships with 
        Greek politicians to increase its influence over Greek and 
        European policy toward China, successfully influencing Athens's 
        response to China's human rights practices and sovereignty 
        claims in the South China Sea. China has also courted the 
        United Kingdom by offering potential investments and trade 
        agreements as London tries to formulate its post-Brexit foreign 
        trade policies. In Latin America, China has used BRI and other 
        investments to convince Taiwan's diplomatic partners in the 
        region to cut ties with Taiwan and officially endorse China's 
        ``one China'' principle.\4\
---------------------------------------------------------------------------
    \4\ Katherine Koleski and Alec Blivas, ``China's Engagement With 
Latin America and the Caribbean,'' U.S.-China Economic and Security 
Review Commission, October 17, 2018, 3, 6, 18. https://www.uscc.gov/
sites/default/files/Research/China%27s%20Engagement%20with%20Lat
in%20America%20and%20the%20Caribbean_.pdf.
---------------------------------------------------------------------------
          Dual-use infrastructure: Even if not their original intent, 
        some BRI investments will result in dual-use facilities--
        airfields, ports, road and rail networks--that could enhance 
        access for an expanded People's Liberation Army presence across 
        Eurasia and the Indian Ocean region. For instance, the PLA's 
        influence and presence in the Indo-Pacific can be bolstered 
        through access to port facilities and other bases to refuel and 
        resupply its navy, including through establishing its first 
        overseas military base in Djibouti--a country which is 
        significantly indebted to China.
          Digital Silk Road: Beijing is using Chinese companies to lay 
        fiber-optic cables, install telecommunications networks, and 
        develop smart city projects to expand China's influence over 
        the global digital economy and align it more closely with 
        Beijing's vision of Internet governance.\5\ With the expansion 
        of what China calls its ``Digital Silk Road,'' Beijing has also 
        used these digital partnerships, in conjunction with the 
        Chinese domestic model of security control, to export its 
        state-controlled media model and surveillance technology 
        abroad.\6\
---------------------------------------------------------------------------
    \5\ See U.S.-China Economic and Security Review Commission, Chapter 
3, Section 1, ``Belt and Road Initiative,'' in 2018 Annual Report to 
Congress, November 2018, 260, 266, 288.
    \6\ Dalibor Rohac, ``The digital silk road,'' AEI, June 10, 2019. 
http://www.aei.org/publication/digital-silk-road/; Rob Marvin, ``How 
China's Techno-Imperialism Is Reshaping Global Economies,'' PCMag, 
March 29, 2019. https://www.pcmag.com/news/367366/how-chinas-techno-
imperialism-is-reshaping-global-economies.

    These and other concerns led the Commission to recommend in its 
2018 Annual Report to Congress that Congress study the potential impact 
of Chinese global infrastructure investment on U.S. national security, 
including by requiring the Director of National Intelligence to produce 
a National Intelligence Estimate, with a classified annex, that details 
the impact of existing and potential Chinese access and basing 
facilities along the Belt and Road on freedom of navigation and sea 
---------------------------------------------------------------------------
control, both in peacetime and during a conflict.

                                 ______
                                 
               Question Submitted by Hon. Chuck Grassley
    Question. Many of the countries China is investing in are countries 
that have a poor record of managing debt. It seems foolish for the 
United States to try and compete with China by spending Federal funds 
or encouraging the private sector to spend money on risky 
infrastructure projects. What else can the United States do to create 
options for these countries other than taking loans from China?

    Answer. The United States should not seek to compete dollar for 
dollar with China but rather play to our strengths. I commend Congress 
for the passage of the BUILD Act, which is an important step toward 
boosting vitally needed private sector investment in low and lower-
middle income countries, particularly to small and medium-sized 
enterprises.

    Technical assistance is also a key element of the U.S. economic 
toolkit. Through programs such as the Infrastructure Transaction 
Assistance Network and Indo-
Pacific Transaction Advisory Fund launched in July 2018, the United 
States can help partner countries vet, negotiate, and implement 
infrastructure projects. One recent example of U.S. technical 
assistance's positive impact can be found in Myanmar. As I noted in my 
testimony to the committee, in 2018 USAID provided a team of technical 
experts to assist Myanmar in renegotiating the cost and scope of a 
major BRI port deal from $7.3 billion to $1.3 billion.\7\
---------------------------------------------------------------------------
    \7\ Ben Kesling and Jon Emont, ``U.S. Goes on the Offensive Against 
China's Empire-Building Funding Plan,'' Wall Street Journal, April 9, 
2019. https://www.wsj.com/articles/u-s-goes-on-the-offensive-against-
chinas-empire-building-megaplan-11554809402.

    Finally, our allies and partners are important force multipliers in 
this effort. The United States should continue to offer high-quality 
development financing to developing countries while urging our allies 
and partners to make complementary efforts. Following the passage of 
the BUILD Act, the U.S. Overseas Private Investment Corporation signed 
multilateral cooperation agreements with the development finance 
agencies of Australia, Canada, the European Union, and Japan to support 
high standard projects that drive growth in emerging markets and 
provide alternatives to ``unsustainable state-led models.''\8\
---------------------------------------------------------------------------
    \8\ Overseas Private Investment Corporation, ``OPIC Signs MOU 
Establishing DFI Alliance with Key Allies,'' April 11, 2019; Overseas 
Private Investment Corporation, ``U.S., Japan, Australia Sign First 
Trilateral Agreement on Development Finance Collaboration, November 12, 
2018.

                                 ______
                                 
             Question Submitted by Hon. Benjamin L. Cardin
    Question. A 2015 agreement between Israel's Transportation Ministry 
and Shanghai International Port Group (SIPG)--a company in which the 
Chinese government has a majority stake--to grant SIPG control over a 
Haifa port in 2021 for 25 years has raised intelligence and security 
concerns in the United States and it has been reported that the United 
States Navy may stop docking in Haifa as a result. What are the dual-
use functions of Haifa? Is there tension between the Israeli national 
security community and the business community over this and other forms 
of Chinese investment in Israel?

    Answer. The agreement between Israel's Transportation Ministry and 
SIPG stipulates that SIPG won the rights to operate the new Bayport 
Terminal within Haifa's port for 25 years beginning in 2021. According 
to Yigal Maor, the director-general at Israel's Transportation 
Ministry's Administration of Shipping and Ports, the port container 
amounts to less than 10 percent of the total Haifa port area. However, 
Haifa's dual function as a military port--it currently hosts Israeli 
submarines and is a regular port call destination for the U.S. Navy's 
Sixth Fleet--has raised concerns that China could use the proximity of 
its commercial investment to both Israeli and United States military 
assets for espionage purposes. Although Israeli officials such as Mr. 
Maor have sought to downplay such concerns, others, such as Rear 
Admiral (Ret.) Shaul Horev, have said Israel was putting its security 
relationship with the United States in jeopardy by letting the deal go 
forward, indicating there is a degree of tension between the national 
security establishment and officials aligned more with business 
interests. Additionally, as the Times of Israel has noted, the 
Transportation Ministry apparently did not consult the National 
Security Council before agreeing to the deal.\9\
---------------------------------------------------------------------------
    \9\ Efron, Shira, Howard J. Shatz, Arthur Chan, Emily Haskel, Lyle 
J. Morris, and Andrew Scobell. The Evolving Israel-China Relationship. 
Santa Monica, CA: Rand Corporation, 2019. Pages xvii, 107-109. Ahren, 
Raphael. ``Has Israel Made a Huge Mistake Letting a Chinese Firm Run 
Part of Haifa Port?'', Times of Israel. December 20, 2018. https://
www.timesofisrael.com/has-israel-make-a-huge-mistake-letting-a-chinese-
firm-run-part-of-haifa-port/.

                                 ______
                                 
    Prepared Statement of Daniel Kliman,* Ph.D., Senior Fellow and 
  Director, Asia-Pacific Security Program, Center for a New American 
                                Security
---------------------------------------------------------------------------
    * The views presented in this testimony are mine alone and do not 
represent those of CNAS or any other organizations with which I hold an 
affiliation. My testimony draws heavily on language, analysis, and 
ideas from the following CNAS publications: Daniel Kliman and Abigail 
Grace, ``Power Play: Addressing China's Belt and Road Strategy'' 
(Center for a New American Security, September 2018), https://
s3.amazonaws.com/files.cnas.org/documents/CNASReport-Power-Play-
Addressing-Chinas-Belt-and-Road-Strategy.pdf?mtime=20180920093003; and 
Daniel Kliman, Rush Doshi, Kristine Lee, and Zack Cooper, ``Grading 
China's Belt and Road'' (Center for a New American Security, April 
2019), https://s3.amazonaws.com/files.cnas.org/CNAS
+Report_China+Belt+and+Road_final.pdf. I am indebted to all of my 
coauthors. My research at CNAS on the Belt and Road has received 
support from a number of funders, including the Sasakawa Peace 
Foundation, the U.S. State Department, and the Quadrivium Foundation. 
CNAS is a national security research and policy institution committed 
to the highest standards of organizational, intellectual, and personal 
integrity. The Center retains sole editorial control over its ideas, 
projects, and productions, and the content of its publications reflects 
only the views of their authors.
---------------------------------------------------------------------------
    Chairman Cornyn, Ranking Member Casey, distinguished members of 
this subcommittee, I am grateful for this opportunity to address you 
about China's Belt and Road. At my home institution, the Center for a 
New American Security (CNAS), I have led several major studies on the 
Belt and Road. This research has underscored that the Belt and Road is 
largely antithetical to American interests and values. If China 
succeeds in realizing its vision for the Belt and Road, U.S. security, 
prosperity, and values will all come under pressure. Beijing will 
sharpen the emerging choice countries confront between their military 
ties with the United States and economic dependence on China. U.S. 
companies will compete on an uneven playing field in large parts of the 
developing world as China increasingly sets commercial standards and 
uses coopted local elites to advantage its enterprises. And American 
ideals of democracy and human rights will lose influence globally as 
Beijing radiates illiberalism through its investments in physical and 
digital infrastructure overseas.

    In the remainder of my testimony, I will address the current state 
of play, assess the implications of the Belt and Road, and advance a 
series of recommendations by which Congress can help to ensure that the 
United States is positioned to compete with China while simultaneously 
offering a positive vision of global infrastructure connectivity and 
economic development.
                        i. current state of play
Here are five observations about the Belt and Road today.

    (1) The Belt and Road is fundamentally a geopolitical enterprise. 
Since its launch in 2013, what Beijing calls ``One Belt, One Road'' has 
emerged as the cornerstone of China's economic statecraft. Under the 
umbrella of the Belt and Road, Beijing seeks to promote a more 
connected world brought together by a web of Chinese-funded physical 
and digital infrastructure. The world's infrastructure needs are 
significant, but the Belt and Road is more than just an economic 
initiative; it is a central tool for advancing China's geopolitical 
ambitions. Through the economic activities bundled under the Belt and 
Road, Beijing is pursuing a vision of the 21st century defined by great 
power spheres of influence, state-directed economic interactions, and 
creeping authoritarianism.\1\
---------------------------------------------------------------------------
    \1\ Daniel Kliman et al., ``Grading China's Belt and Road.''

    (2) China is placing growing emphasis on digital infrastructure. 
When initially launched, the Belt and Road largely focused on physical 
infrastructure, such as ports, pipelines, railways, and power plants. 
However, Beijing under the banner of what it labels the ``Digital Silk 
Road'' is now prioritizing information connectivity projects. Although 
5G wireless networks and Huawei have tended to dominate recent public 
discussions on China's digital expansion, the Digital Silk Road 
encompasses a much broader set of technologies and projects, including 
undersea cables, telecommunications equipment, data centers, and 
research partnerships, and involves at least a dozen key Chinese 
technology companies, according to one recent study.\2\ The geographic 
scope is vast: for example, China is building or operating 
telecommunications infrastructure in countries as varied as Burma, 
Kyrgyzstan, Nepal, Bangladesh, Mexico, and Kenya, along with dozens of 
others.\3\
---------------------------------------------------------------------------
    \2\ Samantha Hoffman et al., ``Mapping China's Tech Giants'' 
(Australian Strategic Policy Institute, April 2019), https://
www.aspi.org.au/report/mapping-chinas-tech-giants.
    \3\ Kliman et al, ``Grading China's Belt and Road.''

    (3) The reality of the Belt and Road differs sharply from the 
beneficent vision advanced by Beijing. When initially unveiled by 
China, the Belt and Road met with a warm reception across large parts 
of the globe. For developing countries eager for new sources of 
investment, it held significant appeal. Yet the downsides of Chinese-
led infrastructure projects have become increasingly apparent to many 
recipient states. These challenges include the erosion of national 
sovereignty; lack of transparency; unsustainable financial burdens; 
disengagement from local economic needs; geopolitical risks; negative 
---------------------------------------------------------------------------
environmental impacts; and significant potential for corruption.

    (4) Despite resistance to the Belt and Road in some countries, 
China has momentum on its side. The challenges associated with 
Beijing's infrastructure projects have provoked international backlash, 
most acutely in the Indo-Pacific. In select cases, such as Malaysia, 
countries have successfully renegotiated projects with China. But many 
states find themselves unable to pull away from China, both for fiscal 
reasons as well as domestic political ones--with Beijing frequently 
exercising lingering influence while awaiting and abetting the 
restoration of sympathetic elites.\4\ Most critically, even countries 
that have become relatively skeptical about the Belt and Road still 
perceive few meaningful alternatives to infrastructure projects 
involving China.\5\
---------------------------------------------------------------------------
    \4\ Daniel Twining, ``China Profits From Southeast Asia's 
Democratic Deficits,'' Nikkei Asian Review, https://asia.nikkei.com/
Politics/International-relations/China-profits-from-Southeast-Asia-s-
democratic-deficits.
    \5\ Kliman et al, ``Grading China's Belt and Road.''

    (5) Recent commitments by China to address the Belt and Road's 
shortcomings are largely a public relations exercise. The backlash 
against the Belt and Road has not gone unnoticed in Beijing. At the 
recent Belt and Road Forum, President Xi Jinping pledged to focus on 
high-quality projects and to fight corruption by Chinese companies 
operating overseas. In tandem with the forum, the Chinese government 
released a new framework for debt sustainability, ostensibly to ensure 
that Belt and Road projects do not leave recipient states with a 
massive financial hangover. Yet this debt framework is voluntary, and 
many of Xi's promises at the forum reiterated unfulfilled commitments 
made during a 2018 speech marking the 5th anniversary of the Belt and 
Road. Ultimately, the sheer number and size of China's overseas 
infrastructure projects render a fundamental change to the Belt and 
Road's implementation unlikely. More importantly still, many of the 
practices associated with the Belt and Road that pose a concern to 
recipient states, such as loss of control, opaque contracting, debt, 
dual civilian-military infrastructure, and corruption, are often 
strategic assets for Beijing.\6\
---------------------------------------------------------------------------
    \6\ ``Xi Jinping's Second Belt and Road Forum: Three Key 
Takeaways,'' Bloomberg, April 27, 2019, https://www.bloomberg.com/news/
articles/2019-04-28/xi-jinping-s-wins-and-losses-at-his-second-belt-
and-road-forum; Ministry of Finance of People's Republic of China, Debt 
Sustainability Framework for Participating Countries of the Belt and 
Road Initiative (April 25, 2019), http://m.mof.gov.cn/czxw/201904/
P020190425513990982189.pdf; Daniel Kliman, ``Don't Be Fooled by China's 
Belt and Road Rebrand,'' Center for a New American Security (April 
2019), https://www.cnas.org/publications/commentary/dont-be-fooled-by-
chinas-belt-and-road-rebrand.
---------------------------------------------------------------------------
            ii. how the belt and road is reshaping the world
    China's Belt and Road is eroding the foundation of the existing 
international order. Already, the effects of the Belt and Road are 
increasingly visible and extend from geopolitics to commerce to 
international and domestic governance. This section evaluates the 
implications of the Belt and Road in each of these areas.
GEOPOLITICS
      The People's Liberation Army (PLA) will become more global and 
the U.S. military will confront new risks. With Chinese investment and 
workers fanning out to distant and sometimes dangerous regions, Beijing 
will increasingly grapple with circumstances that warrant deploying the 
PLA overseas. At the same time, the construction of dual purpose, 
civilian-military infrastructure under the umbrella of the Belt and 
Road will provide a more durable foundation for PLA operations in the 
Indian Ocean and beyond. This will create new risks for the U.S. 
military. The PLA's presence in Djibouti and potential future locations 
overseas poses an intelligence threat and raises the possibility that 
American forces operating far from the Western Pacific will be harassed 
by China. Lastly, Beijing's involvement in the digital ecosystems of a 
large set of countries could compromise the networks of U.S. allies and 
partners and constrain future opportunities to enhance military 
interoperability.\7\
---------------------------------------------------------------------------
    \7\ Kliman and Grace, ``Power Play.''

      China will attain lasting diplomatic leverage. By lending to 
some governments at a level beyond their ability to repay, China has 
placed recipient countries in a position of dependence and 
vulnerability. The diplomatic leverage that China obtains from this 
approach is long-term. Financial obligations transcend changes in 
political leadership and constrain the room to maneuver of successive 
governments--even those inclined to move away from Beijing. Further, 
debt burdens translate into a flexible form of influence that China can 
wield to obtain control of foreign assets, press for military access, 
and compel support--or at least curtail opposition--to its positions on 
issues ranging from maritime disputes in the South China Sea to human 
rights.\8\
---------------------------------------------------------------------------
    \8\ Kliman and Grace, ``Power Play.''

      China's ability to manipulate global supply chains for 
geopolitical benefit will grow. Through its overseas investment 
activities, Beijing will play an increasingly influential role in the 
distribution networks linking suppliers to consumers worldwide. This is 
most pronounced in major container ports, but China also plays a 
leading role in the shipping industry. With multiple points of leverage 
over global supply chains, if economic tensions further escalate, or in 
the event of a military crisis or conflict, China would have the 
ability to influence market prices by limiting the availability of 
manufactured goods and nonrenewable commodities such as critical 
minerals. In this way, the Belt and Road will expand Beijing's coercive 
economic toolkit. China could also more subtly leverage its growing 
presence in global supply chains for advantage, for example, by 
introducing inefficiencies into the supply chains of a geopolitically 
significant foreign company to reduce its competitiveness.\9\
---------------------------------------------------------------------------
    \9\ Kliman and Grace, ``Power Play.'' I am indebted to Elizabeth 
Rosenberg, CNAS senior fellow and director, Energy, Economics, and 
Security Program, for this insight.
---------------------------------------------------------------------------
COMMERCE
      International commercial standards will come under pressure. As 
China races to fund and execute infrastructure projects across Asia, 
the Middle East, Africa, Europe, and Latin America, its activities 
often deviate from existing commercial standards. These standards--such 
as transparent investment procedures, alignment with social and 
environmental responsibility guidelines, and debt sustainability--
reflect decades of lessons learned both by investors and recipient 
countries. Beijing's intent to establish a new Belt and Road dispute 
settlement mechanism indicates that its strategy will also pose a 
growing challenge to existing international legal standards. As 
proposed, this mechanism would sit under China's Supreme People's Court 
and provide Beijing with a more malleable tool to resolve Belt and Road 
legal disputes than local courts in recipient countries or established 
international arbitration frameworks.\10\
---------------------------------------------------------------------------
    \10\ Kliman and Grace, ``Power Play.''

      China's ability to compete in the digital domain will improve. 
The Belt and Road is advancing Beijing's ambition to become the world's 
leading information technology power. As China's national technology 
champions go abroad to construct its ``Digital Silk Road,'' Beijing's 
audacious bid to set international technical standards and establish 
new platforms for online connectivity will gain additional momentum. To 
compete globally, China's technology companies require greater access 
to foreign data. The ``Digital Silk Road'' potentially could yield 
large amounts of data that ultimately will enable Chinese companies to 
more effectively target consumers in overseas markets and boost China's 
artificial intelligence (AI) industry, reinforcing the advantage it 
already enjoys given China's population size and supportive government 
regulations. Beyond data, the Belt and Road likely will serve as a 
mechanism for China to enlist foreign scientists and engineers in 
cooperative technical projects. Through such technology cooperation 
arrangements, China could harness talent across a large part of the 
globe even as it remains a relatively unattractive destination for 
high-skilled immigration.\11\
---------------------------------------------------------------------------
    \11\ Kliman and Grace, ``Power Play.''

      Key countries will struggle to service their Belt and Road-
related debt. Most of China's financing for Belt and Road projects 
involves loans rather than grants. Many of the countries receiving 
Chinese investment also lack the technical capacity to assess their 
repayment ability--a particular challenge given Beijing's willingness 
to ignore debt sustainability standards, which normally serve as 
guardrails for investors and recipient countries. According to a recent 
study, future financing related to Belt and Road projects puts eight 
countries at significant risk of debt distress: Djibouti, the Maldives, 
Laos, Montenegro, Mongolia, Tajikistan, Kyrgyzstan, and Pakistan. China 
is the only major global lender that is not a member of the Paris Club, 
which finds coordinated and sustainable solutions to the payment 
difficulties experienced by debtor countries. In a restructuring 
scenario involving these eight countries--among others--China could 
potentially extract nonstandard concessions that infringe upon debtor 
countries' sovereignty.\12\
---------------------------------------------------------------------------
    \12\ John Hurley et al., ``Examining Debt Implications of the Belt 
and Road Initiative From a Policy Perspective'' (Center for Global 
Development, March 2018), https://www.cgdev.org/sites/default/files/
examining-debt-implications-belt-and-road-initiative-policy-
perspective.pdf; Kliman and Grace, ``Power Play.''

      China will try to externalize some of the financial risk of the 
Belt and Road. Beijing is encouraging U.S. and European investment 
banks and institutional investors to put capital into Belt and Road 
projects. Some Western firms have responded favorably, holding 
conferences on the Belt and Road and designating senior personnel to 
lead their work on it. In addition, Western banks have become directly 
involved in Belt and Road financing. An emerging phenomenon is China's 
attempts to establish investment instruments to finance the Belt and 
Road that bundle together many projects, potentially obscuring the 
underlying risk. Although financing for the Belt and Road will remain 
overwhelmingly Chinese in the near term, these attempts to enlist 
Western capital warrant close scrutiny.\13\
---------------------------------------------------------------------------
    \13\ Kliman and Grace, ``Power Play.''
---------------------------------------------------------------------------
INTERNATIONAL AND DOMESTIC GOVERNANCE
      The development arm of the United Nations will work to 
legitimize the Belt and Road. China has leveraged the UN Department of 
Economic and Social Affairs (DESA) in which its nationals hold 
leadership positions to closely link the Belt and Road to the UN's 2030 
Agenda for Sustainable Development, more commonly known as the 
Sustainable Development Goals (SDGs). DESA has sought to conflate the 
Belt and Road and the SDGs through a high-level convening, official 
statements, and a new program \14\ to promote networking among 
countries that have signed Belt and Road cooperation memorandums with 
China. The UN's leadership--both the Secretary General and the Deputy 
Secretary General--have also endorsed the Belt and Road, in effect 
reinforcing DESA's legitimization campaign. As of the second Belt and 
Road Forum in April 2019, at least 25 UN agencies have initiated joint 
research projects and signed agreements and memorandums of cooperation 
with China.\15\
---------------------------------------------------------------------------
    \14\ ``Jointly Advancing the Belt and Road Initiative to Achieve 
the SDGs,'' UN Development Program press release, February 27, 2019, 
http://www.cn.undp.org/content/china/en/home/presscenter/pressreleases/
2019/jointly-advancing-the-belt-and-road-initiative-to-achieve-the-
sd.html.
    \15\ Kristine Lee and Alexander Sullivan, ``People's Republic of 
the United Nations'' (Center for a New American Security, May 2019), 
https://www.cnas.org/publications/reports/peoples-republic-of-the-
united-nations; ``List of Deliverables of the Second Belt and Road 
Forum for International Cooperation,'' Ministry of Foreign Affairs of 
the People's Republic of China, April 27, 2019, https://
www.fmprc.gov.cn/mfa_eng/zxxx_662805/t1658767.shtml; ``UN Agencies Belt 
and Road Initiative Involvement,'' United Nations Environment Program, 
http://wedocs.unep.
org/bitstream/handle/20.500.11822/26318/
UN%20Agencies%20BRI%20Involvement%2002%20
%2801%20Oct%202018%29.pdf?sequence=17&isAllowed=y.

      Multilateral development banks (MDBs) will largely cooperate 
with China on the Belt and Road. The world's major MDBs will not serve 
as a counterweight to the Belt and Road. Many support the Belt and Road 
given Western countries' limited interest in participating in MDB 
recapitalization efforts. The World Bank has been especially forward-
leaning: its last president offered a full-throated endorsement of 
Beijing's signature effort. The Asian Development Bank and the European 
Bank for Reconstruction and Development likewise seek to cooperate with 
China on the Belt and Road. Provided that MDBs insist on upholding 
international standards, their future co-financing of Belt and Road 
projects could raise the bar and help promote transparency and debt 
sustainability. Yet given the comparatively modest resources that MDBs 
currently dedicate to infrastructure--though they are beginning to 
spend more in this area--co-financing of some projects is unlikely to 
fundamentally change the character of the Belt and Road, which derives 
the majority of its funding from Chinese state institutions.\16\
---------------------------------------------------------------------------
    \16\ Kliman and Grace, ``Power Play.''

      The quality of domestic governance in some countries taking Belt 
and Road investment will decline. Many of the countries involved in the 
Belt and Road feature high levels of corruption and low levels of 
democracy. Despite enacting an anti-foreign bribery law in 2011, China 
has demonstrated minimal interest in enforcing compliance by its 
companies operating overseas. In states with weak governance, Chinese 
enterprises will face a strong temptation to engage in graft and other 
dishonest business practices. The geopolitical dimension of the Belt 
and Road will further exacerbate the problem of corruption; the capture 
of political elites potentially can serve as a potent tool in countries 
where China seeks control of strategic commercial assets or military 
access. Hardly a champion of democracy and human rights, China has 
shown a willingness to defend authoritarian and anti-democratic leaders 
in increasingly far-flung locations closely linked to the Belt and 
---------------------------------------------------------------------------
Road.

      China is becoming an exporter of high-tech illiberalism. 
Domestically, China has harnessed technology for illiberal aims to make 
repression and social control more pervasive and effective than ever 
before. Examples of this include ubiquitous surveillance cameras 
coupled with facial recognition software, the introduction of a social 
credit score, pervasive online censorship, and more. As China has 
reoriented the Belt and Road to focus more on digital connectivity, it 
is exporting infrastructure not only for communications but also 
surveillance and censorship. Beijing's ``Digital Silk Road'' is 
especially pernicious because through the provision of technology, 
funding, and know-how, China is making repression easier and more 
attractive to governments that have weak democratic institutions and 
enabling fragile authoritarian regimes to become more effective and 
cost-efficient. Moreover, China's high-tech illiberalism has 
repercussions that go beyond eroding human rights and freedom of speech 
in particular countries. As China's role in the digital ecosystems of 
developing countries spreads, it is leveraging its influence to 
encourage a shift globally toward a less democratic model of Internet 
governance.\17\
---------------------------------------------------------------------------
    \17\ Kliman and Grace, ``Power Play.''
---------------------------------------------------------------------------
                 iii. getting america's approach right
    In 2018, the United States formulated and began to implement a 
response to the Belt and Road. Nested within a larger competitive U.S. 
strategy toward China spanning the diplomatic, economic, military, and 
informational domains, this response has focused on U.S. areas of 
comparative advantage such as energy and digital connectivity, promoted 
capacity building in countries considering Chinese investment, and 
emphasized cooperation with high-capability American allies and 
partners. Congress in turn has played a critical role in resourcing 
America's approach to the Belt and Road through the passage of the 
bipartisan Better Utilization of Investment Leading to Development 
(BUILD) Act in October 2018, which will result in the establishment of 
a new U.S. Development Finance Corporation (DFC) late this year.\18\
---------------------------------------------------------------------------
    \18\ Daniel Kliman, ``To Compete With China, Get the New U.S. 
Development Finance Corporation Right'' (Center for a New American 
Security, February 2019), https://www.cnas.org/publications/commentary/
to-compete-with-china-get-the-new-u-s-development-finance-corporation-
right#fn6.

    All this is a positive start, but America's current approach still 
falls short of addressing the challenge posed by China's Belt and Road. 
The DFC remains a work in progress, and depending on its future focus, 
organization, and staffing, could ultimately fail to backstop U.S. 
economic alternatives to the Belt and Road. Cooperation with U.S. 
allies and partners, though a bright spot, has yielded meager results 
thus far in terms of joint infrastructure projects. In the information 
domain, the United States has successfully propagated the concept of 
``debt-trap diplomacy,'' crystallizing concerns about China's 
unsustainable financing practices. Nonetheless, large parts of the 
globe continue to regard the Belt and Road as symbolic of China's 
inevitable rise. With Italy's recent signature of a Belt and Road 
cooperation memorandum, and Malaysia's walk-back of its criticism,\19\ 
Beijing is well on its way to demonstrating that recent setbacks to the 
Belt and Road are mere speedbumps, rather than insurmountable 
obstacles. Lastly, the U.S. approach to addressing the Digital Silk 
Road has largely taken a security perspective, with a focus on blocking 
Chinese 5G investments in key allied countries. Washington has only 
partially succeeded in achieving this narrow objective, with Australia 
and Japan committed to 5G solutions that do not involve Huawei, while 
Europe continues to deliberate.\20\ Meanwhile, China's larger promotion 
of high-tech illiberalism goes largely unchecked.
---------------------------------------------------------------------------
    \19\ Giselda Vagnoni, ``Italy endorses China's Belt and Road plan 
in first for a G7 nation,'' Reuters, March 23, 2019, https://
www.reuters.com/article/us-italy-china-president/italy-endorses-chinas-
belt-and-road-plan-in-first-for-a-g7-nation-idUSKCN1R40DV; Tom Mitchell 
and Archie Zhang, ``Malaysia to resume China-built Belt and Road rail 
project,'' The Financial Times, April 12, 2019, https://www.ft.com/
content/8bc8cb02-5ceb-11e9-9dde-7aedca0a081a.
    \20\ Ellen Nakashima, ``U.S. pushes hard for a ban on Huawei in 
Europe, but the firm's 5G prices are nearly irresistible,'' The 
Washington Post, May 29, 2019, https://www.washingtonpost
.com/world/national-security/for-huawei-the-5g-play-is-in-europe--and-
the-us-is-pushing-hard-for-a-ban-there/2019/05/28/582a8ff6-78d4-11e9-
b7ae-390de4259661_story.html?noredirect=on&
utm_term=.33c0ffe7021d.

    Although the executive branch bears primary responsibility for 
American foreign policy, Congress can play a vital role in shaping how 
the United States addresses China's Belt and Road. This section 
advances ten targeted recommendations that directly involve Congress.
GEOPOLITICS
(1)  Congress should support the creation of a U.S. public diplomacy 
toolkit for the 21st century.

    The U.S. approach to the Belt and Road must focus squarely on the 
informational domain, where Beijing has effectively played up the size 
and positive impact of its infrastructure investments and worked to 
portray the Belt and Road as emblematic of its inevitable rise to 
global primacy. Congress should create a reporting requirement for the 
executive branch to put forward a blueprint for a robust non-military 
public diplomacy capability that would re-create aims and functions of 
the U.S. Information Agency during the Cold War, but for the 21st 
century. To backstop a more robust U.S. public diplomacy toolkit, 
Congress should review declassification processes and authorities to 
ensure that American officials can more easily furnish evidence of 
Chinese corrupt business practices to media and civil society 
organizations globally and in countries where Beijing is involved in 
infrastructure projects under the umbrella of the Belt and Road.\21\ 
Congress should also fund the State Department's adoption of commercial 
tools such as artificial intelligence-powered sentiment analysisof 
newsand social media that would both track local attitudes toward 
Chinese investment and help to tailor U.S. messaging in specific 
countries. Winning the narrative contest is essential; if countries 
accept that Belt and Road is the wave of the future, they are unlikely 
to align with the United States in ways that will ultimately secure 
their economic freedom and sovereignty.\22\
---------------------------------------------------------------------------
    \21\ Ely Ratner makes a similar recommendation in his testimony 
before the Senate Armed Services Committee. See Ely Ratner, ``Blunting 
China's Illiberal Order: The Vital Role of Congress in U.S. Strategic 
Competition With China,'' statement to the Senate Armed Services 
Committee, hearing on ``China and Russia,'' January 29, 2019, https://
www.armed-services.
senate.gov/imo/media/doc/Ratner_01-29-19.pdf.
    \22\ Kliman and Grace, ``Power Play.''

(2)  Congressional delegations should travel to countries where China 
may parlay its Belt and Road projects into overseas military access and 
---------------------------------------------------------------------------
emphasize the downsides of a PLA presence.

    Congress should partner with the Executive Branch to constrain 
China's military access where possible and block it where absolutely 
necessary. Delegations by members of Congress provide an opportunity 
for the United States to communicate to senior political and military 
leader in foreign countries what PLA capabilities on their soil would 
prove most destabilizing and the potential impact on their sovereignty 
that could accompany opening the door to China's military. 
Congressional delegations are also positioned to credibly convey to 
foreign governments that a decision to offer the PLA access to their 
territory would result in punitive U.S. legislation. To ensure 
alignment with the executive branch and identify priority countries for 
future delegations, Congress should send a letter to the Secretary of 
Defense to request a classified briefing on the U.S. approach to 
countering China's pursuit of overseas military access.

(3)  Congress should task the U.S.-China Security and Economic Review 
Commission (USCC) to publish a report on the China supply chain 
exposure of 20 large U.S. companies.

    China's growing control over global supply chains presents a 
geopolitical risk. Congress should direct the USCC to produce a report 
estimating the degree to which 20 large U.S. companies across 
industrial sectors source from China and use Chinese-operated global 
distribution networks. This report would help to catalyze a discussion 
in boardrooms on how to mitigate the risk of excessive supply chain 
dependence on China, elevate public discussion on this issue, and 
provide a methodology by which a broader set of companies could 
evaluate their own exposure.\23\
---------------------------------------------------------------------------
    \23\ I am indebted to CNAS adjunct senior fellow Peter Harrell for 
this recommendation.
---------------------------------------------------------------------------
COMMERCE

(4)  Congress should convene hearings to weigh the merits of the United 
States rejoining the TPP--now called the Comprehensive and Progressive 
Agreement for Trans-Pacific Partnership (CPTPP).\24\
---------------------------------------------------------------------------
    \24\ Ely Ratner also makes this recommendation in his testimony 
before the Senate Armed Services Committee. See ``Blunting China's 
Illiberal Order: The Vital Role of Congress in U.S. Strategic 
Competition With China,'' statement to the Senate Armed Services 
Committee, hearing on ``China and Russia,'' January 29, 2019, https://
www.armed-services.senate.gov/imo/media/doc/Ratner_01-29-19.pdf.

    For countries in the Indo-Pacific, the absence of U.S. 
participation in multilateral trade and investment agreements remains a 
major gap in America's approach to the Belt and Road. With bipartisan 
recognition of the China challenge, there is a unique opportunity for 
members of Congress on both sides of the aisle to draw a sharp 
distinction for domestic audiences between China's unfair trading 
practices, which have directly undermined the livelihoods of large 
numbers of Americans, and the overwhelming benefits derived from 
economic engagement with U.S. allies and partners.\25\
---------------------------------------------------------------------------
    \25\ Kliman and Grace, ``Power Play.''

(5)  Congress through its oversight function should encourage the 
executive branch to come together with U.S. ally and partner 
governments around an international certification for high-quality 
---------------------------------------------------------------------------
infrastructure.

    An internationally recognized certification that builds on the 
Group of 20 Principles for Quality Infrastructure Investment would 
establish a benchmark whereby developing countries could assess the 
pros and cons of future projects involving China. This certification 
could be operationalized through standing up a new international 
organization that would vet proposed infrastructure projects and 
support oversight efforts during the construction phase. With 
international buy-in, this certification might ultimately encourage a 
race to the top by companies and investors, including those from 
China.\26\
---------------------------------------------------------------------------
    \26\ Kliman and Grace, ``Power Play.''

(6)  Congress should appropriate resources to establish a new U.S. 
digital development fund that would support information connectivity 
---------------------------------------------------------------------------
projects across the developing world.

    With the Digital Silk Road as a vector for spreading China's high-
tech authoritarianism and compromising the telecommunications security 
of American allies and partners, it is imperative that the United 
States respond. In the developing world, this means driving down the 
price of American digital infrastructure in order to compete with 
subsidized Chinese firms such as Huawei. Congress could play a vital 
role by enacting legislation to stand up a new U.S. digital development 
fund that would support--potentially with lines of credit--information 
connectivity projects in the developing world undertaken by companies 
that are headquartered in countries committed to rule of law and 
globally recognized norms of online freedom and privacy.\27\
---------------------------------------------------------------------------
    \27\ Kliman and Grace, ``Power Play.''

(7)  Congress should work closely with the executive branch to ensure 
the new U.S. Development Finance Corporation is positioned to backstop 
---------------------------------------------------------------------------
a competitive approach toward China.

    Through a combination of hearings, oversight, and legislation, 
Congress should shape the new DFC to ensure it will sharpen America's 
strategic edge. Congress should: encourage the creation of an office 
for strategic investments led by a new member of the DFC's executive 
team; grant the DFC a ``surge financing'' authority to capitalize on 
emerging windows of opportunity generated by blowback against Chinese 
investment in some recipient countries; provide the DFC with the 
political space to make somewhat riskier investments in countries with 
weaker regulatory environments where China is actively competing; and 
encourage linkages between U.S. public diplomacy and projects catalyzed 
by the DFC.\28\
---------------------------------------------------------------------------
    \28\ Kliman, ``To Compete With China, Get the New U.S. Development 
Finance Corporation Right.''
---------------------------------------------------------------------------
INTERNATIONAL AND DOMESTIC GOVERNANCE
(8)  Congress should convene a hearing on China's use of the UN to 
legitimize the Belt and Road and advance its broader geopolitical 
objectives.

    Beijing's growing influence within the UN system and what this 
means for the United States remains inadequately understood in 
Washington. Congress could elevate this issue by holding a hearing that 
would bring together senior American officials serving at the United 
States Mission to the United Nations (USUN) and outside experts 
tracking China's activities in the world's preeminent multilateral 
organization. The hearing would also provide an opportunity for members 
of Congress to discuss how to navigate the increasingly sharp tradeoffs 
between downgrading America's participation in the UN in response to 
its hostile track record on Israel and competing with China.

(9)  Congress should sufficiently resource U.S. efforts to enhance 
technical capacity in countries receiving Chinese investment under the 
umbrella of the Belt and Road.

    Some governments lack the ability to assess Chinese contracts--for 
example, in terms of debt repayment and infrastructure life-cycle 
costs--and have insufficient human resources to oversee projects during 
the implementation phase. This amplifies the challenges associated with 
the Belt and Road. U.S. efforts to build technical capacity in states 
that have welcomed Chinese infrastructure projects remain deeply 
underfunded. Congress should appropriate $250 million for the State 
Department's new Infrastructure Transaction Advisory Network--not the 
currently requested $25 million--and also plus-up complementary efforts 
by the U.S. Treasury Department's Office of Technical Assistance (OTA) 
and the U.S. Trade Development Agency's Global Procurement 
Initiative.\29\
---------------------------------------------------------------------------
    \29\ Kliman and Grace, ``Power Play.''

(10)  Congress should appropriate additional resources for the National 
Endowment for Democracy, the National Democratic Institute, and the 
International Republican Institute, expressly for strengthening good 
---------------------------------------------------------------------------
governance in countries targeted by the Belt and Road.

    Beijing has a relatively freer hand in countries where it can 
capture elites and make backroom deals. Conversely, countries with 
robust domestic institutions are best positioned to engage the Belt and 
Road on their terms. Even a modest increase in U.S. funding to support 
rule of law, transparency, accountability, freedom of the press, and 
civil society would go a long way toward enabling countries to avoid 
the most negative impacts associated with Chinese infrastructure 
projects. Although the United States should tailor efforts to promote 
good governance to each country, it should wherever possible seek to 
direct funds to local non-governmental organizations that track China's 
activities and influence, as this type of investigative work is 
essential to ensuring that societies can have an informed debate on 
whether and how to cooperate with Beijing on the Belt and Road.\30\
---------------------------------------------------------------------------
    \30\ Kliman and Grace, ``Power Play.''

                                 ______
                                 
             Prepared Statement of Derek Scissors, Ph.D., 
            Resident Scholar, American Enterprise Institute
    There are a number of easy myths to dispel about China's Belt and 
Road Initiative. It's worth trillions--false. China is buying up the 
participating countries--if so, only in self-defeating fashion. The 
Belt and Road Initiative (BRI) is primarily about transportation--
reasonable but still mostly wrong.

    Perhaps the most important mistake is that the BRI represents a 
growing Chinese footprint globally. It did in 2016, not now. More 
countries are joining the BRI in name but the extent of activity is 
shrinking. Moreover, inadequate foreign currency reserves means Beijing 
will be hard pressed to keep the BRI afloat as a global commercial 
effort. It is therefore likely to devolve toward a talk shop with 
substantial resources assigned only to a small set of priority 
countries.

    The first implication for American policy of this likely BRI 
trajectory is: do not overreact. The second is to identify the much 
smaller group of countries China will favor going to forward. Our 
interests are very different than the PRC's and the BRI does not appear 
to call for any substantial American response on economic grounds 
(only).
                  facts on the bri's past and present
    Data on the BRI are drawn from the American Enterprise Institute's 
China Global Investment Tracker, the only publicly available 
compilation of Chinese investment and construction globally.\1\ The 
Tracker presently includes over 3,000 transactions compiled from 2005-
2018, each valued at $95 million or more. It does not capture the 
lending which usually supports the investment and construction 
transactions.
---------------------------------------------------------------------------
    \1\ American Enterprise Institute and Heritage Foundation, ``China 
Global Investment Tracker,'' http://www.aei.org/china-global-
investment-tracker/.

    What countries are actually in the BRI and which subset of projects 
should be counted are open questions, as Beijing has deliberately left 
the BRI ill-defined. ``BRI projects are only the good ones'' is not far 
off from the Chinese position. When the initiative was launched in 
2013, it was said to include 64 countries. More have been added, most 
famously Italy. In statistical notes, the Ministry of Commerce never 
uses even the original 64, the number instead bizarrely varying between 
49 and 55 or not mentioned at all.\2\
---------------------------------------------------------------------------
    \2\ Belt and Road Portal, ``China's non-financial ODI in B&R 
countries rose to 3.76 billion dollars in Q1,'' April 17, 2019, https:/
/eng.yidaiyilu.gov.cn/qwyw/rdxw/86102.htm; and Ministry of Commerce, 
People's Republic of China, ``Investment and Cooperation With Countries 
Along Belt and Road Routes in January-October of 2018,'' November 23, 
2018, http://english.
mofcom.gov.cn/article/statistic/foreigntradecooperation/201812/
20181202815840.shtml.

    The Tracker's view of the BRI is based on the official Chinese 
government website, using all projects in all countries profiled.\3\ 
The intention is to get the largest numbers possible, numbers which can 
only overstate the impact of the BRI to date, yet still turn out to be 
on the small side. At time of writing, 137 countries were profiled on 
the BRI site.
---------------------------------------------------------------------------
    \3\ Belt and Road Portal, International Cooperation Profiles, 
https://eng.yidaiyilu.gov.cn/info/iList.jsp?cat_id=10076.

    From 2014 to 2018, total Chinese investment in all BRI countries 
was $190 billion. Again, this is a deliberately high estimate. At this 
rate, it will take until 2040 for investment to reach the $1 trillion 
goal often bandied about--if this is a new Marshall Plan, it's a slow 
one. It's also not especially vital to the PRC. Sizing it as 
aggressively as possible, the BRI comprised less than 30 percent of 
total investment and less than combined Chinese investment in the U.S., 
---------------------------------------------------------------------------
Australia, and United Kingdom over this period.

    Investment is not the main economic activity in the BRI, 
construction is. Chinese construction activity in the full set of BRI 
countries was worth twice as much, at $388 billion for 2014-8. (While 
construction is heavily financed by Chinese loans, it does not involve 
any ownership of assets and therefore does not qualify as investment. 
It is properly categorized as part of services trade.) The construction 
figures are impressive but, at this pace, it would still take 50 years 
for the BRI to be the $6-trillion program some anticipate.\4\
---------------------------------------------------------------------------
    \4\ Lihuan Zhou, et al., ``Moving the Green Belt and Road 
Initiative: From Words to Actions,'' World Resources Institute and 
Boston University Global Development Policy Center working paper, 
October 2018, https://www.bu.edu/gdp/files/2018/11/GDP-and-WRI-BRI-
Movingthe
Greenbelt.pdf.

    What is being built and, to a lesser extent, bought? Road-, rail-, 
and port-building win the most attention but are nosed out by power 
---------------------------------------------------------------------------
plant construction. In investment, energy dominates.


                              BRI by Sector
                           ($ billion 2014-8)
------------------------------------------------------------------------
            Construction                          Investment
------------------------------------------------------------------------
1.  Power  152.4                     1. Power  71.7
------------------------------------
2. Transport  137.7                  2. Metals  26.0
------------------------------------
3. Property  43.3                    3. Transport  18.1
------------------------------------
4. Utilities  13.5                   4. Property  15.9
------------------------------------
5. Metals  10.4                      5. Logistics  11.3
------------------------------------------------------------------------
Source: China Global Investment Tracker.


    By country, the investment pattern within the BRI reflects that of 
Chinese investment in all countries: greater foreign wealth draws more 
Chinese money. Tiny Singapore leads by a substantial margin because it 
is rich and there is money to be made there. Construction goes first to 
heavily populated developing economies, which naturally have the most 
available projects.


                             BRI by Country
                           ($ billion 2014-8)
------------------------------------------------------------------------
            Construction                          Investment
------------------------------------------------------------------------
1. Pakistan  31.9                    1. Singapore  24.3
------------------------------------
2. Nigeria  23.2                     2. Malaysia  14.1
------------------------------------
3. Bangladesh  17.5                  3. Russian Federation  10.4
------------------------------------
4. Indonesia  16.8                   4. Indonesia  9.4
------------------------------------
5. Malaysia  15.8                    5. South Korea  8.1
------------------------------------
6. Egypt  15.3                       6. Israel  7.9
------------------------------------
7. UAE  14.7                         7. Pakistan  7.6
------------------------------------------------------------------------
Source: China Global Investment Tracker.

                            the bri's future
    What the BRI has been to now is often mildly exaggerated, where it 
is headed is in some cases greatly exaggerated. Investment volume and 
growth peaked in 2015. Though construction transactions are publicized 
more gradually and 2018 figures are certainly not final, volume and 
growth looks to have peaked in 2016. Rather than building toward global 
transformation, the BRI may have already seen its most dynamic days.


                               BRI by Year
                               ($ billion)
------------------------------------------------------------------------
                      Construction                   Investment
------------------------------------------------------------------------
2014                                  67.6                          36.9
-------------
2015                                  77.4                          45.3
-------------
2016                                  96.7                          34.4
-------------
2017                                  83.3                          34.0
-------------
2018                                  67.2                         39.7
------------------------------------------------------------------------
Source: China Global Investment Tracker.

    For the first half of 2019, all results are of course incomplete 
for investment and nowhere close to complete for construction. But 
Chinese investment around the world appears to have dropped again, 
after dropping sharply in the second half of 2018. The reason is 
plunging investment by state-owned enterprises (SOEs), which had until 
last autumn unfailingly outspent private Chinese enterprises. For 
roughly eight months, major state investors have either reported 
drastically less global investment for some reason or actually cut 
their spending.

    While that is a global trend, it is telling for the BRI. In 2014-8, 
SOEs accounted for about 73 percent of BRI investment. They accounted 
for about 96 percent of construction, which is utterly dominated by 
giants such as State Construction Engineering and PowerChina and their 
many subsidiaries. The BRI is a program of SOEs. Private companies 
avoid BRI construction because there's no financial return to often-
difficult projects in what are mostly poorer countries. The same is 
true to a lesser extent for investment.

    It is no surprise, then, that the official BRI investment tally for 
January through April 2019 was tallied for just 50 countries and stood 
at just $4.6 billion.\5\ No on-year growth was given, which is Chinese 
for ``it's declining and we don't want to say that.'' If SOEs have 
stopped disclosing some BRI activities, it obviously harms transparency 
and raises questions about Beijing's commitment. If SOEs have stopped 
investing, the questions become pointed: the PRC is a reliable partner, 
until it needs a break?
---------------------------------------------------------------------------
    \5\ ``China's non-financial ODI up 3.3 pct in first four months,'' 
Xinhua, May 16, 2019, http://www.xinhuanet.com/english/2019-05/16/
c_138063770.htm.

    The SOE pause has weight because it can be traced back to serious 
problems in Chinese external finance. When Xi Jinping launched the BRI 
in September 2013, China's foreign exchange reserves were valued at 
$3.66 trillion.\6\ They rose to $3.99 trillion in June 2014, then began 
falling, standing at $3.09 trillion at the end of April 2019. There is 
also a smaller amount of foreign currency held in the state banking 
system which appears to have fallen more steeply. The BRI was launched 
under conditions of not only abundant but also fast-rising reserves. 
They are still abundant but the trend has reversed.
---------------------------------------------------------------------------
    \6\ Ministry of Foreign Affairs of the People's Republic of China, 
``President Xi Jinping Delivers Important Speech and Proposes to Build 
a Silk Road Economic Belt With Central Asian Countries,'' September 7, 
2013, https://www.fmprc.gov.cn/mfa_eng/topics_665678/xjpfwzysiesgjtfhsh
zzfh_665686/t1076334.shtml; and State Administration of Foreign 
Exchange, ``Data and Statistics,'' https://www.safe.gov.cn/en/
DataandStatistics/index.html (accessed June 2, 2019).

    Reserves are what make the BRI go. While China and others fuss over 
the yuan becoming a globally used currency, the share of the yuan in 
global transactions is about 2 percent, with most of those in Hong 
Kong. For global reserve holdings, the yuan is about as important as 
the Canadian dollar.\7\ BRI governments and local businesses want 
dollars or other hard currency from Beijing, hard currency which it 
increasingly cannot spare. Unless the foreign exchange pattern of the 
past 5 years is flipped, the BRI as a global program will slowly starve 
to death.
---------------------------------------------------------------------------
    \7\ China Global Television Network, ``Share of Chinese RMB in 
global payments rose to 3-year high in Jan.,'' March 1, 2019, https://
news.cgtn.com/news/3d3d414d3449444d33457a6333566
d54/index.html; and International Monetary Fund, ``Currency Composition 
of Official Foreign Exchange Reserves, https://data.imf.org/
?sk=E6A5F467-C14B-4AA8-9F6D-5A09EC4E62A4 (updated March 29, 2019).

    Adding a bit more pressure, if only a bit, is internal financial 
failure. The PRC pushed domestic outstanding credit--an aggregate debt 
measure--from $6.5 trillion in 2008 to $33.2 trillion in 2018, mocking 
all claims of recent economic success.\8\ But this is not money used 
for the BRI. To protect fragile banks, Beijing still employs a closed 
capital account, which keeps domestic and foreign funds separate (and 
money from freely leaving the country). A secondary impact: weak growth 
from heavy debt gradually undermines the BRI by making it politically 
sensitive.
---------------------------------------------------------------------------
    \8\ The equivalent U.S. rise was a disturbing but considerably 
smaller $17.4 trillion. Bank of International Settlements, ``Credit to 
the Non-Financial Sector,'' https://www.bis.org/statistics/
totcredit.htm?m=6%7C380%7C669 (updated June 4, 2019).
---------------------------------------------------------------------------
                         u.s. policy on the bri
    The first question for American policy-makers is a surprise but 
follows directly from current conditions: what is it worth to the U.S. 
to kill the BRI? In most situations, for instance with regard to 
intellectual property, the U.S. does not have the ability to halt 
Chinese actions outright. With the BRI, we effectively do.

    Balance of payments weakness since 2014 has made the PRC extremely 
dependent on sales to the U.S. The PRC's cumulative goods and services 
surplus with the U.S. from 1999 through 2018 was close to $4.6 
trillion, more than its foreign exchange holdings at their peak.\9\ 
Moreover, from June 2014 to April 2019, when China's reserves dropped 
$900 billion, it still ran a $1.5-trillion goods and services surplus 
with the U.S. Without that, Beijing cannot avoid a balance of payments 
crisis, much less fund a global BRI.
---------------------------------------------------------------------------
    \9\ Bureau of Economic Analysis, ``U.S. International Trade in 
Goods and Services, April 2019,'' June 6, 2019, https://www.bea.gov/
data/intl-trade-investment/international-trade-goods-and-services.

    Enter the trade dispute. Available 2019 data show goods imports 
from the PRC falling $17 billion from January to March.\10\ The U.S. 
has since hiked from 10 to 25 percent tariffs on $200 billion of 
Chinese imports, pending exclusions, and a tariff of unknown rate is 
possible on $300 billion more. Neither action is yet reflected in trade 
or reserves. Nearly-across-the-board U.S. tariffs, perhaps half 25 
percent and half 10 percent, would cost Beijing at least $150 billion 
in hard currency annually, a loss the PRC can afford for a while but 
the BRI cannot.
---------------------------------------------------------------------------
    \10\ United States Census Bureau, ``Trade in Goods With China,'' 
https://www.census.gov/foreign-trade/balance/c5700.html (accessed June 
3, 2019).

    The BRI presently depends on American consumers buying Chinese 
products and can be paralyzed for an extended period just by making 
those products more expensive. Such actions of course have costs for 
the U.S., though they are not especially large (unless combined with 
25-percent across-the-board tariffs on Mexico). Is the BRI a sufficient 
threat on its own to justify fairly minor sanctions against China? Not 
---------------------------------------------------------------------------
on the commercial side.

    With regard to frequently cited ``debt traps,'' Beijing can no 
longer afford the billions in hard currency needed to spring a trap. 
The clearest illustration: there turns out to be nothing Venezuela can 
provide worth what China has risked. A deeper answer involves assets 
the PRC might acquire for debt forgiveness. In most cases, there are no 
commercially valuable assets available, hence the initial involvement 
of heavily subsidized SOEs instead of profit-motivated multinationals. 
In Sri Lanka, for example, the obvious pieces for China to gain are 
infrastructure projects for which there is little supporting 
demand.\11\
---------------------------------------------------------------------------
    \11\ Nick Miroff, ``China strengthens ties to cash-strapped 
Venezula with $5 billion loan,'' Washington Post, September 3, 2015, 
https://www.washingtonpost.com/news/worldviews/wp/2015/09/03/china-
strengthens-ties-to-cash-strapped-venezuela-with-5-billion-loan/
?utm_term=.627284
9a6ce1; and Iain Marlow, ``China's $1 Billion White Elephant,'' 
Bloomberg, April 17, 2018, https://www.bloomberg.com/news/articles/
2018-04-17/china-s-1-billion-white-elephant-the-port
-ships-don-t-use.

    The idea behind debt traps, however, is relevant more broadly: what 
does Beijing gain from the BRI to justify devoting (increasingly) 
precious resources? The PRC faces rising labor and land costs, making 
its exports particularly less competitive in lower-income countries 
that dominate the BRI. Better transport and logistics can boost demand 
there. The stress on energy reinforces China's interest in commodities 
extraction and shipment, from Russia and other oil suppliers primarily 
---------------------------------------------------------------------------
and metal ore suppliers such as Vietnam and Chile secondarily.

    The U.S. should care little about either exports to poor BRI 
countries or competitive commodities extraction. American exports skew 
heavily to NAFTA partners and Europe. Net American oil and oil products 
imports in the first quarter of 2019 were less than 10 percent of those 
in the first quarter of 2009 and metals imports have never been 
sizable.\12\ It makes no sense for the U.S. to mirror Chinese economic 
priorities, much less dubious actions like subsidizing power plant 
construction in Laos.
---------------------------------------------------------------------------
    \12\ United States Energy Information Administration, ``U.S. Net 
Imports of Crude Oil and Petroleum Products,'' May 31, 2019, https://
www.eia.gov/dnav/pet/hist/LeafHandler.ashx?n=pet
&s=mttntus2&f=m.

    This discussion is limited to economic issues and security concerns 
may be much sharper. Economics can inform those concerns, as well. 
China cannot fund a truly global BRI and odds are better that financial 
constraints will tighten rather than loosen. Beijing will inevitably 
focus on what it sees as the most important countries. On economic 
grounds, these are the richer countries in Southeast Asia for export 
markets and the Arab world for oil. American policy should anticipate 
where China's gaze will finally land and evaluate to what extent this 
very select set of countries calls for a U.S. response. The BRI as a 
---------------------------------------------------------------------------
whole has become a red herring.

                                 ______
                                 

                             Communications

                              ----------                              


                        Center for Fiscal Equity

                        14448 Parkvale Road, #6

                          Rockville, MD 20853

                      [email protected]

                      Statement of Michael Bindner

Chairman Cornyn and Ranking Member Casey, thank you for the opportunity 
to submit these comments, which will put this matter into long-term 
context.

News reports on this project indicate that China's partners in this 
endeavor are adopting more authoritarian means to quell dissent. Where, 
in the American system, the government will provide compensation for 
land seizure, I doubt that current residents receive compensation, 
assuming they held title in the first place.

Like the Slave Power in the antebellum South, even speaking out against 
the project is not allowed. This is an extension of the despotism of 
Chinese state capitalism. While recent events in China have the 
appearance of a free market, the reality is that Party Members are at 
the Center of most enterprise.

This is not terribly different than the progress of economic and 
political freedom in the Global North of the Western World. While a 
Marxist revolution has never occurred in a Marxist state, a Marxian 
analysis (not the elevator speech that Stalin and Mao implemented), 
society moves forward in largely predictable ways.

Aristocracy (or Party) brings about industrialization under a 
capitalistic despotism, which includes militarism and imperialism. As 
the peasantry is forced into slave like conditions in urban factories, 
they soon acquire skills and savings. Eventually, they demand civil and 
union rights, which their capitalist masters resist until a consumer 
surplus is required to match the labor surplus, usually because 
production exceeds worker income.

Marx posited that this would lead to a boom-bust cycle. We now know 
that this cycle actually helps the working class, so unionization, 
social and political democracy exist, despite capitalist resistance. 
Indeed, it is often the fear of socialism that forces concessions, thus 
delaying revolution.

Marx was not familiar with how public spending and debt control the 
business cycle, as opposed to imbalances in production and consumption. 
Keynes got close and Hayek and von Mises thought that the cycle was a 
healthy thing, yielding both innovation and removing failed enterprise. 
Their contention was that aiding failed enterprise let recession 
linger, the hindmost be damned.

This dynamic still plays out in our polity, where discredited supply 
side tax cuts fuel a boom bust cycle, while neo-liberal regimes 
increase taxation to remove excess savings, asset inflation and 
speculation in questionable investments and channel funds to activities 
that actually result in increased gross domestic product.

The other alternative is deficit spending, which also limits asset 
inflation, et al., channeling tax cuts toward bond sales. This usually 
includes high military spending and the need for global hegemony to 
justify it.

The current example of this dynamic is the recovery, which really took 
off when President Obama successfully forced Speaker Boehner and Leader 
McConnell to accept higher taxes on the savings sector and when the 
ironically named Balanced Budget Act of 2018 ate the liquidity produced 
by the Tax Cut and Jobs Act if 2017.

A more robust recovery would have resulted save for neo-liberal 
limitations on transfer payments, which could be destabilizing to 
capitalism, as the rise of the Democratic Socialism among the 
Millennial generation demonstrates. The drive toward employee ownership 
and cooperatives is another trend toward a more socialistic economy, 
not by rage but by arbitrage.

This has everything to do with China and the Belt and Road. One 
possible future is that expanding Chinese militarism will face American 
Hegemony in the same way that emerging Japanese and German militarism 
(both of which occurred in states with a vigorous industrial middle 
class) clashed with British and American imperialism, leading to the 
Second World War (or the Great Patriotic War as it was and is known in 
Russia--which has replaced political imperialism with economic 
imperialism and private capitalist and political corruption which would 
have made Nelson Rockefeller and Boss Tweed proud). Knowledge can help 
us to avoid another super-power conflict, at least for now. Nuclear 
weaponry adds some urgency toward finding another alternative.

Resisting the evolution of China will no more work than attempts to 
preserve our imperialism in the Pacific against Japanese expansion, 
which was ended through nuclear blackmail (and without an adequate 
arsenal of such weapons, we were bluffing) and the extension of 
hegemony absorb Germany and Japan, expanding of late into Eastern 
Europe, as well as recent wars in the Middle East and South Asia. We 
have reached our limit and China will anti them, thanks to their new 
silk road and belt.

At some point, inevitable economic and political change will overcome 
Chinese authoritarianism. Until them, deterrence, rather than conflict 
is essential. Indeed, continuing engagement helped bring the Soviet 
empire to its knees. This is also something we should try in Cuba.

Creating demand for our goods will have Chinese workers and workers in 
their new client states demand more, leading to either evolution or 
revolution. It will not be perfect, but neither is the American system, 
which depends on undocumented labor from the Global south (often with 
slave-like conditions replacing violence with threats of deportation) 
and exploitative contracts with farmers to keep food growing and 
processing cheap.

Oddly, the best alternative is more democracy and ownership in the 
American workplace. To protect themselves from job loss from their own 
supply chain and subsidiaries, such firms will assure that overseas 
workers have the same standard of living and workplace democracy that 
they enjoy, thus subverting authoritarianism in the Global South and 
East. Change in American companies cannot come from governmental 
action.

American workers must seek this for themselves, starting with the 
cooperative and employee owned sector. As this evolves, personal 
accounts in Social Security owning employer voting stock will 
accelerate workplace democratization, which is a measure that this 
Committee could enact, along with the Subtraction VAT that we have long 
suggested in our previous comments. In this way, real American 
cooperative socialism can overcome Chinese stat e capitalism, which is 
both faux socialism and faux free market rolled into one.

Thank you for the opportunity to comment. As always, we are available 
to answer questions from members and staff and to provide direct 
testimony.

Attachment--Employee Ownership from Improving Retirement Security for 
America's Workers, Center for Fiscal Equity, June 6, 2018

In the January 2003 issue of Labor and Corporate Governance, we 
proposed that Congress should equalize the employer contribution based 
on average income rather than personal income. It should also increase 
or eliminate the cap on contributions. The higher the income cap is 
raised, the more likely it is that personal retirement accounts are 
necessary. A major strength of Social Security is its income 
redistribution function. We suspect that much of the support for 
personal accounts is to subvert that function--so any proposal for such 
accounts must move redistribution to account accumulation by equalizing 
the employer contribution.

We propose directing personal account investments to employer voting 
stock, rather than an index funds or any fund managed by outside 
brokers. There are no Index Fund billionaires (except those who operate 
them). People become rich by owning and controlling their own 
companies. Additionally, keeping funds in-house is the cheapest option 
administratively. I suspect it is even cheaper than the Social Security 
system--which operates at a much lower administrative cost than any 
defined contribution plan in existence.

If employer voting stock is used, the Net Business Receipts Tax/
Subtraction VAT would fund it. If there are no personal accounts, then 
the employer contribution would be VAT funded.

Safety is, of course, a concern with personal accounts. Rather than 
diversifying through investment, however, we propose diversifying 
through insurance. A portion of the employer stock purchased would be 
traded to an insurance fund holding shares from all such employers. 
Additionally, any personal retirement accounts shifted from employee 
payroll taxes or from payroll taxes from non-corporate employers would 
go to this fund.

The insurance fund will save as a safeguard against bad management. If 
a third of shares were held by the insurance fund than dissident 
employees holding 25.1% of the employee-held shares (16.7% of the 
total) could combine with the insurance fund held shares to fire 
management if the insurance fund agreed there was cause to do so. Such 
a fund would make sure no one loses money should their employer fail 
and would serve as a sword of Damocles' to keep management in line. 
This is in contrast to the Cato/PCSSS approach, which would continue 
the trend of management accountable to no one. The other part of my 
proposal that does so is representative voting by occupation on 
corporate boards, with either professional or union personnel providing 
such representation.

The suggestions made here are much less complicated than the current 
mix of proposals to change bend points and make OASI more of a needs 
based program. If the personal account provisions are adopted, there is 
no need to address the question of the retirement age. Workers will 
retire when their dividend income is adequate to meet their retirement 
income needs, with or even without a separate Social Security program.

No other proposal for personal retirement accounts is appropriate. 
Personal accounts should not be used to develop a new income stream for 
investment advisors and stock traders. It should certainly not result 
in more ``trust fund socialism'' with management that is accountable to 
no cause but short term gain. Such management often ignores the long-
term interests of American workers and leaves CEOs both over-paid and 
unaccountable to anyone but themselves.

If funding comes through an NBRT, there need not be any income cap on 
employer contributions, which can be set high enough to fund current 
retirees and the establishing of personal accounts. Again, these 
contributions should be credited to employees regardless of their 
salary level.

Conceivably a firm could reduce their NBRT liability if they made all 
former workers and retirees whole with the equity they would have 
otherwise received if they had started their careers under a reformed 
system. Using Employee Stock Ownership Programs can further accelerate 
that transition. This would be welcome if ESOPs became more democratic 
than they are currently, with open auction for management and executive 
positions and an expansion of cooperative consumption arrangements to 
meet the needs of the new owners.

We also suggest a floor in the employer contribution to OASI, ending 
the need for an EITC--the loss would be more than up by gains from an 
equalized employer contribution--as well as lowering the ceiling on 
benefits. Since there will be no cap on the employer contribution, we 
can put in a lower cap for the employee contribution so that benefit 
calculations can be lower for wealthier beneficiaries, again reducing 
the need for bend points.

The new Majority should not run away from this proposal to enact 
personal accounts. If the proposals above are used as conditions for 
enactment, we suspect that it won't have to. The investment sector will 
run away from them instead and will mobilize the next version of the 
Tea Party against them. Let us hope that the rise of Democratic 
Socialism in the party invests workers in the possibilities of employee 
ownership.

Attachment--Tax Reform, Center for Fiscal Equity, May 22, 2019

For the past eight years, we have had a standard plan with four 
elements followed by explanatory paragraphs. The following is a 
different presentation with the same concepts.

Individual payroll taxes. These are optional taxes for Old-Age and 
Survivors Insurance after age 60 (or 62). These will be collection of 
these taxes occurs if an income sensitive retirement income is deemed 
necessary for program acceptance. The ceiling should be lowered to 
reduce benefits paid to wealthier individuals and a floor should be 
established so that Earned Income Tax Credits are no longer needed. 
Subsidies for single workers should be abandoned in favor of radically 
higher minimum wages.

Income Surtaxes. Individual income taxes, which exclude business taxes, 
above an individual standard deduction of $50,000 per year. It will 
include initial cash distributions from inheritance (except those from 
the sale of estate assets, see below). This tax will fund net interest 
on the debt (which will no longer be rolled over into new borrowing), 
redemption of the Social Security Trust Fund, strategic, sea and non-
continental U.S. military deployments, veterans' health benefits as the 
result of battlefield injuries, including mental health and addiction 
and eventual debt reduction.

Asset Value-Added Tax (A-VAT). A replacement for capital gains taxes 
and the estate tax. It will apply to assets held for a longer period of 
time, exercised options, inherited assets and the profits from short 
sales. Tax payments for option exercises and inherited assets will be 
reset, with prior tax payments for that asset eliminated so that the 
seller gets no benefit from them. In this perspective, it is the 
owner's increase in value that is taxed. Free assets to the seller will 
be counted as such. As with any sale of liquid or real assets, sales to 
a qualified broad-based Employee Stock Ownership Plan will be tax free. 
These taxes will fund the same spending items as income or S-VAT 
surtaxes. This tax will end Tax Gap issues owed by high income 
individuals.

Subtraction Value-Added Tax (S-VAT). These are employer paid Net 
Business Receipts Taxes that allow multiple rates for higher incomes, 
rather than collection of income surtaxes. They are also used as a 
vehicle for tax expenditures including healthcare (if a private 
coverage option is maintained), veterans' health care for non-
battlefield injuries, educational costs borne by employers in lieu of 
taxes as either contributors, for employee children or for workers 
(including ESL and remedial skills) and an expanded child tax credit.

The last allows ending state administered subsidy programs and 
discourages abortions, and as such enactment must be scored as a must 
pass in voting rankings by pro-life organizations (and feminist 
organizations as well). An inflation adjustable credit should reflect 
the cost of raising a child through the completion of junior college or 
technical training. To assure child subsidies are distributed, S-VAT 
will not be border adjustable.

The S-VAT is also used for personal accounts in Social Security, 
provided that these accounts are insured through an insurance fund for 
all such accounts, that accounts go toward employee-ownership rather 
than for a subsidy for the investment industry. Both employers and 
employees must consent to a shift to these accounts, which will occur 
if corporate democracy in existing ESOPs is given a thorough test. So 
far it has not.

Regardless, S-VAT funded retirement savings will be credited equally 
for every worker, which allows for funding both the current program and 
personal accounts and lessens the need for bend points in benefit 
calculations. It also has the advantage of drawing on both payroll and 
profit, making it less regressive.

Invoice Value-Added Tax (I-VAT). Border adjustable taxes will appear on 
purchase invoices. The rate varies according to what is being financed. 
If Medicare for All does not contain offsets for employers who fund 
their own medical personnel or for personal retirement accounts, both 
of which would otherwise be funded by an S-VAT, then they would be 
funded by the I-VAT to take advantage of border adjustability. I-VAT 
also forces everyone, from the working poor to the beneficiaries of 
inherited wealth, to pay taxes and share in the cost of government. 
Enactment of both the A-VAT and I-VAT ends the need for capital gains 
and inheritance taxes (apart from any initial payout). This tax would 
take care of the low income Tax Gap.

I-VAT will fund domestic discretionary spending, disability and 
survivors insurance (which will no longer be tied to income and shall 
be raised to the increased minimum wage rate and adjusted for 
inflation), and OASI employer contributions if personal accounts are 
not enacted and non-nuclear, non-deployed military spending, possibly 
on a regional basis. Regional I-VAT would both require a constitutional 
amendment to change the requirement that all excises be national and to 
discourage unnecessary spending, especially when allocated for 
electoral reasons rather than program needs.

As part of enactment, gross wages will be reduced to take into account 
the shift to S-VAT and I-VAT, however net income will be increased by 
the same percentage as the I-VAT. Adoption of S-VAT and I-VAT will 
replace pass-through and proprietary business and corporate income 
taxes.

Carbon Value-Added Tax (C-VAT). A Carbon tax with receipt visibility, 
which allows comparison shopping based on carbon content, even if it 
means a more expensive item with lower carbon is purchased. C-VAT would 
also replace fuel taxes. It will fund transportation costs, including 
mass transit, and research into alternative fuels (including fusion). 
This tax would not be border adjustable.

                                 ______
                                 
                         Rail Security Alliance
June 11, 2019

The Honorable John Cornyn
Chairman
Subcommittee on International Trade, Customs, and Global 
Competitiveness
U.S. Senate
Committee on Finance
Washington, DC 20510

Dear Chairman Cornyn:

The Rail Security Alliance appreciates you convening the hearing 
``China's Belt and Road Initiative,'' a timely topic that is vital to 
both the economic and national security interests of the United States. 
We welcome the opportunity to communicate to you the work of the Rail 
Security Alliance and the importance of protecting U.S. competitiveness 
and national security from the unfair trade practices from the People's 
Republic of China.

The Rail Security Alliance is a coalition of North American freight 
rail manufacturers, suppliers, unions, and steel interests that is 
committed to ensuring the economic and national security of passenger 
and freight rail systems. This alliance was formed in response to the 
merging of China's two rail manufacturers into one super state-owned 
enterprise (SOE), the China Railroad Rolling Stock Corporation (CRRC). 
CRRC, by their own calculation, controls roughly 83 percent of the 
global rail market. As a state-owned enterprise, CRRC has access to 
unlimited state funding that allows them to win contracts around the 
world by underbidding every other competitor, jeopardizing the future 
of this industry.

Over the past 5 years, CRRC has aggressively targeted the U.S. market 
with the intent of overtaking the United States and other nation's 
critical industries like passenger and freight railcar manufacturing. 
Using state-backed financing and other anti-competitive tactics, CRRC 
has now secured $2.6 billion in contracts to build metro transit cars 
in Boston, Chicago, Philadelphia, and Los Angeles, sometimes 
underbidding its competitors by as much as several hundred million 
dollars, which translates from 7% to as much as 50% below other 
bidders. With its Belt and Road Initiative highlighted today, you are 
seeing similar practices in 152 other nations with one goal in mind--
major Chinese influence in every major nation on the globe.

According to a June 2019 Oxford Economics study, which is attached for 
your review and consideration, for each job created by a Chinese SOE in 
the rail sector, the United States loses between 3.5 to 5.4 net jobs, 
which factors out to a net loss of over 5,000 U.S. jobs for every $1 
billion won in contracts by China. CRRC should not be able to hide 
behind the facade of American job creation while putting hardworking 
Americans out of work with our own taxpayer dollars. For this reason, 
we commend you on the introduction of S. 846, the Transit 
Infrastructure Vehicle Security Act alongside Senators Baldwin, Crapo, 
and Brown. This legislation is vital in protecting American transit 
rail from the unfair, and anti-competitive practices of China and its 
SOEs.

This threat is now knocking on the doors of Washington. WM ATA, 
Washington's metro system, is seeking to procure new metro cars this 
year and it is becoming increasingly clear that CRRC could win this 
contract. With no Buy America or Disadvantaged Business Enterprise 
(DBE) requirements for this contract, CRRC is well positioned to submit 
a compelling bid. Needless to say, the prospect of metro cars 
manufactured by the Government of China running under or near the 
Pentagon, the Capitol, the White House, and other sensitive 
installations should raise serious concerns.

Relating to the national security of the nation's capital and country 
at large, in testimony before a recent House Transportation and 
Infrastructure hearing on China's impact on American's rail system, 
Brigadier General John Adams (USA, Ret.) stated, ``CRRC's bylaws direct 
that the company seek guidance from the Communist Party of China on 
significant matters affecting the company's operations. Three of CRRC's 
current board members previously held high-level positions at several 
state-owned defense companies including, Aviation Industry Corporation 
of China (AVIC), which produces fighter and bomber aircraft, 
helicopters, and unmanned aerial vehicles for the Chinese Army, and 
China Shipbuilding Industry Corporation (CSIC), which produces 
submarines, warships, and other naval equipment for the Chinese Navy. 
Furthermore, two former CRRC board members held positions at AVIC and 
China North Industries Group Corporation Limited (NORINCO), a state-
owned defense company that supplies tanks, aircraft, missiles, 
firearms, and related products for the Chinese military.''

The fact that a state-owned company with deep ties to China's defense 
industrial base is winning rail contacts around the United States 
should frighten concern us all because it unequivocally puts every 
American at risk.

The freight system is not immune to CRRC either. CRRC has also 
attempted to enter the North American freight rail manufacturing sector 
with a joint venture in North Carolina. Fortunately, that effort 
failed. Nonetheless we cannot discount the fact that we have seen this 
pattern before by the Chinese. Indeed, CRRC entered the Australian 
market in 2008 and decimated its domestic manufacturing capabilities in 
just nine years. We would be naive to think that cannot and will not 
happen here.

Allowing Chinese SOEs to continue expanding and operating in the United 
States presents major risks to the economic and national security of 
our country.

We look forward to continuing our work together to protect the United 
States and its rail operators, manufacturers, and suppliers.

Respectfully submitted,

Erik Robert Olson
Vice President, Rail Security Alliance

                                 ______
                                 
                            Oxford Economics

            ASSESSING HOW FOREIGN STATE-OWNED ENTERPRISES' 
                U.S.-BASED OPERATIONS DISRUPT U.S. JOBS

    Measuring the Effects of Supply-Chain Loss Due to Expansion of 
              Foreign State-Owned Enterprises in the U.S.

JUNE 2019

EXECUTIVE SUMMARY

Independent research conducted by Oxford Economics assesses the net 
economic impact of Chinese State-Owned Enterprises (SOEs) in U.S. 
passenger railcar manufacturing. Because Chinese SOE railcar production 
relies more on imported parts and subsystems in its supply chain, 
compared to legacy producers operating in the U.S., we estimate that 
for each U.S. job created by a Chinese SOE, the U.S. loses between 3.5 
to 5.4 jobs when factoring in the direct, indirect, and induced 
economic impact. The following analysis provides a more thorough 
explanation of this dynamic.

U.S. passenger railcar manufacturing is currently experiencing 
unprecedented competition from the Chinese state-owned railcar 
manufacturer, CRRC. This SOE recently won four contracts to supply 
passenger railcars in Boston, Philadelphia, Chicago, and Los Angeles; 
altogether totaling approximately $2.7 billion. The winning bids on 
these four contracts were between 7% and 21% lower than the next lowest 
bidder, raising concerns of anti-competitive pricing behavior. In part, 
this is because SOEs are not like traditional commercial enterprises. 
SOEs enjoy a variety of implicit and explicit government subsidies, do 
not face the same hard budget constraints that private firms do, and 
are responsive to various non-commercial policy objectives of their 
home governments.

As a result of these factors, U.S.-based passenger railcar production 
by Chinese SOEs is widely perceived by industry experts to differ from 
that of legacy U.S.-based producers, which are privately held 
companies. Chinese SOEs are thought to do less value-add production in 
the U.S., and to rely more on imported railcar parts and subsystems. 
This behavior echoes similar strategies undertaken in other countries, 
such as Australia.\1\ The ramifications of this change in production 
behavior include lost jobs, GDP, and labor income in the U.S.--
effectively shifting this value abroad. Under a worst-case scenario, we 
estimate the economic cost of this shift to be a net loss of more than 
5,000 U.S. jobs for every $1 billion in contracts won by Chinese SOEs.
---------------------------------------------------------------------------
    \1\ Oxford Economics. Will We Derail U.S. Freight Rolling Stock 
Production? May 2017.

Oxford Economics studied the effects of Chinese SOE penetration of the 
U.S. passenger railcar market. Two specific scenarios are modeled: good 
faith adherence to Buy America provisions, and a ``high impact'' 
scenario where Buy America provisions are assumed not to apply. This 
was then compared to a baseline scenario of existing, well-integrated 
current railcar manufacturers (Legacy Producers).\2\ Three types of 
economic impacts are included in the estimates: direct (impacts by the 
railcar manufacturer itself), indirect (supply chain impacts), and 
induced (impact supported by spending out of wages of workers employed 
directly or indirectly).
---------------------------------------------------------------------------
    \2\ Legacy Producers scenario. This is based on economic data for 
the railroad rolling stock manufacturing industry, adjusted to better 
reflect passenger railcar manufacturing by privately held companies. 
Although legacy producers are foreign owned, they typically localize 
production and sourcing of materials and subsystems.
    Chinese SOE Buy America scenario. This is a lower-displacement 
Chinese SOE scenario with a 70 percent ``Buy America'' domestic content 
restriction on parts and subsystems.
    Chinese SOE High Disruption scenario. This model assumes no 
domestic content requirement and quantifies.
    The assumptions underlying all three scenarios are carefully laid 
out in section 2.3.

Each scenario assumes a hypothetical $1 billion in passenger railcar 
output. Impacts from smaller or larger projects would scale linearly. 
---------------------------------------------------------------------------
Our analysis found that:

      Under the Legacy Producers scenario, this production has an 
impact of approximately 11,600 jobs, $1.2 billion in GDP, and $275 
million in taxes generated (federal, state, and local).

      Under the Chinese SOE Buy America scenario, this production has 
an impact of approximately 8,300 jobs, $880 million in GDP, and $205 
million in taxes generated. Thus, relative to the Legacy Producers 
scenario, job impacts are 28 percent lower, and GDP impacts 26 percent 
lower.

      Under the Chinese SOE High Disruption scenario, this production 
has an impact of approximately 6,500 jobs, $690 million in GDP, and 
$162 million in taxes generated. Thus, relative to the Legacy Producers 
scenario, job impacts are 44 percent lower, and GDP impacts 42 percent 
lower.

[GRAPHIC(S) NOT AVAILABLE IN TIFF FORMAT] 

1. INTRODUCTION

This report focuses on passenger rolling stock manufacturing in the 
U.S., and the recent entry of foreign state-owned enterprises (SOEs) 
into the industry. In particular, we consider impacts on the U.S. 
economy from the entry of Chinese state-owned railcar manufacturers 
into the U.S. passenger railcar market.

Likely because the U.S. is not a large purchaser of passenger railcars 
on the global stage, most passenger railcar manufacturing in the U.S. 
(unlike other segments of the U.S. railroad rolling stock industry) is 
already undertaken by foreign-owned enterprises operating with 
extensive supply chains and investments in the U.S.\3\ However, the 
entry of foreign SOEs present new challenges and concerns for U.S. 
policymakers. Unlike other firms, SOEs often receive implicit or 
explicit subsidies from their home governments, which allow them to 
engage in long-run strategic pricing behavior with anti-competitive 
effects.\4\ Additionally, SOEs are responsive to non-commercial policy 
objectives of their home governments.\5\
---------------------------------------------------------------------------
    \3\ Some of the largest firms include Bombardier (Canada), Hyundai 
Rotem (South Korea), Siemens (Germany), Alstom (France), and Kawasaki 
(Japan).
    \4\ See, for example: OECD (2016), ``State-Owned Enterprises as 
Global Competitors: A Challenge or an Opportunity?'', OECD Publishing, 
Paris. http://dx.doi.org/10.1787/9789264262096-en. This report 
discusses preferential financing obtained by SOEs and ``special 
advantages granted by governments in return for public policy 
obligations at home,'' as well as the obstacles that foreign non-SOEs 
face in competing with an SOE in the latter's home market.
    \5\ CRRC's articles of incorporation acknowledge the company's non-
commercial pollical obligations. (See, for example, article 161.) 
http://www.crrcgc.cc/Portals/73/Uploads/Files/2018/6-4/
636637164457871915.pdf.

Essentially all passenger rolling stock in the U.S. is purchased by 
governmental or quasi-governmental local transportation authorities 
through competitive bidding processes. As shown in Figure 1, Chinese 
state-owned railcar producer, CRRC, has won several high-profile 
passenger railcar projects for some of the largest public 
transportation providers in the U.S., substantially undercutting the 
second-place leading bidders by 7-21 percent. As a condition of these 
projects to date, final assembly of the train cars has or will be done 
in the U.S., much of it at the company's existing facility in 
Springfield, MA.\6\
---------------------------------------------------------------------------
    \6\ The winning bid for the CTA contract was submitted by China 
South Locomotive and Rolling Stock Corp. (CSR), a predecessor to CRRC. 
As part of this bid, CSR agreed to open a Chicago assembly plant that 
would directly employ about 170 people.

Either because of the characteristics of SOEs described above, or 
because of other factors specific to the Chinese railcar manufacturing 
industry (e.g., an overhang of excess capacity), it is widely perceived 
by U.S.-based manufacturers that Chinese SOE railcar production in the 
U.S. is qualitatively different from that of the other, privately held 
railcar manufacturers--hereinafter referred to as ``legacy producers.'' 
Specifically, within the limits prescribed by bidding requirements, 
Chinese SOE railcar production is thought to rely less on U.S.-based 
value-added production, and more heavily on imported pre-fabricated 
---------------------------------------------------------------------------
train parts and subsystems.


  FIG. 1: Summary of CRRC Winning Bids  for Passenger Railcar Projects
------------------------------------------------------------------------
                          Second    Difference   Number of
   Buyer      Winning    place bid   (% of 2nd     cars      Buy America
            bid  ($ m)     ($ m)    place bid)    ordered    requirement
------------------------------------------------------------------------
MBTA              $567        $721         21%         284  No
 (Boston)
 
SEPTA             $138        $172         20%          45  Yes
 (Philadel
 phia)
 
CTA             $1,309      $1,536         15%         846  No
 (Chicago)
 
LA Metro          $637        $683          7%         282  No *
 (Los
 Angeles)
 
    Total       $2,651      $3,112         15%       1,457
------------------------------------------------------------------------
Source: News reports and industry interviews, collated by Oxford
  Economics.
 
* The LA Metro did not require Buy America provisions, however CRRC
  stated that it has met the Buy America standards with 60 percent of
  components to be made in the U.S.


In this report, based on available public materials and interviews with 
industry experts from major U.S.-based passenger and other railcar 
manufacturers, Oxford Economics modeled the full economic impacts of 
Chinese SOE passenger railcar manufacturing in the U.S., as compared 
with legacy U.S.-based passenger railcar manufacturers. This analysis 
quantifies the net economic impact, in jobs, GDP, labor income, and 
taxes, of Chinese SOE passenger railcar manufacturing in the U.S. 
Section 2 presents the assumptions underlying this modeling work. 
Section 3 presents the results of this modeling. Section 4 summarizes 
of our findings and offers concluding statements.

2. MODEL AND ASSUMPTIONS

In this section, we lay out the assumptions behind three economic 
models of passenger railcar production--Legacy Producers, Chinese SOE 
Buy America, and Chinese SOE High Disruption.

The basic structure of the input-output model used in this work, which 
traces the supply chain linkages of various industries through the U.S. 
economy, is described below. In Section 2.2, we present a brief 
discussion of the Buy America Act and its impact on our modeling. In 
Section 2.3, we present the assumptions for the three scenarios.
2.1 MODEL STRUCTURE
This analysis uses IMPLAN economic impact software. IMPLAN is widely 
used and recognized by government organizations, nonprofits, economic 
development organizations, workforce planners, education institutions, 
and consultants across the U.S. and Canada.

The model is designed to capture the inter-industry relationships, 
consumer spending, and ripple effects that result from the direct 
economic activity generated by passenger railcar manufacturers. The 
impacts are measured across three channels:

1.  Direct Impact: direct employment and spending by the industry's 
business operations

2.  Indirect Impact: supply-chain effects, stemming from industry's 
operations (e.g. legal services, utilities, etc.)

3.  Induced Impact: describes impact resulting from employees spending 
their incomes in the U.S. economy

Fig. 2, on the following page, characterizes the impact model 
structure.

[GRAPHIC(S) NOT AVAILABLE IN TIFF FORMAT] 

2.2 BUY AMERICA ACT
In some cases (generally when federal funds are involved),\7\ local 
transportation authorities looking to purchase new passenger rolling 
stock are required to comply with domestic content provisions under the 
Buy America Act.\8\ Historically, in addition to requiring final 
assembly to take place in the U.S., the Buy America Act has required at 
least 60 percent of the value of parts to be domestically sourced. For 
FY 2018 and FY 2019, this threshold has been raised to 65 percent, and 
to 70 percent from FY 2020 onward. Because U.S. taxpayers are the 
source of funds for railcar purchases, the provisions are designed to 
ensure that the value generated from railcar manufacturing accrues to 
Americans.
---------------------------------------------------------------------------
    \7\ For context, three of these four contracts presented in Fig. 1 
above are entirely funded by state and local governments, meaning that 
Buy America provisions requiring a significant percentage of parts to 
be of U.S. origin do not apply. However, other municipality-mandated 
provisions may be stipulated.
    \8\ See Congressional Research Service (September 12, 2016). 
``Domestic Content Restrictions: The Buy America Act and Complementary 
Provisions of Federal Law.''

The precise details of the accounting behind Buy America Act domestic 
content provisions are complex and well beyond the scope of this 
report. However, it is worth noting that a variety of accounting 
practices (e.g., the manipulation of transfer prices) can be used to 
meet Buy America Act requirements while importing a larger share of 
---------------------------------------------------------------------------
real economic value than the Act intends.

With this understanding, our economic impact modeling below for the 
Chinese SOE Buy America scenario takes the 70 percent domestic content 
provision literally and assigns domestic shares to Chinese production 
that allows it to meet this threshold.
2.3 OUR ASSUMPTIONS
The underlying basis for our assumptions about U.S. and Chinese 
passenger railcar manufacturing supply chains is the Input-Output data 
on the railroad rolling stock industry collected by the Bureau of 
Economic Analysis (BEA), as aggregated by IMPLAN for 2016.\9\ The 
production process for any industry is a profile breaking the total 
value of the final output of that industry into spend on intermediate 
goods and services, and industry value-add (the last of which can be 
broken down into employee compensation, capital income, and directly 
paid taxes). To reflect the key categories of inputs used in railcar 
manufacturing, we have categorized the intermediate goods into four 
categories (metallic parts, non-metallic parts, motors and electrical 
equipment, trade and transport margins on parts; the last of which is a 
service but is capitalized into the cost of goods), and the 
intermediate services into two categories (utilities and business 
services). Each of these inputs is also associated with a domestic 
content share, which is the share of the spend in that category spent 
on parts sourced in the U.S.\10\
---------------------------------------------------------------------------
    \9\ The U.S. railroad rolling stock industry (NAICS code 336510) is 
a roughly $20 billion industry (in annual output) directly employing 
approximately 21,000 workers in the U.S. It consists of the following 
activities: railcar manufacturing, which includes passenger, freight, 
and locomotive; railcar parts and subsystem manufacturing (for 
downstream use in the industry); and railcar rebuilds.
    \10\ It's worth noting that, while these domestic shares 
(``regional purchase coefficients'' in IMPLAN terminology) are being 
used as a proxy for Buy America requirements here, they are not 
synonymous. In particular, Buy America places additional restrictions 
on the domestic content of U.S.-assembled parts. It's also worth noting 
that the domestic shares of the railroad rolling stock industry (column 
1) presented in Fig. 4 on p. 11 are based on cross-industry economic 
data specific to the parts categories, and are not specific to the 
railroad rolling parts industry except in the shares of different 
detailed parts categories it uses.

Fig. 3 and Fig. 4 present the assumptions used for the core economic 
modeling in this report. Fig. 3 presents the production process 
associated with different types of manufacturing; that is, each row 
represents the share of final output accounted for by production inputs 
of a particular type. Fig. 4 presents the domestic content share of 
---------------------------------------------------------------------------
each of the intermediate parts and services used.

The columns labeled (1) in Fig. 3 and Fig. 4 present the raw economic
data for the railroad rolling stock industry as a whole. From this, we
make slight adjustments in columns (2) to better reflect the legacy 
passenger railcar manufacturing subindustry, increasing the share of
non-metallic components for components such as signage and seating. 
In columns (3) and (4), we present assumptions for two scenarios for 
Chinese railcar manufacturing. In both, we decrease the share of domestic
value-add and increase the share of differentiated railcar parts and subsystems
to reflect less real value-added manufacturing work occurring in the
U.S. relative to legacy non-SOE manufacturers. Additionally, to reflect
a greater share of imports, we decrease the domestic share of parts. In
column (3), under the Chinese SOE Buy America scenario, we approximate 
binding requirements of the Buy America Act (see Section 2.2 above),
requiring the domestic share of intermediate parts and subsystems to be
at least 70 percent. In column (4), under the Chinese SOE High Disruption
scenario, we assume the Buy America Act is not binding (perhaps because 
a particular project does not fall under its scope) and increase the 
SOE's import shares significantly. The image below further illustrates 
the origin of content for railcars under the Buy America scenario and t
he High Disruption Scenario.




FIG. 3: Production Assumptions, Shares of Intermediate Goods and Services
                  and Value-Add as a Share of Final Output

Category    Production inputs  Railroad   Passenger car manufacturing Chinese SOE Buy  Chinese High
                                rolling          assumptions                American   American scenario 
                               stock 2016       U.S. legacy producers       scenario    Disruption(4)
                               industry data            (2)                     (3)
                                   (1)                      
_______________________________________________________________________________________________________                                                       
                                
                                      
INTERMEDIATE PARTS   Metallic parts 28%                  26%                      20%         20%

                 Non-metallic parts 5%                    7%                       5%         5%
                 
Motor and
electrical equipment                7%                    6%                       5%         5%                     

Differentiated train parts
   (rolling stock)                 17%                    17%                     30%         30%
   
Trade and transport                 9%                     9%                      9%          9%
 margins on parts  
_____________________________________________________________________________________________________ 
INTERMEDIATE
 SERVICES
______________________________________________________________________________________________________ 
 Utilities                          1%                     1%                      1%          1%
 
 Business services                 19%                    19%                     19%          19% 
________________________________________________________________________________________________________ 
 
VALUE-ADD  

     Employee compensation         11%                    11%                       8%          8% 

     Capital income                 3%                     3%                       2%          2%
     
    Directly paid taxes             1%                     1%                       1%          1%
___________________________________________________________________________________________________________

Source: Industry data from IMPLAN, based on BEA data; assumption by Oxford Economics.



                     FIG. 4: Domestic Content Assumptions
                     
                     
Category    Production inputs  Railroad   Passenger car manufacturing Chinese SOE Buy  Chinese SOE High
                                                                                          Disruption
                                rolling          assumptions                American       scenario 
                               stock 2016       U.S. legacy producers       scenario         (4)
                               industry data            (2)                     (3)
                                   (1)                      
_______________________________________________________________________________________________________                                                       
                                
                                      
INTERMEDIATE PARTS   Metallic parts 77%                  77%                      67%         50%

                 Non-metallic parts 70%                  70%                      67%         50%
                 
Motor and
electrical equipment                56%                   56%                     56%         50%                     

Differentiated train parts
   (rolling stock)                 95%                    95%                     67%          30%
   
Trade and transport                98%                    98%                     98%          98%
 margins on parts  
 
____________________________________________________________________________________________________

 Overall parts                      82%                   82%                     70%           48%
____________________________________________________________________________________________________

INTERMEDIATE
 SERVICES
 
 Utilities                         99%                   99%                     99%          99%
 
 Business services                 97%                    97%                     25%          25% 
 _____________________________________________________________________________________________________
                      
Source: Industry data from IMPLAN, based on BEA data; assumption by Oxford Economics  



[GRAPHIC(S) NOT AVAILABLE IN TIFF FORMAT]                      
 


IMPLICATIONS FOR PUBLIC TRANSIT AND PASSENGER RAILCAR MANUFACTURING

Because the impact results presented here are general purpose, and not 
specific to a particular project, all results are scaled to $1 billion 
in final output of passenger railcars. That is, the impacts reflect the
full annual \11\N economic impacts of $1 billion of passenger railcar 
output by one of the three types (scenarios) of producers_legacy
U.S.-based producers, Chinese SOEs operating under binding Buy America
70 percent domestic content provisions, or Chinese SOEs operating without
such provisions (``High Impact''). If a particular project, or set of
projects, were larger or smaller than this $1 billion assumption, the
total impacts could then be scaled linearly (e.g. impacts for a $3 
billion project would be three times as large).

\11\I.e each job reflects one person-year of employment. If $1 billion of output were produced in 6 months instead of a year, the raw number of jobs would double but would only last half as long. Note that employment impacts are measured by headcount jobs, not full-time equivalents.



Fig. 5 presents the impacts_direct, indirect, induced, and total\12\_
of the three scenarios described above, as measured in employment,
GDP, labor income, and taxes generated (federal, state, and local)
for $1 billion of hypothetical output. Figure 6 presents the 
differences (losses) in economic impacts in each category under
the two Chinese SOE scenarios relative to the Legacy Producers scenario.

  \12\See Section 2.1 for a description of these terms.

  3.1 LEGACY PRODUCERS

As shown in Fig. 5, the total economic impact of $1 billion of railcar 
production completed by private sector, non-SOE businesses under the 
Legacy Producers scenario is $1.2 billion of GDP, 11,570 jobs paying 
a total of $760 million in labor income, and $275 million in federal,
state, and local tax impacts.



FIG. 5: Economic Impacts of a Hypothetical $1 Billion of Passenger Railcar Production Under Three Scenarios



Scenario             Impact type         Direct       Indirect       Induced      Total                                
                                                  
_______________________________________________________________________________________________________                                                       
                                
                                      
LEGACY 
                     Employment           1,301        5,514           4,756        11,570
PRODUCERS            GDP ($ m)            $147         $618            $436        $1,201
                     Labor income ($ m)   $111         $404            $245          $760
                     Taxes                 $34         $140            $101          $275
________________________________________________________________________________________________________ 
CHINESE SOE
BUY AMERICA         Employment             938         3,943           3,436         8,317
                    GDP ($ m)            $116          $452            $315          $883 
                    Labor income ($ m)    $80          $292            $177          $549
 
____________________________________________________________________________________________________

                     
                     Taxes ($ m)            $27          $105            $73          $205

                     Employment             938          2866            2688         6492                      
                    
                     
                
 CHINESE             GDP ($ m)              $116         $331            $246          $693
                     
 SOE HIGH            Labor income($ m)       $80          $211            $139         $430
                     
 DISRUPTION            
                     Taxes ($ m)             $27          $78             $87          $162



[GRAPHIC(S) NOT AVAILABLE IN TIFF FORMAT] 


 3.2 CHINA BUY AMERICA

As shown in Fig. 5, the total economic impact of $1 billion under the 
China Buy America scenario is $883 million of GDP, 8,317 jobs paying a
total of $549 million in labor income, and $205 million in federal, state,
and local tax impacts. This represents approximately 28 percent less 
employment impact relative to the legacy producers, and approximately
26 percent less GDP impact (see Fig. 6). 

Relative to the Legacy Producers total employment impacts of 11,570, 
total employment impacts under this scenario are 3,253 fewer jobs  
for every $1 billion of production output lost to an SOE. Thus, for
every one of the 938 direct jobs created under this scenario, we
estimate approximately 3.5 fewer U.S. jobs on net.


 FIG. 6: Impact Differences Relative to Impacts Under Legacy Producers Scenario  


Scenario             Impact type         Direct       Indirect       Induced      Total                                
                                                  
_______________________________________________________________________________________________________                                                       
                                

                                      
 
CHINESE             Employment            -28%         -28%             -28%          -28%        
BUY AMERICA          GDP ($ m)            -21%         -27%             -28%          -26%
                     Labor income ($ m)  -28%         -28%             -28%          -28%          
                     Taxes                21%         -25%             -28%          -26%          
________________________________________________________________________________________________________ 
CHINESE HIGH
1DISRUPTION         Employment            -28%         -48%             -43%          -44%
                    GDP ($ m)            -21%         -46%             -43%          -42%
                    Federal tax           -28%         -48%             -43%          -28%
                    State/local tax       -21%         -45%             -43%          -41%
____________________________________________________________________________________________________

Source: Oxford Economics calculations using IMPLAN software.




[GRAPHIC(S) NOT AVAILABLE IN TIFF FORMAT] 



Fig. 7 illustrates the net loss of jobs associated with each of the two 
China impact scenarios relative to the Legacy Producers scenario. While 
the Buy America scenario preserves more U.S. jobs, modeling results 
still show a net loss of 28%. The High Disruption scenario results in 
still more net loss of U.S. jobs (44), as more of the U.S. supply chain 
is moved overseas.
3.3 CHINA HIGH DISRUPTION
As shown in Fig. 5, the total economic impact of $1 billion of impact 
under the China High Disruption scenario is $693 million of GDP, 6,492 
jobs paying a total of $430 million in labor income, and $162 million 
in federal, state, and local tax impacts. This represents approximately 
44 percent lower employment impacts relative to the Legacy Producers 
scenario and approximately 42 percent lower GDP impact (see Fig. 6).

Relative to the total employment impacts under the Legacy Producers 
scenario, total employment impacts under this scenario are lower by 
5,078 jobs. Thus, for every one of the 938 direct jobs created under 
this scenario, we estimate approximately 5.4 fewer U.S. jobs on net.

4. CONCLUSION

Chinese state-owned railcar manufacturer, CRRC, has recently won 
several major bids for passenger railcar manufacturing in the U.S., 
significantly undercutting its competition. This is potentially 
concerning to U.S. policymakers for several reasons:

      SOEs do not face the same budget constraints as other 
manufacturers and thus have a greater ability to engage in anti-
competitive strategic pricing behavior. 

      SOEs are responsive to non-commercial objectives of their home 
governments.

      Notwithstanding Buy America Act provisions (see Section 2.2) in 
many passenger railcar contracts, industry experts widely perceive 
Chinese SOE passenger railcar production to perform less value-add 
manufacturing in the U.S., relying instead on imported semi-finished 
railcar parts, resulting in less economic activity in the U.S.

      Losses in the domestic U.S. passenger railcar manufacturing 
industry will affect other U.S. industries that rely on some of the 
same supplier industries.

Based on a hypothetical output of $1 billion of passenger railcars, we 
modeled the full economic impact (direct, indirect, and induced--see 
Section 2.1) of three types of passenger railcar production: production 
by legacy (non-SOE) U.S. manufacturers, production by Chinese SOEs 
under a binding Buy America 70 percent domestic-content threshold, and 
production by Chinese SOEs without a domestic-content requirement. 
Assumptions for this modeling are clearly laid out in Section 2.3; full 
results are presented in Section 3.

We find that total (i.e., direct plus indirect plus induced) job 
impacts under the China SOE scenario with a binding 70 percent domestic 
content threshold modeled on the Buy America Act are 28 percent lower 
than those in the Legacy Producers scenario, and GDP impacts are 26 
percent lower. Under the China High Disruption scenario with no binding 
domestic content requirement, job impacts are 44 percent lower than 
those in the Legacy Producers Scenario, and GDP impacts 42 percent 
lower.

Relative to the Legacy Producers, for each direct (i.e., directly 
employed by the SOE itself) U.S. job created under the Buy America 
scenario, we estimate approximately 3.5 fewer total (direct plus 
indirect plus induced) U.S. jobs on net. Relative to the Legacy 
Producers, for each direct U.S. job created under the China High 
Disruption scenario, we estimate approximately 5.4 fewer total U.S. 
jobs on net.

                                   