[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
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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
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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
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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\
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\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
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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\
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\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
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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
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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\
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\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\
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\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
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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.
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\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
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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.
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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.
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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.
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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.
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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\
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\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.
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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\
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\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\
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\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\
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\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\
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\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.
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\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
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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.