[Senate Hearing 116-506]
[From the U.S. Government Publishing Office]
S. Hrg. 116-506
CENSORSHIP AS A NON-TARIFF
BARRIER TO TRADE
=======================================================================
HEARING
BEFORE THE
SUBCOMMITTEE ON INTERNATIONAL TRADE, CUSTOMS, AND GLOBAL
COMPETITIVENESS
OF THE
COMMITTEE ON FINANCE
UNITED STATES SENATE
ONE HUNDRED SIXTEENTH CONGRESS
SECOND SESSION
__________
JUNE 30, 2020
__________
[GRAPHIC NOT AVAILABLE IN TIFF FORMAT]
Printed for the use of the Committee on Finance
__________
U.S. GOVERNMENT PUBLISHING OFFICE
46-137 PDF WASHINGTON : 2021
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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
ROB PORTMAN, Ohio SHERROD BROWN, Ohio
PATRICK J. TOOMEY, Pennsylvania MICHAEL F. BENNET, Colorado
TIM SCOTT, South Carolina ROBERT P. CASEY, Jr., Pennsylvania
BILL CASSIDY, Louisiana MARK R. WARNER, Virginia
JAMES LANKFORD, Oklahoma SHELDON WHITEHOUSE, Rhode Island
STEVE DAINES, Montana MAGGIE HASSAN, New Hampshire
TODD YOUNG, Indiana CATHERINE CORTEZ MASTO, Nevada
BEN SASSE, Nebraska
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
JOHN THUNE, South Dakota RON WYDEN, Oregon
ROB PORTMAN, Ohio DEBBIE STABENOW, Michigan
PATRICK J. TOOMEY, Pennsylvania MARIA CANTWELL, Washington
TIM SCOTT, South Carolina ROBERT MENENDEZ, New Jersey
BILL CASSIDY, Louisiana BENJAMIN L. CARDIN, Maryland
STEVE DAINES, Montana SHERROD BROWN, Ohio
TODD YOUNG, Indiana MARK R. WARNER, Virginia
BEN SASSE, Nebraska CATHERINE CORTEZ MASTO, Nevada
(ii)
C O N T E N T S
----------
OPENING STATEMENTS
Page
Cornyn, Hon. John, a U.S. Senator from Texas, chairman,
Subcommittee on International Trade, Customs, and Global
Competitiveness, Committee on Finance.......................... 1
Casey, Hon. Robert P., Jr., a U.S. Senator from Pennsylvania..... 3
WITNESSES
Gere, Richard, chairman, International Campaign for Tibet,
Washington, DC................................................. 6
Cory, Nigel, associate director, trade policy, Information
Technology and Innovation Foundation, Washington, DC........... 8
Baltzan, Beth, fellow, Open Markets Institute, Washington, DC.... 10
Willems, Clete R., partner, Akin, Gump, Strauss, Hauer, and Feld
LLP, Washington, DC............................................ 12
ALPHABETICAL LISTING AND APPENDIX MATERIAL
Baltzan, Beth:
Testimony.................................................... 10
Prepared statement........................................... 29
Responses to questions from subcommittee members............. 37
Casey, Hon. Robert P., Jr.:
Opening statement............................................ 3
Prepared statement........................................... 40
Cornyn, Hon. John:
Opening statement............................................ 1
Prepared statement........................................... 41
Cory, Nigel:
Testimony.................................................... 8
Prepared statement........................................... 43
Responses to questions from subcommittee members............. 70
Gere, Richard:
Testimony.................................................... 6
Prepared statement........................................... 86
Responses to questions from subcommittee members............. 88
Willems, Clete R.:
Testimony.................................................... 12
Prepared statement........................................... 89
Responses to questions from subcommittee members............. 94
Communication
Center for Fiscal Equity......................................... 97
(iii)
CENSORSHIP AS A NON-TARIFF
BARRIER TO TRADE
----------
TUESDAY, JUNE 30, 2020
U.S. Senate,
Subcommittee on International Trade,
Customs, and Global Competitiveness,
Committee on Finance,
Washington, DC.
The WebEx hearing was convened, pursuant to notice, at 2:31
p.m., in Room SD-215, Dirksen Senate Office Building, Hon. John
Cornyn (chairman of the subcommittee) presiding.
Present: Senators Cassidy, Wyden, Menendez, Brown, Casey,
and Cortez Masto.
Also present: Republican staff: Andrew Cooper, Legislative
Assistant for Senator Cornyn; Democratic staff: 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.
I know this seems a little strange with an empty room
except for three witnesses live in front of me--and many of our
colleagues are going to be joining us virtually--but I want to
welcome all of you nonetheless to this important hearing.
This subcommittee continues to do its work in exploring the
unfair trade practices of foreign governments, especially China
and Russia. The topic of censorship in China is a common one
because of its growing effect on business in the United States,
as well as culture. Last fall, for example, the National
Basketball Association had its market access blocked in China
because an individual American citizen, using a media platform
not even allowed in China, expressed a political opinion.
Now the topics have become much more important. A lack of
timely, accurate information about the spread of COVID-19 due
to Chinese censorship has contributed to the havoc wreaked on
our economy and health, and indeed the pandemic.
This story is nothing new. For some joining us today,
Chinese censorship has long been growing, and it has long had a
negative effect on people around the world, such as those in
Tibet or the Uyghurs in China's Xinjiang Province.
First, I want to set the scene for what censorship actually
is, and a simple dictionary definition is a good place to
start: ``The suppression or prohibition of any parts of media
that are considered obscene, politically unacceptable, or a
threat to security.''
Today we will focus on how the use of censorship has become
a barrier to global trade. When the World Trade Organization
was founded, two exceptions to the principles of national
treatment and most-favored nation were created. Those are for
public morals and national security. Notably, there is no
exception for a country to restrict trade because it deemed
something politically unacceptable.
With discussions over reforming the WTO, multilateral talks
on e-commerce, and the prospect of the Phase Two bilateral
trade deal with China progressing, this subcommittee is
uniquely positioned to inform Congress, the public, and the
executive branch on the use of censorship as a non-tariff
barrier to trade.
We will help determine if the suppression of information,
data, goods, and services via digital media by countries like
China constitutes a trade barrier in violation of the WTO, as
well as multilateral and bilateral agreements and practices. If
so, we will look to determine the economic damage caused; the
human, cultural, business, and political ramifications; and
what remedies are currently available or should be created to
combat the unfair trade practice.
On a bilateral basis, what is clear is the lack of
reciprocity from countries like China or Russia and the United
States. The Chinese Government spends billions of dollars to
promote its propaganda overseas, a form of offensive
censorship.
For years, Russia has broadcast state propaganda in the
United States, and has justly been designated as a foreign
agent. The lack of reciprocity takes advantage of our system of
free expression to promote these countries' agendas online, in
media, entertainment, as well as our education system.
Meanwhile, China and Russia do not grant the United States
the same access to their markets or media. Instead, China has
been expelling our media, having kicked out three Wall Street
Journal and other reporters earlier this year over Chinese
censorship of COVID-19. For centuries, countries blocked trade
through physically restricting access to their ports. Today,
the same thing happens, but with firewalls, filters, and
outright restrictions to access.
In fact, nearly 100 percent of global Internet traffic
travels through a crisscrossing network of undersea cables that
form the backbone of global digital trade. These cables are
another front in the global technology race, with companies
like Huawei Marine rapidly moving to control the media by which
content and trade is censored.
In the era of information, where data is the new gold,
blocking or filtering of that traffic by nation-states is
growing. The censorship is fragmenting our markets, culture,
and understanding of one another.
The Internet itself is becoming less global. Countries like
China and Russia are not only building their own infrastructure
to cut themselves off from the world, but exporting their
authoritarian model to other nation-states through efforts such
as the Digital Silk Road.
It is imperative that Congress support our Nation in
meeting this challenge, and that is why I am working together
with all of our colleagues in the Senate and in the House to
include parts of the CHIPS for America Act in the National
Defense Authorization bill currently on the Senate floor.
If we are forced to rely on China to build our networks and
our technology, the world we know will be much less freer and
open to express opinions and do business. This bill will help
us create our own domestic production capacity for high-end
semiconductors that underpin the technology we use in our daily
lives. It will also let the United States remain a global
leader in promoting free trade of goods, information, and
speech.
Finally, I look forward to discussing what remedies are
available to address the abuse of censorship as a non-tariff
barrier to trade. Last fall, a Chinese-American constituent of
mine in Texas reported that he was censored here on American
soil by the Chinese Government. His American WeChat account was
shut down for supporting protests in Hong Kong.
His response was, quote, ``If you have censorship in China,
fine. But in this country? I am a Republican, but I suffer the
same as Democrats. We are all censored.''
I look forward to exploring this topic in the same
bipartisan fashion in which we always hope to proceed. It is
time for Congress to ask hard questions, and that is why we
have called our panel of four experts here today to discuss
this issue.
I will now recognize Ranking Member Casey.
[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. Mr. Chairman, thanks very much for this
hearing, and I want to thank our witnesses for being with us
today.
This is, as the chairman has noted, the third in a series
of hearings held by the subcommittee outlining the Chinese
Government's civil/military agenda, and efforts to influence
the economic and geopolitical order in a manner that benefits
their authoritarian and anticompetitive practices.
Just yesterday, the Chinese National People's Congress
passed a national security law for Hong Kong that significantly
erodes Hong Kong's special status and, based on available
reporting, will deny the people of Hong Kong the right to
protest, the right to assemble, or the right to criticize their
government.
The U.S. Congress has been clear time and again: the
citizens of Hong Kong must enjoy certain rights that are
distinct from mainland China. An effort to undermine the status
quo is an affront to the people of Hong Kong and decades of
international agreements regarding the status of Hong Kong.
As I have said before, when it comes to China, we must work
with our allies to execute a clear and coordinated strategy.
This applies to trade and to the Chinese Government's most
recent efforts to erode the rights of the people of Hong Kong.
Here in the United States at this time, we know that we are
in the midst of a public health and jobs crisis--so much
suffering all across our country. We have seen the cost, in the
context of this pandemic, this public health crisis, of our
reliance on a single-source supplier and, more to the point,
our reliance on production from a non-market economy.
Last year, Senator Cornyn and I began this effort by
outlining the main issues related to market access to China. We
then focused on specific initiatives and actions undertaken by
the Chinese Government, starting with the Belt and Road
Initiative. Today we turn our attention to censorship.
The actions undertaken by the Chinese Government include
direct barriers, such as blocking movies from entering their
market or restricting content, to blocking Internet firms, to
dictating content related to China's territorial and economic
claims, to demanding action or inaction by businesses related
to Taiwan, Hong Kong, Tibet, and the ongoing human rights
abuses in Xinjiang.
The Chinese Government has become increasingly assertive in
its demands within and outside of its borders. Their mandates
related to extraterritorial censorship are particularly
troubling. The Chinese Government's response to a message of
solidarity for Hong Kong by the General Manager of the Houston
Rockets, for one example, brings to light the lengths the
government will go to censor speech, no matter where in the
world it occurs.
The intended message sent by Beijing's disproportional
response is clear: the Chinese Government can exert command and
control over any enterprise operating in China, public or
private. Simply stated, the Chinese Government is using its
market power to study both speech of our firms and speech of
our people. These actions are inconsistent with our principles,
inconsistent with our values and those of our allies.
The introduction of a corporate social credit system takes
this activity to a new level. The actions undertaken by the
Chinese Government are clearly restrictive and discriminatory.
They are insidious and counter to the necessary conditions of a
fair global economic system.
Since this hearing was originally scheduled in March, we
have seen all too clearly the costs of relying on China, a non-
market economy, for production of our Nation's critical
capabilities, whether that is personal protective equipment or
otherwise.
I recently introduced the Market Economy Sourcing Act,
which will begin to right-size the supply chains toward the
United States and other market-oriented countries. But this is
but one measure that must be adopted to refocus our trade rules
in the global economic system.
If we hope to sustain market-oriented principles for the
next 100 years, we must take action now to ensure competition
and market principles are not simply words in a textbook, but
rather infused into our system of government and governance.
When it comes to trade, we must be responsive and creative to
address challenges and harness opportunity.
There is no doubt Congress, citizens, and businesses must
support and defend the economic security of the United States
of America.
I look forward to hearing today from our witnesses and
discussing potential responses, including the required
disclosure of these types of requests to the appropriate
Federal entities, and trade rules that prevent free-riding from
non-market economies.
Thank you, Mr. Chairman.
Senator Cornyn. Thank you, Senator Casey.
[The prepared statement of Senator Casey appears in the
appendix.]
Senator Cornyn. Now I would like to take a few minutes to
introduce our witnesses, and we look forward to hearing from
all of you today. I ask all witnesses to summarize your written
testimony and try to abide by the 5-minute rule. We will come
back and ask more questions. All of your written statements
will be made part of the record, without any objection.
Our first witness is Mr. Richard Gere. He is chairman of
the International Campaign for Tibet, headquartered in
Washington, DC. Of course Mr. Gere is an internationally known
actor, social activist, and philanthropist who has worked for
more than 25 years to advocate for human rights of the Tibetan
people and preserve the Tibetan culture. He is also co-founder
of Tibet House U.S. and creator of the Gere Foundation. He has
co-sponsored five historic visits to the United States by the
Dalai Lama.
Mr. Gere, I understand you had a recent addition to your
family. Congratulations on your new son. Thank you for being
here.
Next I would like to welcome Nigel Cory, associate director
for trade policy for the Information Technology and Innovation
Foundation here in DC. Mr. Cory is an expert on data and
digital trade issues in the global economy. He spent 8 years
working for Australia's Department of Foreign Affairs and
Trade, which includes positions covering global, economic, and
trade issues among G20 countries, and at the World Trade
Organization. He has also held diplomatic postings in Malaysia
and Afghanistan.
Third, I would like to welcome Beth Baltzan, a fellow in
the Open Markets Institute here in DC. Ms. Baltzan currently
focuses on the impact of monopoly power on trade and its
consequences for national security. She previously served as
Democratic counsel for the House Ways and Means Trade
Subcommittee. She spent 6 years as an Associate General Counsel
at the United States Trade Representative, where she
participated in trade negotiations and litigated trade
disputes. Ms. Baltzan spent 3 years detailed to the Senate
Permanent Subcommittee on Investigations.
And finally, I would like to welcome Mr. Clete Willems, who
is a partner at Akin, Gump, Straus, Hauer, and Feld here in
Washington, DC. Mr. Willems currently advises a variety of
clients on international economic law and policy matters.
Before he joined the firm, Mr. Willems served at the White
House as Deputy Assistant to the President for International
Economics. He has represented the United States as a key
negotiator with foreign governments and has litigated more than
30 WTO disputes. Mr. Willems worked here on Capitol Hill on the
House Budget Committee and for the former Speaker Paul Ryan.
Thank you very much for being here, Mr. Willems, and all of
our witnesses.
And, Mr. Gere, if you are there, please proceed with your
opening statement.
STATEMENT OF RICHARD GERE, CHAIRMAN, INTERNATIONAL CAMPAIGN FOR
TIBET, WASHINGTON, DC
Mr. Gere. I am here, somewhere. This is all a bit bizarre.
I certainly prefer this face-to-face, but let us engage each
other anyhow.
Chairman Cornyn, Ranking Member Casey, members of the
committee, thank you so much for your introduction and inviting
me to testify.
It has been 35 years since I first testified in Congress,
and that was on behalf of our Central American brothers and
sisters--and then of course on Tibet for the last 30 years or
so. Tibet has certainly been my compass that has helped me
navigate through the world, and certainly through Washington,
and probably through all of my life.
This is the first time I have testified before the Senate
since I last met with one of your greatest colleagues, John
McCain. He was a good man. He was a good friend. He was a good
friend of His Holiness the Dalai Lama, and of the Tibetan
people. He certainly was the best of us. And like John McCain,
and many of you I am sure, I hope that our government can
deliver at its best, not only for the American people but for
the millions of people all over the world who look to us, look
to the United States and its democracy and its freedoms and its
openness, as a source of inspiration and refuge while they live
under oppression and violence.
American leadership is at its best when it sets its view
beyond the horizon and looks with balanced confidence at the
challenges and the opportunities that lie ahead. But the rise
of China in the world today is not something beyond our
horizon. It is right here. It is right in front of us. It is in
our face. And it effects our daily lives, our workplaces, our
freedoms, our privacy, our health--obviously, we are finding
out--our elections, and it will certainly shape the future of
our world.
After looking at the committee's work on the Chinese
Government's plans since 1949 to replace the U.S. on the world
stage and advance the communist party's authoritarian model
everywhere in the world, I am happy to offer my experience to
this existentially important conversation.
The conversation about the future of our relationship with
the Chinese is crucial, not only to the U.S.--and frankly, we
have been tragically naive under both Republican and Democratic
administrations--but it is equally crucial for our democratic
allies.
I have been involved in supporting the Tibetan people, and
the vision of His Holiness the Dalai Lama for peaceful
coexistence with the Chinese Government, for almost 40 years
now. When it comes to China, we Tibet supporters have been in
for the long haul, I would say. We knew that what was happening
in Tibet would not stop there, and that China's
authoritarianism would expand well beyond Tibet, as now we see
in Xinjiang, now especially in Hong Kong, and beyond China's
borders.
Now clearly, we have no quarrel with the Chinese people.
They are wonderful people. They are the same as us. We wish the
Chinese people to enjoy development, and quality of life
improvements, and opportunities, and joy and happiness for
their families and for their children. But what I fear is the
Chinese Communist Party's model of development that is
predicated on control, dominance, and violence. Chinese leaders
have often quoted an old Chinese proverb in private: ``Wai ru,
nei fa''--``On the outside, be benevolent. On the inside, be
ruthless.''
I recall vividly a time in the 1990s when a very strong
bipartisan coalition of members of Congress called on the White
House many times to condition Chinese most-favored nation
status on clear criteria that would protect the rule of law and
human rights. That coalition, unfortunately, was defeated by
powerful interests with short-sighted financial goals and a
very naive understanding of China's 100-year plan, which they
are probably 50 years ahead of already.
Conventional wisdom was that by opening our markets to
China, this would somehow, and by itself, produce meaningful
political and social reforms. As we now know, the opposite has
proven to be true, with more restrictions imposed, Communist
Party control of religion, mass incarceration, crackdowns on
all forms of dissent, including concealing critical information
about the spread of the coronavirus.
We also see the Chinese Government using economic policies
to prey on weaker countries through the extremely dangerous
Belt and Road Initiative, their long-term plan to control
natural resources, supply chains, trade, ports, and sea lanes.
The point I am trying to make here is that the
environmental, human rights, and worker rights reforms we
advocated for then would have also protected the larger
economic interests of the U.S. and our allies now.
Let me give an example. The U.S. opened its doors to
Chinese products, Chinese investments, and various forms of
Chinese cultural influence, including state media. We have even
allowed state-sponsored Confucius Institutes to gain a foothold
in our universities and Chinese companies like Huawei to spend
large sums of money to lobby the U.S. and enter the U.S.
markets.
But as you also know, China does not reciprocate. Access to
Chinese markets is limited. They do not allow American media to
broadcast in China. This lack of reciprocity, fueled by an
Orwellian system of state censorship, powerfully restricts the
Chinese people's access to information and American and foreign
media companies' access to one of the world's largest media
markets. In fact, China has repeatedly insisted that U.S. tech
companies accept strict censorship to gain access to its 1.4
billion people
Another example is freedom of movement. Americans have a
strong interest and appreciation for Tibetan people, for their
unique Buddhist culture and their fragile, very beautiful land.
It is the roof of our world. It is the third pole. And it is
the greatest source of the world's fresh water. But here is
what happens in Tibet.
The Chinese Government highly restricts access to Tibet for
Americans, including journalists and politicians, like no other
areas of China, while Chinese citizens face no such limitations
when they visit the U.S. They go where they want.
Now Congress recently took action and passed the Reciprocal
Access to Tibet Act. This is a good, very rational and
systematic response, and we hope the State Department will
implement it soon, as required by law now. As an actor, which
is why I am here, I think, I know you are interested in my
experience in the entertainment industry and growing Chinese
influence there.
Well, I cannot say that my speaking out for human rights in
China has directly affected my career. I am probably an unusual
case, and we can talk about that more in the Q&A session. There
is no doubt that the combination of Chinese censorship, coupled
with American film studios' desire to access China's market,
can lead to self-censorship and to avoiding social issues that
great American films once addressed.
Imagine Martin Scorsese's ``Kundun'' about the life of the
Dalai Lama, or my own film ``Red Corner,'' which is highly
critical of the Chinese legal system--imagine them being made
today. It would not happen.
As I conclude my remarks, I would like to call your
attention to two bills in the Senate. The first is sponsored by
Senators Cardin, Casey, Cornyn, Rubio, and Wyden and has
already passed the House with overwhelming support. The Tibet
Policy and Support Act strengthens U.S. policy in Tibet while
addressing one key and overriding issue, the selection of the
next Dalai Lama. This cannot be allowed to be controlled by the
Communist Party, only by Tibetan Buddhists. I am sure that you
support this basic principle, and I ask you to co-sponsor this
bill and raise it with the Senate leadership for swift passage
by the Senate Foreign Relations Committee.
Now the second bill is the Mongolian Third Neighbor Trade
Act introduced by Senators Sullivan and Cardin and co-sponsored
by Ranking Member Wyden and Majority Whip Thune. This bill
would grant a democratic and independent Mongolia better access
to the U.S. market for cashmere products manufactured in
Mongolia. We can go into this later. Mongolia is under
extraordinary pressure and threat from China right now. This
will greatly benefit Mongolia, create jobs for Mongolian women,
and reinforce democratic institutions. It is a concrete way of
strengthening democracy at a most critical time in the Indo-
Pacific and of helping Mongolia remain independent. I call on
the Senate to pass this bill as well, as soon as possible.
Thank you very much for your attention, and I look forward
to your questions.
[The prepared statement of Mr. Gere appears in the
appendix.]
Senator Cornyn. Thank you for joining us. We will hear the
other opening statements and come back for some questions.
Mr. Cory?
STATEMENT OF NIGEL CORY, ASSOCIATE DIRECTOR, TRADE POLICY,
INFORMATION TECHNOLOGY AND INNOVATION FOUNDATION, WASHINGTON,
DC
Mr. Cory. Thank you. Good afternoon, Senators. I greatly
appreciate the opportunity to testify on the use of censorship
as a non-tariff barrier to trade.
Let me start by saying that it is important to acknowledge
that China uses censorship as a disguised tool for
protectionism. And censorship in the Chinese context means
overly broad and discriminatory control over digital content,
distribution platforms, infrastructure, and the firms involved.
And this disguised protectionism has already cost the U.S.
economy so dearly, but this cost will only rise if China is
able to export its model of digital governance to other markets
around the world.
The United States needs the strongest strategy to push back
on the direct trade impact of censorship in China, but also to
prevent it from moving to other markets. Stakes are high. If we
fail to act, the U.S. could lose its edge in the global digital
economy. And this is especially the case, given censorship
along with other disputes over Internet policy, as part of a
broader troubling rise of so-called digital sovereignty.
And while not alone, China is the world's leader in using
overly broad and restrictive and discriminatory rules around
content it deems illegal. China is advocating for its own
model, but other countries are also attracted to it. And they
are drawn to it for political reasons, because it provides them
with control, but it also provides them with a protectionist
tool because they lack the economic impact.
And while censorship is not the only restrictive tool that
China has used, it is a central one that has led to a
generation of Chinese Internet consumers having an Internet
experience that is completely different from most people in
most countries around the world. And it is known that China
uses the Great Firewall to block access to thousands of foreign
websites, which is obviously a clear barrier to market access.
But it is only one tool of many.
It is less known that censorship is also a key factor that
leads to U.S. firms being prohibited from operating in key
Internet service sectors in how it plays a part in the opaque,
discriminatory, and restrictive content review process for
video games, movies, and TV. And it is also a key factor that
limits or restricts their ability to connect to the global
Internet, which essentially hinders their ability to use or
develop software on a cross-border basis.
Now, while the primary motivation for censorship in China
is regime stability, it also gets the economic benefit. And the
economic benefit to China and the cost to the United States is
already significant, in that over the last 20 years a host of
U.S. industries and firms have lost hundreds of billions of
dollars in revenue. And while it is hard to calculate an exact
cost, the Information Technology and Innovation Foundation
conservatively estimates that, for example Google, which
withdrew from the Chinese market in 2010, has lost in excess of
$32 billion just over a 5-year period from 2013 to 2019.
In contrast, Amazon and Microsoft cloud services, which are
also severely restricted in China, are estimated to have lost
over $1.6 billion just over a 2-year period from 2017 to 2018.
And why should we care about this? Because this lost
revenue of billions of dollars would otherwise have supported
innovation and employment here in the United States. Now some
U.S. policymakers want to exacerbate the impact of censorship
in China by calling for U.S. firms to either leave China or
stay out of China because they believe it is immoral to do
business there.
But the fact is that, with or without U.S. firms, China's
Internet will remain censored. It has been essentially censored
since they first connected to the Internet. But there should be
no doubt that it is in America's economic and security interest
that as many American firms as possible sell goods and services
into the Chinese market. Every dollar's worth of digital and
physical exports is a dollar that Chinese firms do not earn.
And it is a dollar that U.S. firms can otherwise use to
reinvest in research and development, and to support economic
and employment opportunities here in the United States.
It is also important to recognize that human rights and
trade are not mutually exclusive. The U.S. Government should
still obviously lead the charge around the world in advocating
for human rights and democracy, both in China and elsewhere,
but it should also be able to develop a more nuanced, detailed
understanding of how it is playing out and develop a countering
strategy to how China has deployed censorship in the way it
has, and to ensure that it does not spread any further.
As a consequence, we recommend to Congress that it ask the
U.S. International Trade Commission for a detailed study into
the impact of censorship, and this study could form the basis
for new rules for the USTR to use in future trade agreements,
and also to be used by the Department of Commerce. But it could
also form the basis for a more holistic, global digital economy
strategy that is needed to counteract China's effort to
advocate for its own model, because there is a fierce debate
underway at the moment over which direction countries should
go, which approach they should take, and China's is obviously
based on censorship and protectionism.
Again, I thank you for the opportunity to testify, and I
look forward to your questions.
[The prepared statement of Mr. Cory appears in the
appendix.]
Senator Cornyn. Thank you. Ms. Baltzan?
STATEMENT OF BETH BALTZAN, FELLOW,
OPEN MARKETS INSTITUTE, WASHINGTON, DC
Ms. Baltzan. My name is Beth Baltzan, and I am a fellow at
the Open Markets Institute. I have been a trade lawyer for
nearly 25 years.
As Senator Cornyn noted, I have worked at USTR, the Public
Company Accounting Oversight Board, the Senate Permanent
Subcommittee on Investigations, and the House Ways and Means
Committee. All of these experiences inform my testimony today.
In 1989, Francis Fukuyama published an influential article
called ``The End of History.'' He argued that the imminent
dissolution of the Soviet Union reflected the triumph of
economic and political liberalism and that economic liberalism
would pave the way for political liberalism globally. This view
permeated the zeitgeist when we designed the WTO and when we
let China into it.
Developments in China have shattered that theory. Rather
than democratizing as a result of its integration into the
global economy, the Chinese Community Party has weaponized that
integration, using its economic leverage to quash the rights of
foreign citizens in their home countries.
Economic liberalism has become a vector for political
illibralism. Fukuyama has recognized his mistake, going so far
as to identify Chinese state capitalism as the most salient
ideological threat to democracy.
When we look at the actual rules of globalization, we see
how this came to pass. In designing the rules in the 1990s, we
focused on liberalizing capital flows, believing that a laissez
faire model would produce ideal economic and political
outcomes. We did not guard against a government that would
exploit that system with a fundamentally anticompetitive, zero-
sum strategy. It is that anticompetitive strategy, not natural
comparative advantage, that has led us to be economically
dependent on an authoritarian regime.
It is wrong to say we could not have seen this coming. The
founders of the multilateral trading system foretold this
outcome and sought to prevent it. They designed a regime
grounded in fair competition. Cheating through currency
manipulation, labor rights suppression, or monopolistic
behavior was prohibited. They presciently warned that without
these rules, state-trading governments, uber-monopolists, would
destroy free enterprise and democracy.
These rules were memorialized in the Havana Charter signed
in 1948 by over 50 countries, but it never entered into force.
It is popular lore that an isolationist Congress rejected it,
but that is not accurate. The charter failed because the
American business community rejected it. We managed to
forestall the immediate threat to democracy and free enterprise
by keeping the Soviet Union out of the gap, but we did allow
the PRC, a modern state-trading government, into the WTO, and
prophesy now seems to be coming true.
It is not too late to mitigate the risk. Addressing the
CCP's ability to interfere in our civil liberties requires us
to reduce its economic leverage over us. I offer five
recommendations.
First, we must address our supply chain dependency. So much
has changed since early March when this hearing was first
scheduled. People now understand in very real terms what it
means to have a supply chain dependency on China. Fortunately,
for the first time since the 1970s, the United States is having
a conversation about strategic industrial policy. We need to
identify critical sectors, map out supply chains, and ensure we
have diverse sources not just of finished goods, but of
components as well.
Second, we must recognize that unless we reform the
systemic global trading incentives, that it will be difficult
for us to sustain supply chain diversification. As long as the
rules tolerate anticompetitive inducements to offshore, we must
anticipate that any newly rebuilt supply chains will eventually
end up back where they started. Therefore, we need the right
slate of reforms at the WTO. The narrow focus on subsidies is
grossly insufficient to deal with the much more structural
problem of the CCP's anticompetitive approach to trade.
Third, and related to the question of sustaining supply
chain diversification, we must keep an open mind about tariffs.
Tariffs can be a useful tool for driving behavior. The United
States has the lowest bound rate at the WTO. That low rate,
coupled with anticompetitive CCP behavior, has made it
particularly lucrative to offshore American production and
export it back. Until we have achieved global reform, we must
consider tariffs to be one way of incentivizing the sourcing
need.
Fourth, we should work with our allies but be realistic.
Many of our allies simply do not yet see the CCP as a threat to
economic and political freedom. However, supply chain
diversification is one area where we can cooperate with
countries that share our values.
Fifth, we must accept that true market access in China is
illusory. The CCP will give us exactly as much market access as
they want to. The more we telegraph that we believe unfettered
market access is possible, the more leverage they have over us.
Being a market access demandeur puts us in a position of
weakness and increases their ability to interfere with our
civil liberties.
Thank you for the opportunity to present these views.
[The prepared statement of Ms. Baltzan appears in the
appendix.]
Senator Cornyn. Thank you very much. Mr. Willems?
STATEMENT OF CLETE R. WILLEMS, PARTNER, AKIN, GUMP, STRAUSS,
HAUER, AND FELD LLP, WASHINGTON, DC
Mr. Willems. Mr. Chairman, Ranking Member, and members of
the committee, thank you very much for the opportunity to
testify today.
China is expanding its use of censorship to promote
national interests, with adverse consequences around the globe.
This has been driven home for us by the suppression of
information on the coronavirus and the impact that this has had
in the United States.
While censorship is just one of the many tools that has
been used to promote the party's interest--and we have talked
about others already today--it is something that has not been
prioritized in policymaking, including the Phase One
negotiations that I was a part of while I was in the
administration, and therefore it is ripe for further
exploration and action.
China's censorship activities manifest themselves in many
ways. One primary example is the Great Firewall, which
restricts free speech through website blocking and filtering.
According to USTR, China currently blocks over 10,000 websites.
And as I have been getting ready for this hearing, I have seen
other estimates that put that number closer to 20,000 or even
30,000. China also controls domestic news outlets and directs
them to avoid unfavorable stories on issues related to the
economy and, of course, the coronavirus itself.
China's indirect efforts to censor speech are equally
troubling. During last year's NBA Twitter controversy, China
retaliated against a single tweet by a single individual with a
single team by prohibiting the broadcast of all games of all
teams in China, which was a clear effort to intimidate those
abroad who intended to speak out, and whoever wanted to do
business in China.
And this is just the tip of the iceberg. China's social
credit scoring system will enable its regulators to
comprehensively monitor and influence behavior in real time.
Overall, China's policies enable it to suppress disfavored
views, spread propaganda, and promote a business environment
where only its companies can compete.
China has also been encouraging other repressive regimes to
adopt similar policies and has yet to back down in the face of
U.S. pressure. After the State Department classified Chinese
news outlets as foreign agents, China responded by expelling
journalists from Beijing. And I find it particularly ironic
that China's wolf warrior diplomats have taken to Twitter to
influence global opinion on a site that is totally banned in
China.
At the WTO, the U.S. can seek to challenge China's
restrictions on foreign Internet service providers under the
service agreement which bans prohibitions on market access and
discrimination. However, these rules were drafted before the
Internet age, and they are not particularly specific when it
comes to censorship, which could lead to uncertainty.
China could also try to avail itself of certain exceptions
such as public morals or national security. I believe that the
U.S., on balance, has a strong case. But given the time and
resources that it would take to bring a dispute and some of the
uncertainty I mentioned, I think it is better to move in a
different direction.
So how should we deal with this issue? Let me give you a
couple of ideas at the outset.
First, we must consistently highlight China's nefarious
policies and use the full power of government to seek change.
Governments are better positioned than companies to push back
against this behavior, and we should not expect our companies
to do it alone, and we cannot even always expect them to do
what we think is the right thing, on their own. They need the
government behind them.
Second, we must work with key allies to do the same. China
will find it much more difficult to stir up anti-U.S. sentiment
and excuse its behavior if others stand by our side. But those
others must not hedge their bets, and they must not send the
wrong signal to China by adopting similar policies. The EU's
digital sovereignty agenda and the discussion of the European
Firewall is a case in point.
Third, I would apply the same advice to us. As we seek to
counter the threat that is posed by China, we must be careful
not to adopt the same policies that we are condemning, policies
that stifle free speech or increase market access barriers.
This will backfire economically, and it will cause us to lose
moral high ground that is so important to building an effective
international coalition.
Fourth, we should pursue a broad WTO reform agenda with
explicit rules on censorship, forced technology transfer,
subsidies, intellectual property theft--and I think some of the
ideas that Beth raised as well are worth considering. We should
require China to take on the same obligations as the United
States, and fix the dispute settlement system. The WTO is
falling short of its objectives, no doubt, but abandoning the
system that we, not China, helped to create would be a tragic
mistake. China would like nothing more than to see the U.S.-
created system collapse.
Fifth, we should negotiate a broader range of trade
agreements with strong censorship provisions. This includes a
revamped U.S.-EU-Japan trilateral, add-on digital trade
chapters with existing FTA partners like Australia, a new
Taiwan FTA, and a renegotiated TPP. Putting politics aside, the
TPP provides a great opportunity to encircle China with
policies that stand in contrast to its economic model. There
are legitimate concerns about it, but it should be reformed
just like NAFTA, which we are going to bring into force
tomorrow, the new USMCA. Let us do the same thing on TPP.
Sixth, we must pass new laws to protect U.S. companies so
they can safely access a market of over a billion consumers.
Ideas like protecting employees from being terminated for
voicing opinions about foreign governments, prohibiting U.S.
companies from complying with censorship requests, and
disclosing pressure received from the Chinese Government, all
deserve debate.
Finally, we must not draw a false equivalence between the
Chinese Government and its people. Many good Chinese citizens
are suffering, with their voices muffled by the same policies I
have just been describing. A commentary that was briefly posted
online in China earlier this year, before it was deleted by the
censorship police, stated: ``The openness of information is the
best vaccine. Blocked ears and eyes are also a contagious
disease, and no one can escape.''
Thank you.
[The prepared statement of Mr. Willems appears in the
appendix.]
Senator Cornyn. Thank you very much. We will proceed with a
round of 5 minutes of questions per Senator.
Mr. Gere, let me start with you, if I may. Your courage in
confronting the Chinese Communist Party for its methods and
tactics of censoring, retaliating, and punishing those with
whom it disagrees is commendable. And I thank you for that.
As China's economy has grown, though, we have seen more
self-censorship. There is the censorship that can be imposed
directly by the government, but there is also the practice of
self-censorship by companies and individuals that want to do
business in China. Can you describe how Chinese practices
operate and how the magnitude has changed in parallel with the
growth that it has experienced?
Mr. Gere. Yes. Well, in my experience, certainly in the
government diplomatic world I have seen over the last 40 years,
China is not shy about letting everyone know that they do not
like the Dalai Lama to be treated well and the Tibetans to be
treated well.
The three Ts that they freak out about are Tiananmen
Square, Tibet, and Taiwan. And certainly they do call
everyone--local, State, national, Federal, all over the world--
if any of those issues do come up. But I have seen over the
last 30 or 40 years that countries and diplomats do self-censor
now, that they take it upon themselves not to put themselves in
a position where they are going to be reprimanded by the
Chinese or that they are going to lack some kind of economic
access.
Norway went through a horrible period when Liu Xiaobo was
given the Nobel Prize. They were cut out completely from trade
with China. Moving on to movies, I see the same thing happening
over these last years.
As I said before, certainly you are not going to see any
film made by a studio that was critical of China, because of
investment, money coming in from China invested in U.S. films.
But let me go back a little bit and understand how the film
system works in China.
There are only 34 international films that are allowed to
be shown a year in China, and 12 of those, one-third of those,
have to be an IMAX film or a 3D film, at minimum. So what they
want is these high-profile ``tent-pole'' movies they are
called, digital CGI films--you know, the Marvel movies, et
cetera--which are consumed at a very high level in China, and
entrepreneurs can make a lot of money. The two biggest
distributing companies in China are state-owned. The film
industry is owned by the state in China. So of course there is
a lot of self-censorship.
What would have been maybe a Chinese villain is now a North
Korean villain in a movie. I mean some of it is quite silly.
There is a movie, a high-profile movie, where I noticed Tom
Cruise was walking through Shanghai and there was some
underwear on a clothes line. The censor objected to that
because it made Shanghai look like a less developed city, and
it was removed.
``Christopher Robin'' was not allowed to be screened in
China because there was some amusement that Winnie the Pooh
looked like Xi Jinping, and it was refused entry into China.
But yes, I see this in studios, and it came up even recently
with me. There was a Hollywood script that takes place partly
in China, and the producers of it at first balked at the idea
of me being in the film. And then they were talked to--and
actually they are supporters of the Dalai Lama in Tibet, and
they took a deep breath and said, ``No, no, we are going to
make the moral decision here.''
So we are talking about making that film. Of course we will
never be able to shoot it in Shanghai. I am not allowed to go
to China. I do not even know now if I would be allowed in Hong
Kong. I asked, point blank, to some very well-known actresses,
friends of mine, Chinese actresses, if I could work with them.
And they said, absolutely not. Their careers would be over in
China, and they would never be allowed to work again.
I have had other circumstances with very talented Chinese
directors who--one was in tears with me, having to call me up
and say that he could not work with me, that his career would
be over and his family could not travel.
So I mean, this is personal to a lot of people. My own
career I cannot say has suffered at all because I don't make
CGI-kinds of films. My films would not naturally be shown in
China anyhow, except underground and on the black market. I
know the film that I made, ``Red Corner,'' many years ago--of
course we could not shoot it in Asia. We could not even get
insurance because of me and the threat from the Community
Party. But when it was shown, I did go to Hong Kong after that
and, although it was not officially shown in China, as I was
going up the elevator in the hotel there, the elevator operator
looked up at the camera that was watching us in the elevator
and, as I passed him at my floor, he said, ``Thank you for `Red
Corner'.''
Senator Cornyn. Well, there is that ubiquitous technical
surveillance in a police state that----
Mr. Gere. Well, we know that the budget for surveillance in
China is larger than the military budget.
Senator Cornyn. Thank you very much.
Senator Casey, do you have some questions?
[Pause.]
Senator Cornyn. Senator Casey? I understand we have a
little technology issue. Let me turn to Senator Cassidy----
Senator Casey. Mr. Chairman, thanks very much.
Senator Cornyn. Oh, there he is. Thank you. Go ahead,
Senator Casey.
Senator Casey. Mr. Chairman, thanks very much. I want to
thank you for the hearing. I will start with Mr. Gere and then
go to Ms. Baltzan.
Mr. Gere, I want to first note for the record, because some
other members of the Senate may not know this, but you have
strong Pennsylvania roots personally, and then your family,
both your parents, and I know that we want to note that for the
record, and we appreciate that. I know that we always are
welcoming people back who want to move back. But I want to
thank you for that.
I also want to thank you today for the great work that you
have done calling attention to these issues over decades now in
a manner that is the kind of sustained effort that those of us
in Washington sometimes do not undertake. There has to be a lot
more focus than we have brought to bear on these issues that
relate to China. And you have been sounding the alarm for
years.
I wanted to start with your observations with regard to
both the tactics and the strategy employed by the Chinese
Government, especially over the last decade, to compel or to
elicit actions from individuals or companies, or in some cases
governments.
So I guess it is a two-part question: your observations of
both the tactics and strategies employed by the Chinese
Government. And secondly, what is your advice for both firms
here in the United States as well as the Congress?
Mr. Gere. Am I on now? Can you hear me? Hello? Yes, good.
Well, thank you for your kind words, and I have to say,
yes, my mother and father both came from Susquehanna County--
Brooklyn, PA, which I do not think is any larger today than it
was in the 1920s when they were born. It is a farming
community, dairy farms. My father grew up milking cows by hand,
early on. So I still have family there and consider that maybe
my spiritual home.
I think the big, overriding thing, from my point of view,
is that we have to understand that China is playing the long
game. They have been playing the long game. They do have a 100-
year plan, and they are way ahead. They were very clever. They
realized they were coming from a very weak position, and they
decided that they would be the cheapest place in the world to
make products. And this was well thought-out from their side.
They were not looking to make profits. What they were looking
to do was own the markets, which they do at this point.
We get our medicines from China. We get most of our
manufactured goods from China. We get almost everything we buy
in the store made in China. They own us in many ways. And
certainly that, to them, is controlling the world, the world
that we have bought into, which is one of, who is going to make
the most money? We have made some huge mistakes along the line,
very short-
sighted, very naive. They are much smarter than we are. They
are much more patient than we are.
They creep into power, as we back off, as we pivot away
from Asia and we leave a vacuum. They fill it immediately. When
we back off in the environmental world, they fill it in
immediately. When we break up our alliances, they come
immediately. They are making alliances with Italy right now.
The Belt and Road is now ensconced in Italy. It should be the
American Belt and Road. It is the Chinese Belt and Road.
Again, it is long-term thinking. And especially now that
they have made Xi Jinping Emperor for Life, this 100-year plan
will be continuous. As we change administrations, as we change
the focus of what we are doing, how we are thinking, how we
approach the world, there are spaces and vacuums that are
created, and the Chinese have taken them every single time.
They creep into every open space.
And I have talked to leaders all over Europe, all over
Central America and Asia. I have said, ``Please, do not take a
loan to build an airport or a port from the Chinese, because
they will take that airport. They will take that railroad. They
will take that port away.'' We have seen it in Sri Lanka, and
we are going to see it in Italy.
So I think the strategy for us is to step back and
understand this long-term strategy for world dominance that is
coming from the Chinese Communist Party. And part of that is
talking to each other, having these alliances, relying on TPP,
relying on real, honest relationships with the EU.
This is a world of strong alliances that can confront what
the Chinese are doing and win.
Senator Cornyn. Senator Casey, I know you had a question
for Ms. Baltzan.
Senator Casey. I will go to that on the second round. Thank
you.
Senator Cornyn. Thank you. Senator Cassidy?
Senator Cassidy. Thank you. Mr. Gere, you just said
something--by the way, thank you all for testifying. Incredibly
important hearing, and I thank you very much.
And, Mr. Gere, you just mentioned creeping into power. I
kind of like that, as they kind of, you know, creep into the
vacuum. But I am trying to ask myself, how do we stop it?
Now, Ms. Baltzan, I am struck by your testimony because it
actually links their ability, the Chinese ability, to do
digital censorship to the economic power that they are
accruing. And it suggests that--I liked that whole exchange
that you had in your testimony about how free trade by itself
does not necessarily make things happen. It has to have other
guard rails.
I say that because I was recently told by Central American
countries that the workers' rights, the human rights, and the
environmental requirements we place upon them in order to
conduct trade have increased their cost of production and put
them at a competitive disadvantage for a company looking for a
low-cost place to produce. Therefore, they go to China, which
does not have the workers' protections, to say the least, the
environmental protections, et cetera. And so it kind of slides
that way, which, if you will, works against our interests in
multiple fashions.
Do you have a thought on that?
Mr. Gere. Yes; is that to me? Or is that to----
Senator Cassidy. Ms. Baltzan. Am I pronouncing your name
correctly, ma'am?
Ms. Baltzan. You did, thank you very much. Thank you very
much.
Yes, I think this is something that we see with Mexico as
well. I think the answer to stopping this race to the bottom,
which is fundamentally based on anticompetitiveness--these are
anti-
competitive bases for trade--is to incorporate these standards
at the WTO. And it is very surprising to me that, in light of
not only these issues in Central America and Mexico and other
places, but in light of Tazreen, the fire at Tazreen in
Bangladesh, the collapse of Rana Plaza in Bangladesh, it
surprises me that labor issues and environmental issues in this
race to the bottom are not part of a WTO reform package.
I did point out in my testimony that there were labor rules
in the Havana Charter, which was supposed to be the governing
document for the global trading system going back to 1948. If
China were actually required to adhere to those rules like
everyone else, then you would have the opportunity to mitigate
the race to the bottom.
Senator Cassidy. But let me ask you for a second, if you
will. If we are--you mentioned the problem with our supply
chains going through China. But they are going to be the lower
cost as long as they are willing to sacrifice international
environmental standards, labor rules, human rights, et cetera.
Granted, Vietnam might be lower cost in some places based upon
labor, but nonetheless, even that is a further race to the
bottom.
If we are talking about bringing supply chains back to more
secure places and decreasing the economic growth of China by
which they can coerce people into accepting their censorship,
we really have to kind of take into accommodation that which
you are describing now.
Is that kind of the essence of--I am adding to it, but
would you agree with that which I said?
Ms. Baltzan. I think that is right. I think we need a race
to the top, not a race to the bottom. And I think--you know,
labor is part of section 301, so that could be on the table,
not just IP, but section 301 on labor with respect to our
negotiations with China as well. Why not?
Senator Cassidy. Okay. That is very helpful. And I am
sorry, I do not have my notes in front of me. I am not used to
working remotely. The gentleman who spoke at the very end, I
think you spoke of a need to confront this digital and
censorship issue across the globe. But tell me again how the
U.S. is to do that? How do we get, for example, Italy to not
accept censorship when, according to Mr. Gere, Hollywood is
effectively accepting censorship?
Mr. Willems. So thank you for the question. What I was
referring to in general was that I think we need a much more
robust negotiating agenda, with a range of potential allies
that is more explicit on the censorship question.
We have made some progress in some trade agreements--the
USMCA, the U.S.-Japan Digital Trade Agreement--where we talk
about nondiscrimination and the free flow of information across
borders, but I think we can go much further and much deeper and
be much more explicit on censorship. And I think that doing so
would actually help address some of the concerns that I have
about a WTO dispute and some of the uncertainty that could be
put into place by some of China's counter-argument.
So I think a much broader trade negotiating agenda is the
way to go.
The other thing, though, on Italy that I think Mr. Gere was
referring to was that Italy had basically signed up for some
Belt and Road money. It happened about 2 years ago while I was
in the administration. And I personally was involved in calling
Italy and trying to get them to stop. The problem was, they
were in an economic crisis. They wanted infrastructure, and
China was offering it cheaply. It is a huge problem. We need to
have an American alternative.
We have tried to do that with the International Finance
Corporation. I think it is a very helpful addition to the U.S.
toolkit. But I would like to see us put even more money at that
effort, and like to see us link up with other trading partners,
and then have international standards on development
financing--standards about transparency and accountability,
standards that we meet, that Europe meets, and that China
cannot.
That is another area where I would like to go.
Senator Cassidy. Thank you. I yield back.
Senator Cornyn. Thank you very much. Senator Menendez?
Senator Menendez. Thank you, Mr. Chairman, for holding this
hearing. And thank you to all of our witnesses.
You know, the movie industry's thirst for profits and for
access to China's huge audiences makes it uniquely susceptible
in many ways to the sort of self-censorship that the Chinese
Communist Party, the CCP, likes to encourage others to impose
on themselves.
One-quarter of ``Aquaman's'' global box office came from
China. Disney earned $600 million off of ``Avengers: Endgame''
in China. That is a lot of leverage. And the People's Republic
of China is very clear that when it comes to movies, it wants
products that are not only entertaining, but that align with
the party's world view.
So, Mr. Gere, can films that are not CCP propaganda pieces
really get access to China, given the role of China in the
global box office? What effect is China having on the movie
industry overall?
Mr. Gere. Yes; I mean, look, I do not think it is as dark
as you were describing, in this moment. And there are certainly
benign movies that are completely apolitical that have access.
Those movies that you brought up are pure entertainment and
politically neutral.
I think those will never have a problem having access to
1.4 billion Chinese viewers. But I do think that challenging
films along the lines of ``All the President's Men'' or ``Red
Corner,'' that I made, it is highly unlikely that these kind of
films are going to be supported by Chinese investors. And
especially if they say in advance, which they often do, that
there is no way that that film will have access to the Chinese
people.
Senator Menendez. Yes. How about--and I get that those are
rather benign--but even in the case of ``Top Gun: Maverick,''
whose producers removed references to the Japanese and
Taiwanese flags at the request of the Chinese investor, China
still has a lot of power to dictate their preferences. Is that
not fair to say?
Mr. Gere. It is very fair to say. But also it is very
illustrative of their weakness. I mean, how silly is that? How
completely ridiculous? The way that they are hypersensitive
about the Dalai Lama, you know, the kindest, most generous man
on the planet, who is consumed and saturated with love and
compassion and forgiveness. The mere mention of his name makes
them crazy.
The problem is that communist parties everywhere lack
legitimacy. And someone like the Dalai Lama, for instance, is
legitimate. People love the Dalai Lama, for deep and powerful
reasons. You do not love the Communist Party. You abide by it
because it is powerful, and it controls you. But you do not
love it.
Legitimacy truly--true legitimacy comes from the heart, and
that is really what they are afraid of: something that touches
the heart, and through the heart a sense of right and wrong and
decency. Anything that basically has that, that would challenge
even the idea of a communist party, or of totalitarianism, or
the kind of surveillance state that they have developed there,
anything that challenges that even in a poetic way is going to
make them crazy.
Senator Menendez. Yes. I agree with you. How small is it of
them to be worried about a Japanese or Taiwanese flag? But even
something as small as that is something that the film makers
were willing to submit themselves to. And so that is what
worries me.
And I agree with you on the Dalai Lama. And I so
appreciated in my other role on the Foreign Relations
Committee, what you have done in your long quest to have the
recognition and the freedom of the Dalai Lama to do what he
does as a spiritual leader of so many.
But this is what I am concerned about. You know, we know
what the Chinese are and what they do. I am concerned about
their influence over us. I look at the fact that President Xi
has declared that every foreign movie to be shown in China must
be vetted by the Central Propaganda Department. And, depending
on the content, the Ministry of State Security, the Ministry of
Public Security, the Ethnic Affairs Committee, and the Bureau
of Religious Affairs also may be involved.
Now I do not think they are looking at lighting or
cinematography or editing. I think they are looking to preempt
themselves--and this is a challenge. I wonder, I wonder--and I
say this to the panel--does this influence film makers' choices
to preempt themselves from offending Chinese censors?
What happens if the creative team is unwilling to make the
sorts of changes that China wants?
Mr. Gere. Well, you have different types of movies. And
certainly a ``Top Gun'' kind of movie, that is not an art-film
festival kind of movie. It is a mass-market entertainment. And
I do not know that the changing of the flags on his uniform,
you know, is a major blow to the soul of the film makers. It is
not that kind of a film. I am not worried about those kind of
films.
I am worried about the rabbit hole that one goes down at
this point. If all of our films become primarily financed by
Chinese money, then clearly you are going to see films that are
to glorify the Chinese Party in some way. But that is a ways
down the rabbit hole.
I think still, serious film makers are going to make the
kind of films that they want to make. The commercial movies
that you are talking about, you know, they want access to a
mass market. And I cannot blame them for that. And minor
changes along the way, it is hard for me to fault. I am more
concerned about the soul of storytelling and movies and
entertainment which are beyond the kind of Marvel movie kind of
movie making.
Now clearly you are not going to have Chinese villains
anymore. That is not going to happen. That is done. It is going
to be North Koreans. They are all going to be North Koreans
from now on. But, you know, I always thought those were paper
tigers anyhow. I never felt comfortable with that in any event.
But as I mentioned in my original talk, the serious films
looking deeply, profoundly at the situation in China will not
happen now.
Senator Menendez. Mr. Chairman, I just want to make one
last comment, if I may.
Senator Cornyn. Sure.
Senator Menendez. I understand, Richard, what you are
saying. But sometimes the soul is lost step by step and dollar
by dollar.
Mr. Gere. That is the rabbit hole I am afraid of, yes.
Senator Menendez. Thank you, Mr. Chairman.
Senator Cornyn. Thank you, Senator. Senator Cortez Masto?
Senator Cortez Masto. Thank you. Thank you to the panel. I
appreciate the conversation today.
So let me approach it from this perspective, and let me
turn to Hong Kong. American and European countries are
receiving pressure from the Chinese Communist Party to endorse
national security law and other CCP actions toward restricting
freedom and civil liberties in Hong Kong. We know that.
The pressure will almost certainly extend to other issues
that CCP deems sensitive. But what we have also seen is the
pressure on American companies who want to do business in China
to change some of their, I do not know, policies, principles,
some of their products in response to the pressure from China.
So I guess my question to all the panelists is, what can
Congress do to support American companies experiencing the CCP
government pressure and propaganda? I mean, that is the
challenge we have here. I sit on Banking and Housing as well,
and we just had this discussion on how American companies are
succumbing to the pressure put on by the Chinese Government.
What do we need to be aware of here in Congress? And what
can we do to support our American companies that want to get
into that market, but at the same time stay true to our
freedoms, our democracy, and who they truly are as a business?
Mr. Gere. Yes, I just had one comment here, and it is to
bring, again, the attention of reciprocity, international norms
of reciprocity. We have to demand. We have given away way too
much--way, way, way too much. We did not have to. The Chinese
are sitting back in their chairs and going, ``Ah, we got what
we wanted again. We got what we wanted again, again, and
again.''
Reciprocity, just the norms of international behavior,
access to their markets, access to information, those are huge
things to them--huge. But we can demand that there is
reciprocity. Reciprocity of movement, you know? No one gets to
Xinjiang. No one gets to Tibet. It is impossible. It is easier
for a journalist--journalist friends of mine have told me this:
it is easier to get into North Korea than into Tibet.
Reciprocity, the norms of international behavior have to be
demanded, and we cannot be drunk with those short-term goals of
money. We cannot, because we have seen what it has done to us
over the last 25, 30 years.
Senator Cortez Masto. I appreciate that. Thank you. But let
me ask you--well, let me open it up to the panel, because I
think, Mr. Cory, earlier you said that the U.S. should ask the
International Trade Commission for a study on China censorship
and protectionism. So we get this study; then what do we do?
And let me put it in this perspective. Once we have the study,
is there an opportunity to bring in international organizations
or other countries, or allies, or friends to really put
pressure here and to focus on this reciprocity, or what we
should be doing to address the censorship and protectionism?
Mr. Cory. I think the study is a simple first step that
sort of sends a clear signal that the United States recognizes
that this is no longer some minor trade irritant, that this is
a part of the strategic calculation with China. And what we
have seen is that countries, like my home country of Australia,
the United States, Canada, and the European Union, are all
somewhere along a spectrum in waking up to what China and the
Chinese Communist Party represents to their trade interests,
their economic interests, but also their own political
interests and values there.
And so it sends that clear signal. And then it starts the
process of outlining what are the corresponding steps that the
United States can take? And that is multi-faceted. That is
addressing the cases where Chinese Communist Party action is
applied extraterritorially, outside of China, in the United
States, in Australia, and elsewhere, documenting those. It is
bringing the transparency to that.
It is also setting up the mechanisms to talk with U.S.
firms and industries that are in the impossible position of
trying to stand up to the Chinese Communist Party to get a
better understanding what exactly is going on. What are they
asking for? How are they asking for it? What is the legal basis
for that? Because only then does the United States have the
information it needs to respond.
But also, and importantly, I think the study would reflect,
and the strategy that it should lead to is, that the United
States cannot do this alone. It most definitely needs to lead
the charge in making the case and pressing back against what
China is doing, but the point has passed where the United
States can do this on its own. Whether that point was 10 or 15
years ago, it is a matter of fact now that the United States
really does need to work with its like-minded value-sharing
partners, especially the European Union, Japan, Australia, and
others, in providing a collective response. Because that is
really the best chance we have for affecting change in China
and its effect outside of China.
Senator Cornyn. Thank you, Senator Cortez Masto. We will
now turn to Senator Wyden.
Senator Wyden. Thank you very much, Mr. Chairman, and I
appreciate all our guests being with us. And as ranking
Democrat of the full committee, I take a great interest in
this. Good to see you again, Mr. Gere, as well. Welcome.
And I want to ask you all about something John Bolton wrote
in his book--and of course he is the former National Security
Advisor--and I am just going to read it to you.
``At the opening dinner of the Osaka G20 meeting in June of
2019 with only interpreters present, Xi had explained to Trump
why he was basically building concentration camps in Xinjiang.
According to our interpreter, Trump said that Xi should go
ahead with building the camps, which Trump thought was exactly
the right thing to do. The National Security Council's top Asia
staffer, Matthew Pottinger, told me that Trump said something
very similar during his November 2017 trip to China.''
So we have very knowledgeable witnesses on this panel, and
I would just like to see if any of you believe that encouraging
foreign leaders to build detention and forced labor facilities
for religious minorities is anything but a repudiation of
American values? Does anybody think that that is not the case,
that this is a repudiation of American values?
Mr. Gere. Yes, I mean it is--I do not know what crazy movie
we are in all of a sudden. This is ``Dr. Strangelove.'' I
cannot imagine there is another person in the U.S. Government
or another person, an American citizen, who even remotely would
believe what the President said, would feel that same way, that
the concentration camps are the right way to go. It is
appalling.
Senator Wyden. Anybody want to add to that? I think that
pretty much sums it up. It certainly does for me, and our
family knows a lot about concentration camps as well.
Okay; thank you very much, Mr. Chairman, Senator Casey.
Good job--an incredibly important hearing, and I look forward
to learning more about all that you have discussed. Thank you.
Senator Cornyn. Mr. Willems, before we move to the next
questioner, you had your hand up and wanted to make a comment
on some earlier testimony or questions. Go ahead.
Mr. Willems. Thank you very much. And let me just comment
quickly on the last two questions. First on this question about
the Osaka dinner. I was out of the administration by that time,
so I have no first-hand knowledge of it. I can tell you that
while I was in the administration, I did work closely with Matt
Pottinger and Ambassador Bolton and others on trying to push
back on the policies in Xinjiang. And I think that ultimately,
you know, action has been taken there, as it should. What is
going on in that region is appalling, and the U.S. and allies
around the world need to stand up against it.
The comment I also had just wanted to make on the previous
question was about what we can do to help our companies. And I
do think in particular we need to play a robust role at the
governmental level. A lot of this conversation has been about
how it is terrible that we are trying to access China's market,
because that gives them more leverage.
I might flip it another way and say that by having access
to China's market, we are getting a lot of money that our
companies can then pump into research and development to make
sure that they are an innovation leader ahead of China.
So another way to put it is that China is subsidizing our
innovation. And I think if you look at our semiconductor
industry, which you have paid a lot of attention to, they get
30 to 40 percent of their sales in China. So that is an
important source of revenue for them. I think we also need to
do our part, like the CHIPS Act, but I think it is important
not to only look at what the adverse consequences are of market
access, but also to look at the positive ones.
But in terms of helping our companies, I like the idea--I
mentioned this in my opening--of disclosure, making our
companies disclose when they are pressured by the Chinese
Government. I think you should do that for forced technology
transfer as well. It puts the onus on the U.S. law instead of
on the company and therefore makes it much more difficult for
China to retaliate, because the problem is not the U.S.
companies; the problem is the U.S. Government. So bring it to
us. We can stand up.
A similar thing I would consider is prohibiting U.S.
companies from complying with censorship requests with respect
to the activities that they are conducting in our jurisdiction.
And what I like about this is that it is reciprocal, as Mr.
Gere was talking about. And Beth will be familiar with this,
with her time at the PCAOB: the legislation that you all have
been looking at to say it is unacceptable for Chinese companies
to refuse access to our auditors who want to regulate their
financial records.
Now what those companies tell our regulators is, we cannot
do it because of Chinese law. So let us do the same thing. Let
us tell our companies they cannot comply with censorship
because of U.S. law. And that is exactly what China is doing to
us, so let us do it back to them.
Just as it is unacceptable for them to say we cannot access
the audits, it is also unacceptable for them to say they should
censor our companies. And so let us use a robust response from
the U.S. Government to help those companies.
Senator Cornyn. Thank you for mentioning the CHIPS Act.
This is a major bipartisan effort to bring high-end
semiconductor manufacturing back onshore and to reduce
dependence on China, as Ms. Baltzan pointed out in her
testimony, in these supply chains of critical technology. Can
you imagine if we did not have access to that and we did not
have the capacity to build it here in America? Obviously, that
is a huge vulnerability, and the virus has taught us many
lessons, most of them painful, but some of them point to a much
different path than we have traveled down before. We simply
cannot continue to depend on China just because it is cheap,
especially in some of these very sensitive areas.
I think Senator Brown is next, if he is with us.
[No response.]
Senator Cornyn. Well, I understand that he is not able to
be with us. So, Mr. Gere, let me just ask you. How much money
does the Chinese Government invest in Hollywood? Do you have
any way of quantifying that?
Mr. Gere. I am probably not the person to ask. I was
looking through some material last night, and there were some
deals in the $250-million range. There were several in the
hundred-million-plus range.
Senator Cornyn. Well, we can run those numbers down. Let me
ask you this. Last year I was very much involved in the effort
to reform the Committee on Foreign Investment in the United
States, but we were focused primarily on foreign investment in
technology and start-ups.
As you know, the Chinese Government does not observe any
distinction between the private sector and their military. And
in fact the private sector is compelled to share anything they
have that the military wants with them and the communist party.
But given what you have described about the self-censorship and
the influence that China has on the sorts of movies that
Hollywood makes, do you think we ought to be looking more
broadly, beyond just technology, at other investments that
China is making in the United States that help facilitate the
path they are on?
Mr. Gere. Well, I think they read us very well, as I said
before. Their 100-year plan was to step back and really look at
the rest of the world. And they saw the trajectory that the
U.S. was on. If they could--money was the way. And they began
by creating products that were manufactured the cheapest in the
world, as we all know. And that created the situation where
they controlled those markets that we are seeing, tragically,
now with the medicines that they own, our pharmaceuticals.
This is going to permeate everything in our society as long
as money is our prime motivator. It was not for them. It was
power and control. They gave up the money part of it early on
to create control, understanding that that control would pay
off decades later. And that is what they are reaping right now.
I want to go back to something I think Mr. Cory said and
emphasize it. The turn that this administration made that the
U.S. should go it alone has been a huge mistake in terms of
China. The only way we can counter China is if the U.S. and the
EU--our European friends and allies, true friends and allies--
and Japan and India create a coalition that really understands
what the Chinese are trying to do, and that we negotiate with
them as a group, as democracies, free-market democracies,
independent. That is the only way that we are going to make any
real change here. And the U.S. Government, the U.S. Congress
has done extraordinary things, but the U.S. cannot do it alone,
and especially in this situation where it is ``America First''
and all those, frankly, kind of naive cliches.
We are in a very interconnected world, and let us be
interconnected with the best of the world. And the best of the
world still exists. Our European brothers and sisters, Japan,
India, the great democracies of the world, we can do this
together and create the world we want, and counter the Chinese
Communist Party.
Senator Cornyn. Thank you. Senator Casey, do you have any
other questions you would like to ask?
Senator Casey. Mr. Chairman, I hope you can see and hear
me.
Senator Cornyn. We can see and hear you.
Senator Casey. That is great. I was hoping at least for
audio. But thanks so much for the hearing. I just had one
question I wanted to ask earlier to Ms. Baltzan about the
Havana Charter, which she gave some of the history of, the fact
that it was signed by 54 countries but never went into force,
and that there was opposition, at the time, from our business
community.
I guess I would ask you, in addition to the history and the
significance of it, what is still relevant today, and in
particular, how does it relate to conditions of trade, in terms
of trade?
Ms. Baltzan. Thank you so much for the question, Senator
Casey. I think there has been this narrative that the
foundation of the global trading system was about tariff
liberalization and nothing else. And I think that narrative is
false and extremely harmful.
Some of the things Mr. Gere was talking about, about the
philosophy we had in the 1990s about the conditions in which we
created the WTO and let China in, are directly traceable to
that misunderstanding of our own history.
If you look at what was motivating the founders of the
system--and we are talking about initially FDR and John Maynard
Keynes, and then those who followed them--these were people who
had lived through the Gilded Age. They had seen income
inequality. They had seen nationalism. They had seen political
instability. They had seen authoritarianism. And more
importantly, they had seen how, particularly in Europe,
authoritarian governments had been able to deploy concentrated
economic power in the form of cartels and trusts to pursue an
authoritarian agenda.
And they were not just thinking about Italy and Germany in
the past, they were looking ahead to the Soviet Union, and that
was communist rather than fascist, but it was the same
fundamental problem, which is this relationship between an
authoritarian government and concentrated industrial
production. And that is why so much of the Havana Charter is
about making sure that you are protecting competition itself,
because they believed that protecting competition was a way of
protecting democracy.
And somehow that entire line of thinking has been lost. So
let us look at what we are confronting today. Is the Havana
Charter relevant today? Well, it is a second Gilded Age. We
have again problems with income inequality, and this goes to
the issue with Senator Cassidy. You cannot just keep
suppressing labor rights and expect not to have
authoritarianism and a revolt by the working people.
So if we want to deal with these structural issues, then we
have to have a set of rules that promotes competition. We are
seeing, again, a rise in industrial concentration. When we
bring all this to bear and look at what is going on in China,
in my view we see the emergence of the very thing that the
founders of the global trading system were trying to prevent,
which is an authoritarian government that is not only able to
leverage industrial power to pursue its ends, but is actually
able to use the multilateral trading system to execute that
agenda.
And I really want to point out something in your opening
remarks that is important. This really is not about publicly
owned versus privately owned. And the Havana Charter covers
both.
I am extremely concerned that we spend a lot of our time
talking about state-owned enterprises in China, when the
pivotal variable is not who owns what, it is the relationship
between those industries and the government.
Senator Casey. Thank you very much, Mr. Chairman.
Senator Cornyn. Thank you, Senator Casey. Senator Cassidy,
do you have another question?
Senator Cassidy. I do.
Senator Cornyn. We are sort of winding down here a little
bit, but I want to give everybody who has another question an
opportunity. Go ahead, please.
Senator Cassidy. Ms. Baltzan, again I go back to your, I
guess, thesis, that it is their economic power that allows them
to exert this censorship. And again, I find that valid.
So it is a little bit far afield from this hearing, but
still you have raised it, so I am going to ask you. I agree, we
should not allow people to use arbitrage of environmental laws
or of workers' rights or of human rights, using slave labor, et
cetera, in order to undercut the ability of a worker in the
United States, for example.
On the other hand, there is a tension there. If we have
environmental laws that we really need and another nation does
not, it would require everybody to have the same environmental
laws and the same labor laws, even though obviously conditions
in, say Central America are different than those in the United
States. I say that as regards what is the minimum wage, for
example.
So if we are going to reexamine our trade relationship, I
think everybody would agree--I do at least--that if we are
going to demand a certain environmental standard for air
pollution in the U.S.--and Chinese air pollution blows over to
the U.S.--we should ask for the same environmental standard
there. I get that.
But going back to wage rates, do you concede that wage
rates would also be required to have some sort of equivalency?
Because otherwise our folks would be disadvantaged.
Ms. Baltzan. I am actually very supportive of what is in
the new NAFTA. I am supportive of the rules that have been
enforceable in our trade agreements since 2007, which are core
labor standards.
This is not about setting a specific, prescriptive set of
rules that every country must follow without regard to its
development level. This is about setting a floor. And that is
also what the founders of the system did in the Havana Charter.
Senator Cassidy. Okay; and so if we had that floor as part
of a trade agreement with China, that may be a remedy, if you
will, knowing that that is easier said than done, but
nonetheless that would be a potential remedy. Correct?
Ms. Baltzan. Yes. I would use the WTO, and I would use
section 301 to establish that.
Senator Cassidy. Although in your testimony, you point out
that since that is a consensus organization, that would be
difficult to work through WTO.
Ms. Baltzan. I think that is true. I think we should ask
for it.
Senator Cassidy. And if we fail there, because undoubtedly
we will fail--what was it, the section 301 and anything else?
Ms. Baltzan. I think there have been proposals, not in any
concrete terms, but proposals about access to U.S. markets and
having essential standards as part of our domestic regime. And
I think those are worth considering.
Senator Cassidy. Okay. Thank you very much.
Senator Cornyn. Senator Cortez Masto, do you have an
additional question?
[No response.]
Senator Cornyn. Senator Wyden, do you have any other
questions you want to ask?
[No response.]
Senator Cornyn. Well, let me just say how much I
appreciate--and I know we all appreciate your testimony here
today.
Mr. Gere, for what it is worth, I think we need to sort of
get to a place where we recognize that administrations, whether
they are Republican or Democrat, can have good ideas, and some
not-so-good ideas. I know this administration seems to believe
that bilateral trade negotiations are optimal, and I can
understand why their argument is that if you do a multilateral
trade agreement you are going to have to give up too much in
order to get it. But there are benefits. And I think you
described one of them, particularly dealing with China. We do
need to work with our allies and to confront this challenge.
One, because they are in the same situation we are in. They are
being eviscerated economically and threatened militarily, and
it is important for us to work with people who share our values
to counter this incredible aggressive economic and military
threat from China.
So let me thank you for raising that point, and I think you
will find a lot of people in Congress who share that view.
So with that, let me thank all of you for joining us here
today on this very, very important topic. We are going to have
a deadline of 2 weeks for additional questions. It may be that
Senators have some additional written questions they would like
to ask, and we will keep the record open for 2 weeks. If the
witnesses would be so kind as to respond to those, we would
very much appreciate it.
And with that, the Subcommittee on International Trade,
Customs, and Global Competitiveness stands adjourned. Thanks so
much.
[Whereupon, at 4 p.m., the hearing was concluded.]
A P P E N D I X
Additional Material Submitted for the Record
----------
Prepared Statement of Beth Baltzan, Fellow, Open Markets Institute
economic liberalism, the chinese communist party, and free speech
Those of us who remember the debate over whether the United States
should grant China Permanent Normal Trade Relations (PNTR) status in
2000 also remember the ultimate justification for it: integrating China
into the global economic order would promote democracy there. This line
of thinking was spurred on by the collapse of the Soviet Union in 1989-
1990. Works like Francis Fukuyama's ``The End of History?'' postulated
that we might have reached the culmination of political evolution, and
that political conflict would give way toward democracy--with economic
liberalism as the driver. As Fukuyama noted, the imminent implosion of
the Soviet Union seemed to be a ``an unabashed victory of economic and
political liberalism.''\1\
---------------------------------------------------------------------------
\1\ Francis Fukuyama, ``The End of History?'', The National
Interest, Summer 1989 (https://www.embl.de/aboutus/science_society/
discussion/discussion_2006/ref1-22june06.pdf).
Fukuyama himself had praised China's evolution toward liberalism as
---------------------------------------------------------------------------
far back as 1989. At the time, he found little room for backsliding:
the pull of the liberal idea continues to be very strong as
economic power devolves and the economy becomes more open to
the outside world. . . . The People's Republic of China can no
longer act as a beacon for illiberal forces around the
world.\2\
---------------------------------------------------------------------------
\2\ Id., at 10.
Precisely because we assumed the march toward economic and
political liberalism to be inexorable, we failed to contemplate that
any other outcome was possible--or to construct rules that would
prevent any other outcome from occurring. Because of it, we are now
witnessing the outcome opposite to the one the PNTR proponents believed
---------------------------------------------------------------------------
would occur.
As discussed further below, it is global economic integration that
has given the Chinese government the economic leverage over the rest of
us to advance an illiberal agenda. Thus, rather than having global
economic integration incubate democracy and suppress autocracy, global
economic integration has become a vector for autocratic suppression of
democracy. Economic liberalism did not lead to political liberalism: it
has led to political repression.
There are various ways to address the threat the behavior the
Chinese Communist Party poses to the system. The most critical is to
reduce the CCP's ability to engage in this kind of behavior. That means
reducing the amount of economic leverage China has over us, and our
trading partners.
More broadly, we must also reform the rules of globalization. The
current reform proposals are woefully inadequate to address the scope
of the problem. It is not clear that our allies yet share our concerns
about the seriousness of threat. As a result, cooperation with allies
alone is unlikely to suffice to address the problem, at least in the
short-term.
extraterritorial suppression of freedom of speech
With increasing boldness, the CCP--the Chinese Government--has used
its considerable leverage over global markets to attack the right to
freedom of expression. For Americans, the most notorious examples have
involved the NBA and ``South Park.'' Houston Rockets General Manager
Daryl Morey had the temerity to support democratic protestors in Hong
Kong, tweeting ''Fight for freedom, stand with Hong Kong.''\3\ This
statement, which would be anodyne to a secure, non-authoritarian state,
set off the CCP. The Chinese Government canceled broadcasts of pre-
season NBA games in China and ominously indicated that it was reviewing
its relationship with the NBA.\4\ The Chinese broadcaster squarely
addressed the free speech issue, stating that
---------------------------------------------------------------------------
\3\ CNN Business, ``The NBA Faces a No-Win Situation in China.
Here's What It Stands to Lose,'' October 8, 2019 (https://www.cnn.com/
2019/10/08/business/daryl-morey-tweet-nba-china/index.html).
\4\ CNN Business, ``China Won't Show NBA Pre-Season Games as
Backlash Over Hong Kong Tweet Grows,'' October 8, 2019 (https://
www.cnn.com/2019/10/08/media/nba-china-hong-kong-morey/index.html).
We express our strong dissatisfaction and opposition to [NBA
Commissioner] Silver's stated support of Morey's right to free
speech. We believe any remarks that challenge national
sovereignty and social stability do not belong to the category
of free speech.\5\
---------------------------------------------------------------------------
\5\ Id.
Not surprisingly, the CCP's interpretation of the meaning of free
---------------------------------------------------------------------------
speech is at odds with the very concept of it.
When the CCP was ``offended'' by a ``South Park'' episode, the
creators had a different response. They used the government's attitude
to mock it--and the Morley critics. ``We, too, love money more than
freedom.''\6\
---------------------------------------------------------------------------
\6\ Katie Shepherd, ``We Too Love Money More Than Freedom: South
Park Creators Issue Mock Apology Over Chinese Censorship,'' Washington
Post, October 8, 2019 (https://www.
washingtonpost.com/nation/2019/10/08/south-park-creators-blast-china-
nba-over-censorship/).
Though the apology was satirical, it drove home the issue: by doing
business with China, Americans are too often forced to choose between
money and freedom. This choice is fundamentally inconsistent with the
premise under which Congress voted to give China PNTR. Economic
liberalism was meant to pave the way for political liberalism, not to
facilitate political repression through threats to withdraw market
---------------------------------------------------------------------------
access.
Chinese efforts to control speech about Hong Kong are the most
well-known, but the third-rail subjects are much broader. They range
from the Uyghurs, to Tibet, to Taiwan, to the nine-dash line, to COVID-
19. The episode with ``South Park'' should be no surprise: it has been
an open secret for years that Hollywood cannot include Chinese bad guys
in its movies. Judd Apatow explained how this came to be:
I think it happened very slowly and insidiously. . . . You
would not see a major film company or studio make a movie that
has story lines which are critical of countries with major
markets or investors. The question becomes: what's the result
of all of this? The result is, there are a million or more
Muslims in reeducation camps in China, and you don't really
hear much about it.\7\
---------------------------------------------------------------------------
\7\ Evan Osnos, ``The Future of America's Contest With China,'' New
Yorker, January 6, 2020 (https://www.newyorker.com/magazine/2020/01/13/
the-future-of-americas-contest-with-china).
The Chinese Government is obsessed with controlling information,
and deploying it in furtherance of an agenda that uses increasingly
Orwellian tactics. 2020 is the year the Chinese Government is set to
execute its social credit system. The system is described as a
``creepy'' take on a credit score, where the government's judgment of a
citizen's social conduct is baked into a social credit score. The
consequences of a bad score range from slowing the person's internet
speed to banning him or her from flying to being named a bad
citizen.\8\ Coupling the social credit system with the Chinese
government's push into facial recognition, and the concept of being a
private citizen will lose all meaning.\9\
---------------------------------------------------------------------------
\8\ Alexandra Ma, ``China Has Started Ranking Citizens With a
Creepy Social Credit System,'' Business Insider, October 29, 2018
(https://www.businessinsider.com/china-social-credit-system-
punishments-and-rewards-explained-2018-4).
\9\ Lily Kuo, ``China Brings in Mandatory Facial Recognition for
Mobile Phone Users,'' The Guardian, December 2, 2019 (https://
www.theguardian.com/world/2019/dec/02/china-brings-in-mandatory-facial-
recognition-for-mobile-phone-users).
For the time being, the social credit system seems to be a domestic
enterprise. But if there was any doubt that the CCP is on the march to
extend its control over domestic speech overseas, we need look no
further than the revocation of the press credentials of three Wall
Street Journal reporters.\10\ As a sign of the extreme direction in
which the Chinese Communist Party is headed, the newspaper noted that
it is
---------------------------------------------------------------------------
\10\ Wall Street Journal, ``China Expels Three Wall Street Journal
Reporters,'' February 19, 2020 (https://www.wsj.com/articles/china-
expels-three-wall-street-journal-reporters-11582100
355).
the first time the Chinese Government has expelled multiple
journalists simultaneously from one international news
organization since the country began re-engaging with the world
in the post-Mao era.\11\
---------------------------------------------------------------------------
\11\ Id.
The Chinese Government's extraterritorial control of speech is not
limited to Americans, either. The Swedes gave a freedom of speech award
to a Chinese-born Swedish publisher under detention in China.\12\ The
Chinese Government warned that Sweden would ``suffer the consequences''
for it.
---------------------------------------------------------------------------
\12\ The Guardian, ``China Threatens Sweden After Gui Minhai Wins
Free Speech Award,'' https://www.theguardian.com/books/2019/nov/18/
china-threatens-sweden-after-gui-minhai-wins-free-speech-award.
Chinese diplomats have also escalated their decidedly undiplomatic
barbs.\13\ The double standard is jarring. Anyone commenting critically
on the CCP's conduct is subject to accusations of ``hurt feelings'' and
retaliation. In the meantime, Chinese diplomats insult other countries
with increasing abandon.
---------------------------------------------------------------------------
\13\ The Straits Times, ``Diplomatic Outbursts Mar Xi's Plan to
Raise China on the World Stage,'' March 7, 2019 (https://
www.straitstimes.com/asia/east-asia/diplomatic-outbursts-mar-xis-plan-
to-raise-china-on-the-world-stage).
The Chinese Government's behavior takes on ever greater
characteristics of the authoritarian heyday that Fukuyama believed was
---------------------------------------------------------------------------
over.
Ironically, by concluding that the fall of the Soviet Union meant
we need not worry about becoming deeply integrated with a Communist
country, we have facilitated the very integration that gives the CCP
the leverage to impose its authoritarian views all over the world.
How did this happen?
a brief, relevant history of the negotiations to create the gatt
Our appreciation of the true roots of the multilateral global
trading system is a bit rusty. We have a vague notion that there were
tariff wars in the 1930s, and that the architects of peace felt that a
rules-based global trading system would promote harmony.
What we remember less is that the Soviet Union was not part of that
system. The Soviet Union was invited to join the talks but ignored the
invitation.\14\ Without this communist presence, the negotiations
focused on the construction of a system that would promote free
enterprise.
---------------------------------------------------------------------------
\14\ C. Donald Johnson, Wealth of a Nation, 2018, at 343.
The architects, which included Franklin Roosevelt's lieutenants and
the famous British economist John Maynard Keynes, did not, as is
commonly understood, believe that tariff cuts alone would protect free
enterprise. Instead, they believed the system needed a comprehensive
set of rules that would promote fair competition in the global
marketplace, ultimately reflected in the Havana Charter\15\ These rules
included standard antitrust fare, such as antimonopoly provisions, as
well as provisions to prevent labor arbitrage, cheating through
currency manipulation, and destabilizing behavior by foreign
investors.\16\
---------------------------------------------------------------------------
\15\ United Nations Conference on Trade and Employment, Final Act
and Related Documents, (Havana Charter) (https://www.wto.org/english/
docs_e/legal_e/havana_e.pdf).
\16\ Beth Baltzan, ``The Old School Answer to Global Trade,''
Washington Monthly, April/May/June 2019 (https://washingtonmonthly.com/
magazine/april-may-june-2019/the-old-school-answer-to-global-trade/).
These rules did not survive. The received wisdom is that they
failed because Congress was in an isolationist mood and did not want to
set up an International Trade Organization. But this received wisdom is
incorrect. The rules failed because the American business community,
including the Chamber of Commerce, the National Association of
Manufacturers, and the National Foreign Trade Council, balked at the
constraints on capital.\17\ They wanted tariff cuts without disciplines
on their own freedoms. Some of the objections were thought to come from
businesses affiliated with pre-war German cartels \18\--and ridding the
economy of cartels was one of the principal goals of the Charter
drafters. As the United States explained in its 1945 trade proposal,
---------------------------------------------------------------------------
\17\ C. Donald Johnson, Wealth of a Nation, 2018, at 414, 430.
\18\ Id., at 419.
[t]rade may . . . be restricted by business interests in order
to obtain the unfair advantage of monopoly. . . . These
practices destroy fair competition and fair trade, damage new
businesses and small businesses, and levy an unjust toll upon
consumers. Upon occasion, they may be even more destructive of
world trade than are restrictions imposed by governments.\19\
---------------------------------------------------------------------------
\19\ United States State Department, Proposals for Expansion of
World Trade and Employment, November 1945 (https://
fraser.stlouisfed.org/files/docs/historical/eccles/036_04_0003.pdf).
The Charter's negotiators--successful businessmen themselves--were
exasperated by the short-sightedness of the business community's
opposition. What the business community considered limitations on free
enterprise, the negotiators considered essential elements of free
enterprise. In advocating for the Havana Charter, which reflected the
original U.S. trade proposal, State Department Adviser Will Clayton
---------------------------------------------------------------------------
pointed out that:
There are two roads we can take here. One leads in the
direction of free enterprise and the preservation of democratic
principles. The other road leads in the direction of Socialism
and state trading.\20\
---------------------------------------------------------------------------
\20\ ``Why and How We Came to Find Ourselves at the Havana
Conference,'' William L. Clayton, Adviser to the Secretary of State,
State Department Bulletin, June 27, 1948.
Compare this more nuanced view to the one handed down over
generations: it is not trade by itself that produces a social good, but
trade as part of a system of free enterprise. And, critically, free
enterprise was not synonymous with ``laissez-faire,'' but rather with a
suite of rules designed to impose restraint on the excesses of capital
that, for example, led to the 1929 crash. That the system designed by
the post-war architects was based on laissez-faire is unthinkable in
light of the fact that Keynes himself repudiated such a system in 1926
with his essay ``The End of Laissez Faire.''\21\ Keynes celebrated the
American proposal, deeming it ``the blue prints for long term
commercial . . . policy'' and ``the first elaborate and comprehensive
attempt to combine the advantages of freedom of commerce with
safeguards against the disastrous consequences of a laissez-faire
system.''\22\
---------------------------------------------------------------------------
\21\ John Maynard Keynes, ``The End of Laissez Faire,'' 1926
(https://delong.typepad.com/egregious_moderation/2009/01/john-maynard-
keynes-the-end-of-laissez-faire-1926.html). ``The phrase laissez-faire
is not to be found in the works of Adam Smith [or] Ricardo.''
\22\ Quoted in Wealth of a Nation, at 332-33.
In describing the two paths that lay ahead, Clayton was referring
to the Soviet Union. But his words ring true with respect to the CCP
today. State capitalism is the direct descendant of Soviet state
trading. It is less focused on command and control over every aspect of
the economy, but any sector of the economy is subject to command and
control if the Chinese Government wants it to be. As finance scholar
and Beijing resident Michael Pettis and his co-author Matthew Klein
---------------------------------------------------------------------------
explain:
[T]he Chinese party-state has enormous power to tell companies
what to do. Communist Party cells are embedded in most Chinese
companies, even the subsidiaries of non-Chinese firms.
Executives at many large companies, including those without
direct government ownership, are party members, which makes
them eligible for promotions and favors--and vulnerable to
party discipline. . . . The legal academics Curtis J. Milhaupt
and Wentong Zheng . . . note that private firms have ``little
autonomy from discretionary state intervention in business
judgment'' because ``the state exercises significant extra-
legal control rights over private firms.'' . . . Executives can
simply be told to pick Chinese suppliers over foreign ones. . .
. The result is that, unlike most other countries, imports have
become less and less important to the Chinese economy since the
mid-2000s.\23\
---------------------------------------------------------------------------
\23\ Matthew C. Klein and Michael Pettis, Trade Wars Are Class Wars
(Yale University Press 2020), at 122.
When this approach is married with the corporate emphasis on short-
term returns, it becomes easier to see how the Chinese Government has
achieved such leverage in the global marketplace that it can control
---------------------------------------------------------------------------
the speech of private citizens thousands of miles away.
When China joined the WTO, its allure for manufacturers and service
providers (mainly banks) was both the size of its market, and the size
of its low-wage workforce. The combination--along with a chronic
currency manipulation regime that made it even more lucrative to
manufacture products in China and export them back to the United
States--lured capital to China's shores.
But it was not just the size of the market, or the cheapness of the
labor that led to the rapid rise of China as an economic powerhouse
after PNTR, shown in the graph below.\24\
---------------------------------------------------------------------------
\24\ Visual Capitalist, ``70 Years of Economic Development and
Policy in the People's Republic of China'' (https://
www.visualcapitalist.com/china-economic-growth-history/). A time-lapse
version is also available that shows China's position in the global
economy compared to others.
[GRAPHIC] [TIFF OMITTED] T3020.001
The interventionist nature of the Chinese Government also played a
critical, and underappreciated, role. It is typical to ascribe the
Chinese economy's rise to the simple operation of Ricardo's comparative
advantage. However, in exploring how China has risen to the top of the
lithium ion battery industry, The Wall Street Journal has done an
excellent job of demonstrating how incorrect that premise is.\25\ The
economic rise is not through comparative advantage, but a combination
of subsidies and forced joint ventures. While the Journal's article was
limited to batteries, the underlying model is prevalent. It has been
used in other industries, and will be used in still others. The
increasing awareness of the Made in China 2025 initiative is awakening
policymakers and defenders of the global trading system to the
comprehensive nature of the threat.\26\
---------------------------------------------------------------------------
\25\ Trefor Moss, ``The Key to Electric Cars Is Batteries. One
Chinese Firm Dominates the Industry,'' Wall Street Journal, November 3,
2019 (https://www.wsj.com/articles/how-china-positioned-itself-to-
dominate-the-future-of-electric-cars-11572804489).
\26\ U.S. Chamber of Commerce, Made in China 2025: Global Ambitions
Built on Local Protections (https://www.uschamber.com/sites/default/
files/final_made_in_china_2025_report_full.
pdf).
Why do companies participate in these forced joint ventures? The
---------------------------------------------------------------------------
size of the market and the size of the low-wage workforce.
If we examine the approach of the Chinese Government to the global
marketplace from a broader lens, we start to see the common thread
across its behavior. China, Inc. is, at its core, a monopoly. It is not
a monopoly of a particular company, or in a particular sector: it is a
monopoly of a country that both wishes to be autarkic in terms of
domestic consumption, and mercantilist in terms of taking advantage of
export markets to generate revenue. This, of course, is at odds with
the very purpose of the multilateral trading system, which rejects both
autarky and mercantilism.
but japan
Many trade experts remain relatively unconcerned by the behavior of
the Chinese Government. According to this view, similar arguments were
made about Japan in the 1980s. The Japanese economy eventually
sputtered; this is presumed to be the path Chinese economy will follow.
The increasing aggression of the Chinese Government illustrates the
radical differences between the Japan of the 1980s, and the China of
the 2020s. Japan's ambitions in the 1980s, which were mercantilist in
nature, centered around economic development. Like China, Japan used
export-led growth to move through the manufacturing value chain,
creating significant domestic wealth. That economic ambition was not,
however, coupled with grand geopolitical ambitions.
By contrast, as its behavior in the South China Sea, Taiwan, and
Hong Kong indicates, the CCP indeed does have grand geopolitical
ambitions. Moreover, the size of China's economy is orders of magnitude
larger than that of Japan. Japan's economy at its peak has been around
$5 trillion; China's today is nearly three times that size.\27\
---------------------------------------------------------------------------
\27\ Id.
Finally, a state capitalist economy with an authoritarian
government is able to deploy subsidies of a size that would be more
difficult to justify in a system with checks and balances. Authors
Pettis and Klein, in describing CCP control over business, take the
position that ``the Chinese economy may be fundamentally incompatible
with the spirit of any rules-based trading system.''\28\
---------------------------------------------------------------------------
\28\ Klein and Pettis, Trade Wars Are Class Wars, at 121-22.
It is critical to factor in that the United States is now
profoundly dependent on supply chains in China in a way that was not
the case with Japan in the 1980s. COVID-19 has illustrated the point
vividly, as Americans have been plagued with shortages of personal
---------------------------------------------------------------------------
protective equipment because of a dependency on Chinese production.
It is not only PPE, however. One review of the transcripts at the
USTR section 301 hearings reveals an extraordinary list of products
that witnesses claimed could not be made outside of China.\29\ It is
not simply that these goods cannot be made in the United States; it is
that, according to these witnesses, they cannot be made anywhere but
China. This is not a recent development: supply chain concentration in
China has been a problem for at least the better part of a decade.\30\
---------------------------------------------------------------------------
\29\ Matt Stoller, ``Bible Lobbyist: We Can't Print Bibles in
America Anymore'' (https://mattstoller.substack.com/p/bible-lobbyist-
we-cant-print-bibles).
\30\ Matt Stoller, ``How America Could Collapse,'' The Nation, July
21, 2011 (https://www.thenation.com/article/archive/how-america-could-
collapse/); Barry Lynn, ``A Glitch in the Matrix,'' Foreign Policy,
September 12, 2012 (https://foreignpolicy.com/2012/09/12/a-glitch-in-
the-matrix/).
This situation is serious enough that it has gotten the attention
of the Pentagon. In a report on the industrial base, the Department of
Defense identifies areas in which we have become dependent on China as
the sole source of some materials essential to national defense.\31\
According to the report:
---------------------------------------------------------------------------
\31\ ``Assessing and Strengthening the Manufacturing and Defense
Industrial Base and Supply Chain Resiliency of the United States,''
Report to President Donald J. Trump, September 2018 (https://
media.defense.gov/2018/Oct/05/2002048904/-1/-1/1/ASSESSING-AND-
STRENGTHENING-THE-MANUFACTURING-AND%20DEFENSE-INDUSTRIAL-BASE-AND-
SUPPLY-CHAIN-RESILIENCY.PDF)
China is . . . the sole source or a primary supplier for a
number of critical energetic materials used in munitions and
missiles. In many cases, there is no other source of drop-in
replacement material and even in cases where that option
exists, the time and cost to test and quality the new material
can be prohibitive--especially for larger systems (hundreds of
millions of dollars each).\32\
---------------------------------------------------------------------------
\32\ Id., at 36.
Part of the reason we have not, historically, concerned ourselves
with supply chains is because our approach to trade for decades has
emphasized ``efficiency''--low cost--as virtually the only relevant
value. But, as we are now finding out, efficiency is in fact not the
only value in a global trading regime. Redundancy has value too. This
is why information technology systems have backups. It is not
necessarily ``efficient'' in a dollars-and-cents calculation--until the
---------------------------------------------------------------------------
day the system crashes.
Trade policymakers are now in the process of finding out what IT
workers have known for decades: redundancy is critical.
Because of the size of the Chinese economy, its geopolitical
ambitions, our extreme supply chain dependency, and the Chinese
Government's willingness to exert that power in ways inimical to the
interests of democratic societies, the CCP poses a threat that is
simply not analogous to Japanese economic ambitions in the 1980s.
solutions
The CCP's leverage over the speech of American citizens comes in
large part from its economic leverage over the United States. Abating
the Chinese Government's economic leverage over us in turn abates its
leverage over our exercise of our constitutional rights. There are
different approaches that can be adopted to diminish that leverage.
Some of these approaches will involve coordinating with our allies,
be it at the WTO or through other mechanisms. However, we must be
cognizant that the WTO is a consensus-based organization. That means
all WTO members would be expected to agree to any new rules. As a
member, China has the ability to frustrate the negotiations,
particularly if it has the backing of other like-minded members (or
Belt-and-Road beneficiaries). China has already rejected U.S. subsidy
reform efforts.\33\
---------------------------------------------------------------------------
\33\ ``China: U.S. Proposal Merely `Scene Setting' for Desired
Subsidy Rules,'' Inside U.S. Trade (March 3, 2020) (https://
insidetrade.com/daily-news/china-us-proposal-merely-`scene-setting'-
desired-subsidy-rules)
In addition, as many experienced American trade negotiators are
aware, our allies are not necessarily as concerned--yet--about
addressing the problematic behaviors of the CCP. Prior efforts to
cooperate, including the Global Steel Forum, have produced little to
---------------------------------------------------------------------------
nothing in the way of real results.
We cannot afford to rely exclusively on collaboration with allies
to address to threat the CCP now presents. It will take a mix of
strategies.
The following priorities stand out, though these are by no means
exhaustive:
Promote redundancy in supply chains. Although there are mixed
feelings about the section 301 tariffs, one benefit is that they have
been moving supply chains out of China, and to other countries.\34\
Among the countries benefiting are those with values more akin to our
own, including Mexico.
---------------------------------------------------------------------------
\34\ Austen Hufford and Bob Tita, Wall Street Journal,
``Manufacturers Move Supply Chains Out of China,'' July 14, 2019
(https://www.wsj.com/articles/manufacturers-move-supply-chains-out-of-
china-11563096601).
We must be more deliberate, however. For example, building on
the Pentagon's efforts, we should examine supply chains and identify
alternatives for those that are important to the U.S. economy and the
welfare of the American people. We can then work to mitigate any
outsized dependence on the Chinese Government. In light of COVID-19,
pharmaceuticals and PPE are areas that have emerged as a priority. In
addition, Senators Cornyn and Warner have introduced legislation to
restore semiconductor manufacturing in the United States.\35\ In
considering supply chain diversification, we can and should seek to
collaborate with allies, so that we are not swapping one supply chain
dependency for another.
---------------------------------------------------------------------------
\35\ Creating Helpful Incentives to Produce Semiconductors for
America Act (https://www.cornyn.senate.gov/node/5599).
Although the concept of industrial policy was out of vogue for
the past 40 years, there was a strong bipartisan consensus in favor of
it in the 1970s. Supporters included Pete Peterson, after whom the
Peterson Institute is named,\36\ and David Rockefeller.\37\ Even Alan
Greenspan considered that the United States might need to revive the
wartime Reconstruction Finance Corporation; in the strange bedfellows
department, the AFL-CIO agreed.\38\ COVID-19, in exposing the depth of
our dependence on the CCP, has reignited the discussion.
---------------------------------------------------------------------------
\36\ One Peterson Institute fellow, Simon Johnson, has coauthored a
book that reexamines U.S. industrial policy during World War II, which
sets out a detailed proposal for a modern version. See Jonathan Gruber
and Simon Johnson, Jump Starting America, 2019.
\37\ Judith Stein, Pivotal Decade, 2011, at 39, 75.
\38\ Id., at 103, 250.
However, to ensure that we address the true scope of the
problem, we must understand all the ways in which the trading system
facilitates supply chain concentration in China. One area, for example,
is the rules of origin in bilateral and regional trade agreements. TPP
in some cases permits 70 percent of a good to come from China, yet the
good trades preferentially under the agreement. In fact, there are
goods in which the content is likely much higher. Even NAFTA, which has
stronger rules (because it was it written in the 1990s) allows
significant Chinese content; this is equally true even of the new auto
rules under the USMCA, which allow lithium ion batteries from China to
be incorporated into a USMCA car. Senator Casey has introduced
legislation to address the systemic flaw with our approach to rules of
origin.\39\
---------------------------------------------------------------------------
\39\ Market Economy Sourcing Act (https://www.casey.senate.gov/
download/market-economy-sourcing-act).
Negotiate comprehensive reforms to the rules of globalization
to preserve competition. Even if we succeed in diversifying supply
chains, it will be difficult to sustain that diversification unless the
rules of globalization themselves are reformed. Otherwise, the same
incentives that led to offshoring and concentration in the first place
will lead to offshoring and concentration again. Therefore, reforms
must address the fundamentally anticompetitive behaviors at the heart
of the problem: monopolistic conduct, currency manipulation, and labor
---------------------------------------------------------------------------
and environmental arbitrage.
To address monopolistic behavior, this paragraph from the
Havana Charter is a useful starting point:
Each member shall take appropriate measures and shall
co-operate with the Organization to prevent, on the
part of private or public commercial enterprises,
business practices affecting international trade which
restrain competition, limit access to markets, or
foster monopolistic control, whenever such practices
have harmful effects on the expansion of production or
trade. . . .\40\
---------------------------------------------------------------------------
\40\ United Nations Conference on Trade and Employment, held at
Havana, Cuba, April 1948, at 63 (https://www.wto.org/english/docs_e/
legal_e/havana_e.pdf).
These rules cover both private and public commercial
enterprises and allow us to avoid the pointless debate over whether a
---------------------------------------------------------------------------
particular company is state-owned or not.
The Havana Charter also had rules to guard against labor
arbitrage. With respect to currency manipulation, the Charter set out a
mechanism for dispute settlement that included fact-finding by the
International Monetary Fund.
Rethink our asks of the CCP during the ongoing negotiations.
Some of the priority asks of the CCP are at odds with the goal of
reducing Chinese economic dominance and indeed would increase CCP
leverage over us. For example, the Chinese Government's lack of respect
for intellectual property rights is one of the reasons companies choose
not to produce there. By improving the investment climate in China, we
are doubling down on our excessive dependence on a hostile
authoritarian government. Democrats and Republicans both agreed to
nearly eliminate investor-state in the new NAFTA, for example, under
the rationale that it was not the role of U.S. trade policy to
facilitate offshoring. The same rationale applies to intellectual
property in China.
We should instead use the talks to discuss labor and
environmental arbitrage.\41\ It is not because labor and environmental
issues are ``social'' issues, as has been the traditional perception.
Rather, the Chinese Government suppresses these rights in order to
create a false comparative advantage, and that is bad for American
workers and American businesses. Indeed, it is bad for every country in
the world that has to compete with Chinese production of industrial
goods. Part of the reason Mexico, for example, has a history of labor
rights suppression is because its workers compete with Chinese workers.
Mexico is our ally, and our neighbor; we should create a trading system
that does not put Mexico at a disadvantage when it agrees to respect
labor rights.\42\
---------------------------------------------------------------------------
\41\ Andy Green and Daniella Zessoules, ``U.S. Trade Policy in
North American, China, and Beyond,'' Center for American Progress,
February 27, 2019 (https://www.americanprogress.org/issues/economy/
reports/2019/02/27/466705/u-s-trade-policy-north-america-china-beyond/
).
\42\ Beth Baltzan and Jeff Kucik, ``NAFTA's Replacement Gives Labor
Some Shelter From Globalization's Storms,'' Foreign Policy, January 16,
2020 (https://foreignpolicy.com/2020/01/16/usmca-mexico-canada-trump-
workers-democrats-naftas-replacement-gives-labor-some-shelter-from-
globalizations-storms/).
---------------------------------------------------------------------------
And it is also bad for Chinese workers.
This is reason enough to revive the Charter's rules on labor
rights, and to expand them to include environmental rights, as part of
the WTO reform agenda. 54 countries agreed to enforceable labor rights
in 1948. There is no reason not to support them today.
conclusion
The optimism that prevailed after the demise of the Soviet Union
led some to believe that authoritarian state trading regimes would
never surface again. According to Fukuyama, following his view that we
were potentially reaching the end of history:
The state that emerges at the end of history is liberal insofar
as it recognizes and protects through a system of law man's
universal right to freedom, and democratic insofar as it exists
only with the consent of the governed.\43\
---------------------------------------------------------------------------
\43\ Francis Fukuyama, ``The End of History?'', at 3.
Although the founders of the GATT had the foresight to devise rules
to frustrate the ability of state trading systems to thrive, precisely
because of the threat they pose to free enterprise and democracy, the
American business community persuaded Congress to reject them. Our
failure to know our own history--or the hubris of believing it did not
matter--meant that we did not think to revive them either when the WTO
---------------------------------------------------------------------------
was formed, or when China joined.
Ironically, then, we are now living through the very outcome the
founders of the system sought to prevent. If the Chinese Government
continues on its present path, which is to bend others to its will, we
may well end up with a global trading system that more closely
resembles state capitalism than free enterprise. The loss of free
speech we are witnessing seems merely to be a harbinger of the loss of
other freedoms, too.
We are not powerless to act, but it does require us to part company
with the theories of trade that have predominated over the past 25
years. Trade does not produce peace by itself. Rather, trade fosters
peace when the rules are designed to promote peace.
Fukuyama has more recently revisited his views. Commenting that the
``unregulated markets'' associated with Thatcherism had in many ways a
``disastrous effect,'' he went on to comment that the only ``plausible
systemic rival to liberal democracy'' is Chinese state capitalism.
The Chinese are arguing openly that [state capitalism] is a
superior [model] because they can guarantee stability and
economic growth over the long run that democracy can't.\44\
---------------------------------------------------------------------------
\44\ George Eaton, ``Francis Fukuyama Interview: Socialism Ought to
Come Back,'' The New Statesman, October 17, 2018 (https://
www.newstatesman.com/culture/observations/2018/10/francis-fukuyama-
interview-socialism-ought-come-back).
The system we thought would breed democracy has instead facilitated
a rival ideology that threatens democracy itself. Fukuyama has the
integrity--and the courage--to revisit his assumptions, and to
---------------------------------------------------------------------------
recognize his mistake.
We must do the same.
______
Questions Submitted for the Record to Beth Baltzan
Questions Submitted by Hon. John Cornyn
Question. In the past, countries blocked access to their markets by
closing or limiting maritime ports to the trade of goods. So too,
today, can nations block the trade of information, services, and even
goods by using firewalls and filters. The infrastructure of our global
Internet runs through a maze of roughly 300 undersea cables that
connect the continents and countries that use them.
How do our international trade agreements and laws apply to a
digital product traveling through an undersea cable in comparison with
the shipment of a good into a port?
Answer. Our trade agreements recognize that digital products may be
considered goods or services. To avoid having to resolve which, our
agreements now refer to them as ``digital products.'' In that way the
agreements focus on the treatment of the products, not the method of
delivery.
The WTO rules were negotiated before the modern digital trade era
emerged, and thus the rules are crafted somewhat differently for goods
and services. Columbia Professor Tim Wu provides an excellent overview
\1\ of the various rules that may apply.
---------------------------------------------------------------------------
\1\ https://scholarship.law.columbia.edu/cgi/
viewcontent.cgi?article=1879&context=faculty_
scholarship.
In both instances, the obligation to provide national treatment
applies. However, any analysis of services obligations depends on
specific, affirmative commitments that WTO members made on a sectoral
basis. As Professor Wu explains, this is where the analysis of a
---------------------------------------------------------------------------
member's obligations can become complicated.
Question. Do our agreements need to be updated to reflect this area
of digital trade and what conversations are currently ongoing
internationally, multilaterally, and bilaterally?
Answer. The problem may have less to do with the rules themselves
than the fact that the global trading system was originally designed on
the basis that authoritarian state trading governments, such as the
Soviet Union, were not part of the system. Authoritarian state
capitalist governments were admitted in an era in which, as my
testimony indicated, economic liberalization would pave the way for
political liberalization. We now realize that theory was flawed, but it
is proving nearly impossible to change the global trading rules because
individual members can block these efforts.
While some call for WTO members to accommodate alternative economic
models, such as state capitalism, doing so would be a fundamental
rejection of the vision of the founders of the multilateral trading
system, who believed that free enterprise was an integral part of
democracy, and that state trading would destroy democracy.
In this regard, the use of censorship as a trade barrier is a
symptom of a much deeper problem.
The WTO is engaged in e-commerce negotiations. However, it is
unlikely that those who deploy censorship as a barrier to trade will
agree to any efforts to craft rules to discipline the behavior, the
United States may, if it chooses to confront this issue directly,
consider domestic legal provisions. Section 301 provides the executive
branch with broad authority to address behaviors by trading partners
that are unreasonable or discriminatory and burden or restrict U.S.
commerce.
It is important to recognize, as I suggested in my testimony,\2\
that liberalizing trade in cross-border data, and prohibiting data
localization, runs the risk of having all the data end up in China. At
present, our trade agreement rules do not prevent such an outcome. The
agreements do, however, provide room for the signatories to agree on
data storage rules that would protect against this outcome.
---------------------------------------------------------------------------
\2\ https://waysandmeans.house.gov/sites/
democrats.waysandmeans.house.gov/files/documents
/BaltzanWrittenTestimony.pdf.
Question. What remedies are currently available under our trade
---------------------------------------------------------------------------
laws to confront censorship as a trade barrier?
Answer. WTO rules prohibit import bans and quotas with respect to
goods. WTO rules on services require national treatment. Depending on
the nature of the trade barrier, there is an argument that using
censorship as a non-tariff barrier can breach either the provisions
covering import bans in goods, or the national treatment provisions for
services. A WTO member could explore bringing a claim grounded in one
or both of those provisions.
However, any member accused of breaching those obligations can
avail itself of a defense. GATT Article XX(a) provides as follows:
Subject to the requirement that such measures are not applied
in a manner which would constitute a means of arbitrary or
unjustifiable discrimination between countries where the same
conditions prevail, or a disguised restriction on international
trade, nothing in this Agreement shall be construed to prevent
the adoption or enforcement by any contracting party of
measures:
(a) Necessary to protect public morals. . . .
Thus, a member could argue that any censorship measures were
necessary to protect public morals. A panel would then evaluate whether
the exception applied. It is difficult to predict how a panel might
rule. In any event, the Appellate Body is currently not functional, and
as a result, there would be no final adjudication until dispute
settlement finality is restored. The WTO did just issue a decision on
the U.S. invocation of the public morals exception in a dispute with
China, finding against the United States.
Question. As the Internet becomes more fractured, should we be
having a conversation about flagging data from countries that do not
reciprocate access to markets? This would be similar to how the Law of
the Sea requires vessels to flag their ships.
Answer. If the Internet continues to become more fractured, then
the old model--that liberalization would minimize the relevance of
individual nationalities as we moved toward free flow of goods and
services--will no longer be as relevant. In that context, flagging data
is one way to begin to recognize the reality that the nationality of
digital products matters, and it would begin to establish pathways for
executing strategies of requiring reciprocity should the United States
choose to do so.
Question. The World Trade Organization has two core principles. The
first is national treatment, which requires a country to treat domestic
and international products the same. The second is most-favored nation
that requires a nation to treat all countries under the WTO equally.
There are two exceptions to these principles for public morals and
national security. These exceptions, intentionally or not, align well
with the definition of censorship which allows for the blocking of
media due to obscenity or security. The third piece in that definition
is content deemed ``politically unacceptable.'' The WTO does not
provide for an exception to that one.
Was the topic of censorship raised during the negotiations over
GATT and eventually the WTO and what conclusions were reached?
Answer. As my written testimony indicates, the GATT was originally
created with the understanding that the Soviet Union and other state
trading countries would be excluded. In general, the contracting
parties were democratically-oriented. As a result, the rules were
designed with democratic governance in mind, and the founders did not
see a need to protect against censorship and other tools of
authoritarianism.
As my written testimony also indicates, the WTO was created after
the collapse of the Soviet Union, when policymakers tended to believe
that economic liberalization would produce political liberalization.
Therefore, WTO rules similarly do not include protections against
censorship and other tools of authoritarianism because the assumption
was that political liberalization was to some degree inevitable.
As referenced above, Professor Tim Wu wrote an article in the
Columbia Law Review in 2006 that explains the analytical complexities
of censorship, and Internet filtering more generally, and concludes
that censorship was not to be considered a trade barrier in the WTO,
including with respect to China's accession (https://
scholarship.law.columbia.edu/cgi/
viewcontent.cgi?article=1879&context=faculty_
scholarship). However, Wu also explains that the WTO dispute settlement
system sometimes adapts the rules to contemporary circumstances. This,
of course, is one of the longstanding U.S. criticisms of the dispute
settlement system: that it does not adhere to bargain struck by the
parties, but rather deploys its own judgment instead.
______
Questions Submitted by Hon. Benjamin L. Cardin
Question. The Third Neighbor Trade act proposes improved economic
and trade ties between the United States and Mongolia, chiefly by
lowering barriers on the import of Mongolian cashmere.
What other initiatives can the United States take to expand
bilateral economic ties for mutual benefit?
Answer. The challenge in this regard is, to some, extent,
geographical. Any effort to expand bilateral economic ties must in fact
be for mutual benefit, rather than providing a greater benefit to
Mongolia's immediate neighbors. As I testified before the House Ways
and Means Trade Subcommittee earlier this month, GSP and other
preference program beneficiaries are typically under pressure from
textile and apparel importers, and non-GSP beneficiaries, to request
relaxed rules of origin. While this approach is often presented as a
job creator in GSP beneficiaries, weak rules of origin mean that most
of the benefits flow to non-beneficiaries. In my testimony, I also
explained that our existing model of preference program does not
adequately reflect the goal of inclusive prosperity, and we may
therefore need to consider new rules for these programs that are
designed to promote the creation of a middle class in the beneficiary
countries. One of the proposals is to include an environment criterion,
to begin to protect developing countries against the practice of
advanced economies' exporting their polluting industries as part of a
broader investment strategy grounded in environmental arbitrage.
It is also worth exploring ways to encourage more integrated
production among beneficiaries themselves. Can Mongolian semi-finished
products be finished in, for example, beneficiary countries in the
Caribbean, rather than in non-beneficiaries such as China? Can they be
finished in the United States?
Question. What other opportunities exist for Mongolia to diversify
its economy sustainably and break away from over reliance on extractive
industries?
Answer. One of the unfortunate outcomes of some of our preference
programs is that the principal exports under them may be raw materials.
This has not been the goal of the programs, and the United States has
struggled for some time to devise incentives to use the programs to
diversify away from, for example, extractive industries.
When Congress renewed the African Growth and Opportunity Act in
2016, one way of promoting diversification and better use of the
program was to encourage each beneficiary to develop an AGOA strategy.
Many beneficiaries were in fact unaware of the scope of the benefits
under AGOA and would often ask for product expansion to include goods
that were in fact already covered. Mongolia might likewise benefit from
a review of the preferences available under GSP, and whether it is in a
position to better take advantage of the program.
Mongolia might also consider new compacts with the Millennium
Challenge Corporation.
______
Prepared Statement of Hon. Robert P. Casey, Jr.,
a U.S. Senator From Pennsylvania
This hearing is the third of a series of hearings held by the Trade
Subcommittee outlining the Chinese Government's civil-military agenda
and efforts to influence the economic and geopolitical order in a
manner that benefits its authoritarian and anticompetitive practices.
Just yesterday, the Chinese National People's Congress passed a
national security law for Hong Kong that significantly erodes Hong
Kong's special status and, based on available reporting, will deny the
people of Hong Kong the right to protest, assemble, or the right to
criticize their government.
The United States Congress has been clear time and time again: the
citizens of Hong Kong must enjoy certain rights that are distinct from
mainland China, and efforts to undermine the status quo is an affront
to the people of Hong Kong and decades of international agreement
regarding the status of Hong Kong.
As I've said before: when it comes to China, we must work with our
allies to execute a clear and coordinated strategy. This applies to
trade and to the Chinese Government's most recent efforts to erode the
rights of the people of Hong Kong.
Here in the United States, we are in the midst of a public health
and jobs crisis. We have seen the cost of our reliance on a single
source supplier, and more to the point, our reliance on production from
a non-market economy.
Last year, Senator Cornyn and I began this effort by outlining the
main issues related to market access in China. We then focused on
specific initiatives and actions undertaken by the Chinese Government,
starting with the Belt and Road Initiative.
Today, we turn our attention to censorship. The actions undertaken
by the Chinese Government include direct barriers, such as blocking
movies from entering their market or restricting content, to blocking
Internet firms, to dictating content related to China's territorial and
economic claims, to demanding action or inaction by businesses related
to Taiwan, Hong Kong, Tibet, and the ongoing human rights abuses in
Xinjian.
The Chinese Government has become increasingly assertive in its
demands within and outside of its borders. Their mandates related to
extra-territorial censorship are particularly troubling. The Chinese
Government's response to a message of solidarity for Hong Kong by the
general manager of the Houston Rockets, brings to light the lengths the
government will go to censor speech, no matter where in the world it
occurs.
The intended message sent by Beijing's disproportional response is
clear: the Chinese Government can exert command and control over any
enterprise operating in China--public or private. Simply stated, the
Chinese Government is using its market power to stifle speech of our
firms and people. These actions are inconsistent with our principles;
they are inconsistent with our values, and those of our allies.
The introduction of the corporate social credit system takes this
activity to a new level. The actions undertaken by the Chinese
Government are clearly restrictive and discriminatory. The actions
undertaken by the Chinese Government are clearly insidious and counter
to the necessary conditions of a fair global economic system.
Since this hearing was originally scheduled in March, we have seen
all too clearly the cost of relying on China, a non-market economy, for
production of our Nation's critical capabilities.
I recently introduced the Market Economy Sourcing Act, which will
begin to right-size supply chains towards the United States and other
market-oriented countries. This is but one measure that must be adopted
to refocus our trade rules and the global economic system.
If we hope to sustain market-oriented principles for the next 100
years, we must take action now to ensure competition and market
principles are not simply words in a textbook, but rather infused into
our system of government and governance.
When it comes to trade, we must be responsive and creative to
address challenges and harness opportunities.
There is no doubt Congress, citizens, and businesses must support
and defend the economic security of the United States of America.
I look forward to hearing from our witnesses and discussing
potential responses, which, in my view, should include the required
disclosure of these types of requests to the appropriate Federal
entities, and trade rules that prevent free-riding from non-market
economies.
______
Prepared Statement of Hon. John Cornyn,
a U.S. Senator From Texas
I want to welcome my colleagues, the witnesses joining us here
today in person and virtually, and those who are tuned in to hear about
the important and pressing topic of ``Censorship as a Non-tariff
Barrier to Trade.'' This subcommittee continues its work in exploring
the unfair trade practices of foreign governments--and especially China
and Russia.
The topic of censorship in China is commonplace in the news because
of its growing effect on American businesses and culture. In the fall
of last year, the National Basketball Association (NBA) had its market
access blocked in China because a single American citizen (using a
media platform not even allowed in China) expressed their political
opinion.
Now the topic has become much more important. The lack of timely,
accurate information about the spread of COVID-19 due to Chinese
censorship has contributed to the havoc wreaked on our economy and
health.
This story is nothing new for some joining us today. Chinese
censorship has long had a growing, negative effect on people around the
world, such as those in Tibet or the Uyghurs in China's Xinjiang
province.
First, I want to set the scene for what ``censorship'' actually is.
A simple look at the dictionary states it is ``the suppression or
prohibition of any parts of media that are considered (1) obscene, (2)
politically unacceptable, or (3) a threat to security.''
Today, we will focus on how the use of censorship has become a
barrier to global trade.
When the World Trade Organization was founded, two exceptions to
the principles of national treatment and most-favored nation were
created. These are for public morals and national security. Notably,
there is no exception for a country to restrict trade because it deems
something ``politically unacceptable.''
With discussions over reforming the WTO, multilateral talks on e-
commerce, and the prospect of a Phase Two bilateral deal with China
progressing, the subcommittee is uniquely positioned to inform
Congress, the public, and the executive branch on the use of censorship
as a non-tariff barrier to trade.
We will help determine if the suppression of information, data,
goods, and services via digital media by countries such as China
constitutes a trade barrier in violation of WTO, multilateral, and
bilateral agreements and practices. If so, we will look to determine
the economic damage caused; the human, cultural, business, and
political ramifications; and what remedies are currently available or
should be created to combat the unfair trade practice.
On a bilateral basis, what is clear is the lack of reciprocity
between countries like China or Russia and the U.S. The Chinese
Government spends billions of dollars to promote its propaganda
overseas, a form of offensive censorship. For years, Russia has
broadcast its state propaganda in the U.S. and, as a result, the
President required it to register as a foreign agent. The lack of
reciprocity takes advantage of our system of free expression to promote
these countries' agendas online, in media, entertainment, and our
education system.
Meanwhile, China and Russia do not grant the U.S. the same access
to their markets or media. Instead, China is expelling our media,
having kicked out three Wall Street Journal and other reporters earlier
this year over Chinese censorship of COVID-19.
For centuries, countries blocked trade through physically
restricting access to their ports. Today, the same happens with
firewalls, filters, and outright restrictions to access. In fact,
nearly 100 percent of global Internet traffic travels through a
crisscrossing network of undersea cables that forms the backbone of
global digital trade. These cables are another front in the global
technology race, with companies like Huawei Marine rapidly moving to
control the media by which content and trade are censored.
In the era of information, where data is the new gold, the blocking
or filtering of that traffic by nation-states is growing. This
censorship is fragmenting our markets, culture, and understanding of
one another.
The Internet itself is becoming less global. Countries like China
and Russia are not only building their own infrastructure to cut
themselves off from the world, but exporting their authoritarian model
to other nation-states through efforts such as the Digital Silk Road.
It is imperative that Congress support our Nation in meeting this
challenge. That's why I am working with my colleagues this week to
include parts of the CHIPS for America Act in the National Defense
Authorization. If we are forced to rely on China to build our networks
and technology, the world we know will be much less freer and open to
express opinions and do business.
This bill will help us create our own domestic production capacity
for semiconductors that underpin the technology we use in our daily
lives. It will also help the U.S. remain a global leader in promoting
the free trade of goods, information, and speech.
Finally, I look forward to discussing what remedies are available
to address the abuse of censorship as a non-tariff barrier to trade.
Last fall, a Chinese-American constituent in Texas reported that he
was censored here on American soil by the Chinese Government. His
American WeChat account was shut down for supporting protests in Hong
Kong. His response was, ``If you have censorship in China, that's fine,
but in this country? I'm a Republican, but I suffer the same as
Democrats. We are all censored.''
I look forward to exploring this topic in the same bipartisan
fashion in which censorship affects us all. It is time that Congress
ask the hard questions, and that is why we called our panel of four
experts here today to discuss this issue.
______
Prepared Statement of Nigel Cory, Associate Director, Trade Policy,
Information Technology and Innovation Foundation
Good afternoon, Senator Grassley, Senator Cornyn, and members of
the committee; thank you for inviting me to testify. I am Nigel Cory,
associate director, trade policy, with the Information Technology and
Innovation Foundation (ITIF). ITIF is the world's top-ranked think tank
for science and technology policy. We advocate for policies that
accelerate innovation and boost productivity in order to spur growth,
opportunity, and progress. As part of that mission, my area of focus
encompasses barriers to digital and high- tech trade with China and
other countries around the world.
overview: censorship as a non-tariff barrier to trade
The U.S. lead in the digital economy is under threat as a growing
number of countries enact overly restrictive and discriminatory laws
and regulations around digital content they identify as illegal in ways
that becomes barriers to trade. Explicit content review processes are
the most visible aspect, but it also includes content distribution,
Internet, and connectivity services as these play a crucial role in
managing and controlling information, especially online. China is by
far the worst offender. U.S. firms have lost significant revenue by
being blocked or inhibited from accessing and operating in the Chinese
market. The impact has been especially damaging given that for many
companies' their market access has been denied during a critical,
formative period of economic growth in China. This has not only reduced
U.S. company global market share but provided Chinese competitors with
a protected market from which to launch competitive challenges in other
regions, such as South America, the rest of Asia, and Africa. Alongside
China's other protectionist measures, this also means that a generation
of Chinese consumers have grown up without knowing that their Internet
and consumer experience is completely different than what is available
in most other countries. They have little or no idea about Google,
Twitter, Facebook, or other U.S. firms and their products, even as
Chinese government officials and party ``apparatchiks'' use these
platforms to spread propaganda in the United States.\1\
---------------------------------------------------------------------------
\1\ Li Yuan, ``A Generation Grows Up in China Without Google,
Facebook or Twitter,'' New York Times, August 6, 2018, https://
www.nytimes.com/2018/08/06/technology/china-generation-blocked-
internet.html.
The economic impact is not trivial. A host of U.S. industries and
firms, in sectors ranging from Internet services to cloud computing,
video games, and movies, have likely lost hundreds of billions of
dollars in revenues due to Chinese censorship and related market
restrictions. Importantly, these revenues would have supported
innovation and job creation in the United States, while limiting
Chinese firms' ability to grow and capture global market share. While
it is not possible to calculate an exact figure, ITIF conservatively
estimates (based on market-share comparisons) that Google, which
withdrew from the Chinese market in 2010, subsequently lost $32.5
billion in search revenue from 2013 to 2019, while Amazon and
Microsoft's cloud services (IaaS, which is restricted in China) lost a
combined $1.6 billion over the 2-year period from 2017 to 2018. As the
China market continues to rapidly grow, these losses will also grow
significantly. And it is important to remember that this was all during
a time when China was already running significant trade surpluses with
---------------------------------------------------------------------------
the United States.
U.S. firms and their increasingly digital goods and services are
susceptible to non-tariff barriers in the form of both at-the-border
and behind-the-border laws and regulations. The Great Firewall of China
represents a rare case where U.S. digital exports face a barrier at the
border. Meanwhile, behind this clear market access barrier, U.S. firms
face a complicated, opaque, and changing regulatory framework tied to
content moderation and information control that together makes for a
very difficult and different business environment. Moreover, in many
cases, China's approach to censorship is unwritten, with enforcement
often being arbitrary and delegated to private firms. This is in large
part a conscious decision to avoid WTO sanctions which would be much
easier to put in place if the rules are on paper. Ever changing
political sensitivities in China make it even more challenging to
figure out what is expected of foreign firms. As we recently saw when
China blocked NBA games, the Chinese Communist Party (CCP) is also
increasingly assertive in punishing foreign firms for actions or speech
that occurs outside of China. Censorship is obviously a major factor in
China's decision to prohibit foreign firms from operating in key
sectors (for example, by not giving them licenses or allowing foreign
equity stakes in local firms) and through onerous, unpredictable, and
discriminatory content-review processes, such as for video games and
movies. Taken together, China's approach to censorship is clearly
restrictive and discriminatory towards foreign firms and their goods
and services.
Because China (and other countries) rely on a range of legitimate
public policy goals to provide a justification for their approach to
censorship--such as public safety, morals, cybersecurity and national
security--the United States and other governments have been reluctant
to challenge Chinese practices. Trade-related concerns over censorship
are also just one of many issues in the U.S.-China trade relationship.
While the primary motivation for censorship may be political, by making
life hard or simply keeping U.S. firms out of China, the government
gets the added benefit of supporting China's innovation mercantilism
strategy by protecting local firms from foreign competition. Over time,
this has greatly re-shaped trade and market dynamics in China to the
detriment of U.S. firms and the U.S. economy.
Whatever the stated motivation for its approach to censorship,
China sees it as essential to achieving the most important goal of
all--regime stability. But the implications go far from China's
domestic politics. Chinese President Xi Jinping has outlined his vision
for ``cyber sovereignty,'' a concept in which each country is free to
set its own rules and exercise absolute control of the Internet within
its own borders.\2\ Thus far, the United States and other countries
that support an open and rules-based global digital economy have failed
to respond to the situation in China where it has enacted a censorship
system that acts (whether intentionally or inadvertently) as a non-
tariff barrier to trade (as in China). Other countries view the ``China
model'' of digital development as a success and one they want to
replicate, in part, because it has used censorship for political and
economic ends. At the multilateral level, the trade rules of the global
economy (as under various World Trade Organization (WTO) agreements)
allow countries to enact restrictions based on a range of broad
exceptions for public morals, public order, privacy, and national
security. But when those are used as disguised barriers to trade, as is
clearly the case in China, then trade rules at the WTO and elsewhere
should provide a clear path for countries to challenge the misuse of
these exceptions.
---------------------------------------------------------------------------
\2\ For example: Chinese President Xi Jinping's speech to the
National Propaganda and Ideology Work Conference, August 2013,
``Western anti-China forces have constantly and vainly tried to exploit
the Internet to `topple China.' . . . Whether we can stand our ground
and win this battle over the Internet has a direct bearing on our
country's ideological and political security.'' Quote taken from: James
Griffiths, The Great Firewall of China: How to Build and Control an
Alternative Version of the Internet (London: Zed Books, 2019).
Some U.S. policymakers exacerbate the impact of Chinese censorship
and mercantilism by calling for U.S. firms to leave or stay out of
China by saying that it's immoral to do business there.\3\ In many
companies' case, they rightly say that the U.S. companies would have to
comply with Chinese censorship rules. But while telling companies like
Google to stay out China might allow advocates to assert moral
authority, it would have no actual beneficial effect on free speech and
human rights: China's Internet users would still face a censored
Internet. Yet it would give companies like Baidu (the main Chinese
search engine company) the vast Chinese market, and they would use
those revenues to continue innovating and expanding into markets all
around the world, ultimately taking market share and jobs from American
technology companies.
---------------------------------------------------------------------------
\3\ Wesley Rahn, ``Is Google selling out for access to China's
massive tech market?'', Deutsche Welle, October 19, 2018, https://
www.dw.com/en/is-google-selling-out-for-access-to-chinas-massive-tech-
market/a-45961894.
There should be no doubt that it is in America's long-term economic
and security interests that U.S. companies sell as many goods and
services to China as possible. Every dollar's worth of digital and
physical exports from the United States to China is a dollar that
Chinese firms do not make--and it is a dollar American firms can use to
reinvest in R&D and support employment in the United States. We should
be encouraging, rather than berating, U.S. firms to engage in the
Chinese market (not including, obviously, selling directly to the
Chinese military) for we are locked in a critical competition for
global technology leadership with them. Walking away from the China
market only gives China a leg up in that competition. It is time that
our policy vis-a-vis U.S. information services and digital content
exports to China be based on national interest, not national
---------------------------------------------------------------------------
moralizing.
None of this means that the U.S. Government shouldn't continue
supporting human rights, free speech, and democracy around the world--
it most clearly should. Congressional representatives, U.S. Government
agencies, and successive U.S. administrations have dedicated funds and
attention to how censorship affects these issues over the last decade.
Whether this is the State Department's global Internet freedom
programs, U.S. Government advocacy on Internet governance at the
International Telecommunications Union, or U.S. Government membership
of the Freedom Online Coalition of like-minded countries, all these
ensure that U.S. values are being promoted.\4\ The point here is that
the onus should be on the U.S. government to keep leading the case to
promote U.S. values around the world.
---------------------------------------------------------------------------
\4\ Summarized: Patricia Moloney Figliola, ``Internet Freedom in
China: U.S. Government Activity, Private Sector Initiatives, and Issues
of Congressional Interest'' (Congressional Research Service, May 18,
2018), https://www.hsdl.org/?view&did=811017. It is important to also
ensure that the U.S. State Department should use a dispassionate
analysis and pursue true violations of Internet freedom, such as
political persecution: Robert D. Atkinson and Michael McLaughlin,
``Freedom Is Not Free License: Freedom House's Flawed Measurement of
`Internet Freedom' '' (The Information Technology and Innovation
Foundation, June 8, 2020), https://itif.org/publications/2020/06/08/
freedom-not-free-license-freedom-houses-flawed-measurement-internet.
This testimony provides a detailed analysis of censorship in China,
including how it uses the Great Firewall and other censorship-related
restrictions to prohibit market access and trade. I will explain how
this censorship is a significant and growing non-tariff barrier to U.S.
trade, how it has negatively affected a number of leading U.S. firms
and sectors, and by extension how it impacts U.S. jobs and the U.S.
economy. I will then provide a conservative estimate as to the large
and growing impact censorship has had on search (Google) and cloud
(Amazon), and the limited utility of trade law to challenge Chinese
censorship. It then provides recommendations for U.S. policymakers to
pressure China to revise its approach to censorship, even if it doesn't
cease the practice, so that it doesn't act as a model of digital
protectionism that other countries try and replicate, and so that it
provides meaningful market access to U.S. firms.
china's use of censorship: broad, complicated, and opaque
China's Communist Party has centralized, strengthened, and expanded
the censorship mechanisms it uses in an attempt to protect itself at
home and abroad.\5\ In recent years, this has been driven by a broader
political crackdown under Chinese President Xi Jinping. It is one part
of President Xi goal for China to become a ``cyber superpower,'' which
includes being free and independent from foreign technology (which has
obvious trade implications) and objectionable content that may threaten
his and the CPP's control of China. But the implications extend
internationally--China wants to (re)write the rules for global cyber
governance.\6\ China's model is at odds with those of many other
countries that recognize the value provided by an open, innovative, and
global digital economy.\7\ In essence, China is pushing an alternative
to the current mostly open Internet.\8\ While there are most definitely
economic and commercial considerations, ultimately--China's Internet
management system is about control and the goal of maintaining order.
However, the focus of this testimony will be on the trade and economic
impact on U.S. firms and the U.S. economy.
---------------------------------------------------------------------------
\5\ Matthew D. Johnson, ``Safeguarding socialism: The origins,
evolution and expansion of China's total security paradigm'' (Sinopsis,
a joint project between AcaMedia z.u. and the Department of Sinology at
Charles University in Prague, June 11, 2020), https://sinopsis.cz/en/
johnson-safeguarding-socialism/.
\6\ Samm Sacks, ``Beijing Wants to Rewrite the Rules of the
Internet,'' The Atlantic, June 18, 2018, https://www.theatlantic.com/
international/archive/2018/06/zte-huawei-china-trump-trade-cyber/
563033/; (translation) ``Xi Jinping: Accelerating the Independent
Innovation of Network Information Technology and Making Unremitting
Efforts Towards the Goal of Building a Network Power,'' Xinhua, October
9, 2016, http://www.xinhuanet.com/politics/2016-10/09/c_1119682204.htm.
\7\ Nigel Cory, ``Why China Should Be Disqualified From
Participating in WTO Negotiations on Digital Trade Rules'' (The
Information Technology and Innovation Foundation, May 9, 2019), https:/
/itif.org/publications/2019/05/09/why-china-should-be-disqualified-
participating-wto-negotiations-digital.
\8\ Michael McLaughlin Daniel Castro, ``The Case for a Mostly Open
Internet'' (The Information Technology and Innovation Foundation,
December 16, 2019), https://itif.org/publications/2019/12/16/case-
mostly-open-internet.
Censorship in China is a broad, complicated, and opaque system
involving a range of actors, laws and regulations, and social,
economic, and political interests. At the individual level, these come
together and result in considerable self-censorship given people
realize the potential negative consequences of crossing the many
unclear lines on what may or may not be allowed. In this way, China's
---------------------------------------------------------------------------
pursuit for censorship has resulted in significant societal changes.
As to the formal structure of censorship, the State Internet
Information Office (established in 2011) is reportedly responsible for
Internet censorship.\9\ However, censorship is a much broader endeavor.
The United States Trade Representative (USTR) states that Chinese
government officials from as many as 12 separate agencies are involved
in monitoring and filtering Internet traffic that enters China,
focusing primarily on the content that they deem objectionable on
political, social, religious, or other grounds.\10\
---------------------------------------------------------------------------
\9\ ``China sets up State Internet information office,'' Xinhua,
May 4, 2011, at http://www.chinadaily.com.cn/china/2011-05/04/
content_12440782.htm.
\10\ United States Trade Representative (USTR), 2018 Report to
Congress on China's WTO Compliance (Washington, DC: USTR, February
2019), https://ustr.gov/sites/default/files/2018-USTR-Report-to-
Congress-on-China%27s-WTO-Compliance.pdf.
While it is only one part of China's broader censorship machine,
the Great Firewall is central. Typically, China says that a firm has
used ``illegal content''--a catch-all explanation for censorship.
Attempts to access a blocked site from China typically results in a
connection error as the Chinese nameservers--address books that match
up website names to their digital locations--is unable to correctly
retrieve the IP address of the requested website. This form of
nameserver corruption has been often used by the Chinese government to
block platforms.\11\ There are reportedly over 10,000 websites blocked
in China.\12\ In the first half of 2018 alone, China's regulator the
Cyber Administration of China (CAC) said it had shut down or revoked
the licenses of more than 3,000 websites.\13\
---------------------------------------------------------------------------
\11\ Yuan Yang, ``China blocks Bing access in curb on last foreign
search engine,'' FT, January 24, 2019, https://www.ft.com/content/
714ac466-1f64-11e9-b126-46fc3ad87c65.
\12\ Gerry Shih, ``China adds Washington Post, Guardian to `Great
Firewall' blacklist,'' The Washington Post, June 8, 2019, https://
www.washingtonpost.com/world/china-adds-washington-post-guardian-to-
great-firewall-blacklist/2019/06/08/5ae4fb76-8a56-11e9-b1a8-
716c9f3332ce_story.html.
\13\ ``Online Censorship in China,'' GreatFire.org, https://
en.greatfire.org/analyzer; Yuan, ``A Generation Grows Up in China
Without Google, Facebook or Twitter.''
While state agencies obviously play a key role, Chinese private
firms play a crucial role. Government agencies rely on the state
control of the main telecommunication companies (China Telecom, China
Unicom and China Mobile) to enforce blocks and other censorship and
information control measures. Another crucial group of firms are the
members of China's Cross-border Data Telecommunications Industry
Alliance, which sets out common self-discipline measures for firms
involved in managing cross-border data traffic.\14\ However, the
implementation of censorship is decentralized to a much broader range
of private firms who act as crucial intermediaries.
---------------------------------------------------------------------------
\14\ ``Notice on Invitation to Membership and Overseas Observers of
China Cross-border Data Telecommunications Industry Alliance,'' China
Academy of Information and Communication Technology, September, 2018,
http://www.caict.ac.cn/english/news/201809/t20180920_271372.
html.
Tech firms, especially China's ``big three'' Internet firms Baidu,
Alibaba, and Tencent, are critical intermediaries in enacting
censorship in Chins. These firms do so, in part, as they have to manage
content as part of their license to operate.\15\ China's new counter-
terrorism law also requires companies to monitor user behavior to
ensure public safety.\16\ Another law on ``mobile Internet application
programs'' requires app providers to monitor online content and keep
records of user violations and report them to the relevant government
authorities.\17\ In many areas, this role is strictly limited to
Chinese firms as China prohibits foreign investment in ``Internet
publishing'' (providing the public with publications through the
Internet).\18\ Chinese laws also prohibit people and firms from
developing or hosting tools that could be used to circumvent its data
and content control measures.\19\
---------------------------------------------------------------------------
\15\ State Council, Telecommunications Regulations of the People's
Republic of China. Decree of the State Council of the People's Republic
of China No. 291, September 25, 2000.
\16\ Standing Committee of the National People's Congress, Counter-
terrorism Law of the People's Republic of China, Order of the President
of the People's Republic of China No. 36, December 27, 2015.
\17\ Cyberspace Administration of China (CAC), Administrative
Provisions on Information Services of Mobile Internet Application
Programs, June 28, 2016; Library of Congress, China: CAC Releases New
Rules on Mobile Apps, July 26, 2016.
\18\ State Administration of Press, Publication, Radio, Film and
Television (SAPPRFT) and Ministry of Industry and Information
Technology (MIIT), Administrative Regulations for Online Publishing
Services (``Online Publishing Regulations''), February 14, 2016;
Heather Timmons and Zheping Huang, ``Beijing is banning all foreign
media from publishing online in China,'' Quartz, February 18, 2016,
https://qz.com/620076/beijing-is-banning-all-foreign-media-from-
publishing-online-in-china/; United States Trade Representative (USTR),
2018 Report to Congress on China's WTO Compliance; Albert C. Tan and
Frank S. Wu, ``New Regulations on Internet Publishing in China: Foreign
Capital Prohibited,'' Haynes and Boone website, March 30, 2016, https:/
/www.haynesboone.com/Alerts/new-regulations-on-internet-publishing-in-
china.
\19\ ``Ninth Amendment to the Criminal Law,'' China Law Translate,
July 7, 2015, http://www.chinalawtranslate.com/criminallawam92/
?lang=en.
Chinese tech firms often have thousands of content moderators to
remove censored content. These moderators look for code words or slang
that people use to try and get around censorships as well as memes that
deal with subjects that the government doesn't want people to
access.\20\ There are also censorship ``factories'' in China that
fulfil these duties for firms. For example, one such firm is
Beyondsoft, which has a service (called Rainbow Shield) that has
compiled over 100,000 basic sensitive words and over three million
derivative words, with about one-third related to political content,
followed by words related to pornography, prostitution, gambling, and
knives.\21\
---------------------------------------------------------------------------
\20\ Javier C. Hernandez, ``Chinese Citizens Evade Internet Censors
to Remember Liu Xiaobo,'' New York Times, July 14, 2017, https://
www.nytimes.com/2017/07/14/world/asia/china-liu-xiaobo-censorship-
internet.html; Amy Qin, ``Ridicule Turns to Affection as Chinese Social
Media Embraces Jiang Zemin,'' New York Times, October 20, 2015, https:/
/sinosphere.blogs.
nytimes.com/2015/10/20/jiang-zemin-china-toad-xi-jinping/; Michael
Wines, ``A Dirty Pun Tweaks China's Online Censors,'' New York Times,
March 11, 2009, https://www.nytimes.com/2009/03/12/world/asia/
12beast.html.
\21\ Li Yuan, ``Learning China's Forbidden History, So They Can
Censor It,'' New York Times, January 2, 2019, https://www.nytimes.com/
2019/01/02/business/china-internet-censor.html.
China's censorship system, and the criteria it uses, are opaque and
unpredictable, which together create considerable market and policy
uncertainty. China's regulatory authorities frequently take actions
that appear to be arbitrary, rarely issue lists of banned search terms
or banned sites, and provide little or no justification or means of
appeal when they block access to all or part of a website. Furthermore,
while non-state actors often take explicit guidance from government
authorities, they also take an educated guess to block services and
material that they think the government would consider offensive or
sensitive. China's online crackdowns are often cyclical, especially in
the lead-up to key CCP meetings. The unclear and imperfect application
of censorship means that firms and content moderators face the
challenge of adapting to Chinese users reverting to slang words and
memes when communicating on Chinese social media apps like Weibo, QQ,
and WeChat. In many ways, the opaque, evolving, and decentralized
nature of censorship is one of the factors that makes it easier for
China to avoid a legal challenge at the WTO as many parts of its
censorship model is through informal administrative guidance or
unguided intermediary action.\22\
---------------------------------------------------------------------------
\22\ Martina F. Ferracane and Hosuk Lee-Makiyama, ``China's
technology protectionism and its non-negotiable rationales'' (The
European Centre for International Political Economy, 2017), https://
ecipe.org/wp-content/uploads/2017/06/DTE_China_TWP_REVIEWED.pdf.
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censorship in china is a significant and growing
non-tariff barrier to u.s. trade
China's use of censorship affects both market entry and operations
in China and the provision of digital services and products from
overseas. This section outlines how China's use of censorship acts as a
significant barrier to trade for many U.S. firms and their goods and
services, while also showing how a smaller subset of U.S. tech firms
have successfully managed to enter and compete.
In analyzing the trade and economic impact of censorship in China
it's important to note that even if China was fully open to U.S. firms
and their goods and services that they would not necessarily be able to
gain the market share they have in the United States and elsewhere
around the world. Chinese firms are robust competitors. But U.S. firms
may be better than local firms in some areas, in part, as they're able
to draw on their experience and technologies developed and used
elsewhere around the world that Chinese firms have not yet developed.
But the point is that U.S. firms should have market access and clear,
predictable, and consistent rules around illegal material so that they
could at least compete on level terms in China.
Drawn by the world's largest smartphone market and an increasingly
wealthy population deeply intrigued by new technologies, just about
every American tech company has taken a shot at China. But outside of
LinkedIn, AirBnb, Apple, and a group of older companies like IBM,
Microsoft, and Intel, few have a major presence in the country
today.\23\ While U.S. firms may not hold the same market shares as they
do in the United States and other foreign markets, it's not hard to
expect that a greater number and range of U.S. firms would have some,
probably sizable, market share in China if there was better market
access.
---------------------------------------------------------------------------
\23\ Paul Mozur and Carolyn Zhang, ``Silicon Valley Giants Confront
New Walls in China,'' New York Times, July 22, 2017, https://
www.nytimes.com/2017/07/22/technology/in-china-silicon-valley-giants-
confront-new-walls.html.
However, success is far from assured. It's also getting more
challenging to achieve, in part, as President Xi and CPP have become
even more sensitive to content and action that they deem offensive or
illegal. Foreign firms understand that doing business in China is
contingent on the firm doing its best to not offend the CCP, both in
words and deeds in China and elsewhere around the world. The economic
and trade tradeoff with censorship is increasingly clear with an
assertive CCP: entering China means you get access to a huge and
dynamic market, but the government gets to hold you accountable for
offending it. When there are few or no legal limits (whether domestic
or trade law-related) to the Chinese government's reaction, then
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foreign firms are obviously at a major disadvantage.
Censorship in China is much broader than website blocking. It no
doubt plays a role in China's decision to prohibit wholly or partially
owned foreign firms from key sectors. For example, China uses licenses
to strictly control who can offer value-added telecommunication
services, such as voice-over-Internet protocol calls, online database
storing and searching, electronic data exchange, online data processing
and transactions processing, domestic multiparty communication
services, virtual private network (VPN) services, and video
teleconferencing and who can interconnect these services with public
telecommunication networks.\24\ Similarly, foreign ownership in basic
telecommunication services (fixed line, mobile, and broadband) is
capped at 49 percent.\25\
---------------------------------------------------------------------------
\24\ United States Trade Representative (USTR), Section 1377 Review
on Compliance With Telecommunications Trade Agreements (Washington, DC:
USTR, 2015), https://ustr.gov/sites/default/files/2015-Section-1377-
Report_FINAL.pdf.
\25\ State Council, Provisions on Administration of Foreign-
Invested Telecommunications Enterprises. Decree of the State Council of
the People's Republic China No. 333, December 11, 2001.
As it relates to blocking, most of the foreign online services,
apps or intermediaries that China blocks are rarely revised and lifted
(as the list above shows). Firms that have their web services
temporarily blocked typically find that this is simply a prelude to a
total and permanent block. The impact of being blocked is cumulative in
its trade impact as for many services that are already blocked, if they
add innovative new services and products, the block is automatically
extended. For example, China's initial blocking of foreign search
engines has expanded to encompass many email, cloud storage, and other
services. This shows that even if there was a specific politically or
socially offensive article to prompt a block, the extension of this
block to new services makes it much more impactful from a trade and
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economic perspective.
The status of a range of key U.S. and foreign firms and services
blocked or throttled in China.
Amazon
Twitch (a live video streaming service) has been blocked
since September 2018.\26\
---------------------------------------------------------------------------
\26\ Shannon Liao, ``Twitch is now blocked in China,'' The Verge,
September 20, 2018, https://www.theverge.com/2018/9/20/17883736/twitch-
china-block-app-store.
Local marketplace Amazon.cn shut down in 2019, due to a
small market share (not due to being blocked). Amazon focuses on
``cross-border commerce.''\27\ China is among the small number of
countries where Amazon Prime Video is not available.\28\
---------------------------------------------------------------------------
\27\ Arjun Kharpal, ``Amazon is shutting down its China marketplace
business. Here's why it has struggled,'' CNBC, April 18, 2019, https://
www.cnbc.com/2019/04/18/amazon-china-marketplace-closing-down-heres-
why.html.
\28\ Patrick Frater, ``Why China Is Absent From Amazon Prime
Video's Global Rollout,'' Variety, December 14, 2016, https://
variety.com/2016/digital/asia/why-china-is-absent-from-amazon-prime-
videos-global-rollout-1201941851/.
---------------------------------------------------------------------------
Box.com
There appears to be a soft block on Box's cloud and sync
services. Users who have Box pre-installed (e.g., travelers) can
generally use the service, or through a China-specific link. Box
appears to work best for those who are visiting rather than long-term
residents.\29\
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\29\ ``Accessing Box From China,'' Box Community website, May 18,
2018, https://community.box.com/t5/Archive-Forum/Accessing-Box-from-
China/td-p/56552.
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Dropbox
First blocked in May 2010.\30\ Temporarily restored in
February 2014, but then blocked again in June 2014.\31\
---------------------------------------------------------------------------
\30\ Matthew Humpries, ``China has blocked Dropbox,'' Geek.com, May
11, 2010, https://www.geek.com/news/china-has-blocked-dropbox-1235291/.
\31\ Catherine Shu, ``Dropbox Now Accessible for the First Time in
China Since 2010,'' TechCrunch, February 17, 2014, https://
techcrunch.com/2014/02/17/dropbox-now-accessible-for-the-first-time-in-
china-since-2010/; Michael Kan, ``China cuts access to Dropbox,'' PC
World, June 19, 2014, https://www.pcworld.com/article/2365540/china-
cuts-access-to-dropbox.html.
---------------------------------------------------------------------------
Facebook (further details below)
Main Facebook website was blocked in 2009. Instagram was
blocked in September 2014. WhatsApp was blocked in September 2017.\32\
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\32\ Hannah Kuchler, ``WhatsApp blocked in China ahead of Communist
Party Congress in October,'' FT, September 25, 2017, https://
www.ft.com/content/685b02c6-4f37-3d69-97f1-38bf7eafeb9d.
Operates an online advertising unit for Chinese customers
to target foreign markets. In 2018, China was the second-largest source
of foreign revenue for ad spend on Facebook.\33\
---------------------------------------------------------------------------
\33\ George P. Slefo, ``Report: China, despite ban, is Facebook's
second-largest ad market,'' AdAge, May 15, 2018, https://adage.com/
article/digital/china-facebook-s-largest-market/313524.
---------------------------------------------------------------------------
Google (further details below)
Temporarily blocked in 2002, but was later re-opened.
However, Google decided to withdraw its search engine from China in
2010 and direct all traffic to google.com.hk (which is blocked in
China).\34\ Google also operates an online advertising unit in China.
---------------------------------------------------------------------------
\34\ https://www.google.com.hk is 100 percent blocked in China,
GreatFire.org website, https://en.greatfire.org/https/
www.google.com.hk.
YouTube was blocked on and off in the late 2000s before
---------------------------------------------------------------------------
being permanently blocked in March 2009.
Also blocked: Gmail, Google Drive, Google Docs, Google
Play, Google Translate, Google Calendar, Google Picasa, Google Groups,
Google Keep, Google Voice, Google Wallet, Google Earth, Google Earth,
Google Chrome homepage, Google Code, Google Blogspot, and Google
Feedburner.\35\
---------------------------------------------------------------------------
\35\ ``Google disrupted prior to Tiananmen anniversary; Mirror
sites enable uncensored access to information,'' GreatFire.org website,
June 2, 2014, https://en.greatfire.org/blog/2014/jun/google-disrupted-
prior-tiananmen-anniversary-mirror-sites-enable-uncensored-access.
---------------------------------------------------------------------------
Microsoft (further details below)
Microsoft OneDrive was blocked in 2014.\36\ Bing was the
last major U.S. search engine blocked in China in January 2019.\37\
---------------------------------------------------------------------------
\36\ Kaylene Hong, ``Little trouble in big China: Flickr, OneDrive,
Line and Kakao Talk suffer accessibility issues,'' TheNextWeb, July 4,
2014, https://thenextweb.com/asia/2014/07/04/little-trouble-in-big-
china-flickr-onedrive-line-and-kakao-suffer-downtime/#.tnw_FFQ06QZk.
\37\ Yuan Yang, ``China blocks Bing access in curb on last foreign
search engine,'' FT, January 24, 2019, https://www.ft.com/content/
714ac466-1f64-11e9-b126-46fc3ad87c65.
---------------------------------------------------------------------------
News services
The Washington Post, The Guardian, Bloomberg, The New York
Times, Reuters, The Wall Street Journal, BBC Chinese, Chosun Chinese,
and Google News are all blocked in China.\38\
---------------------------------------------------------------------------
\38\ For example: Shih, ``China adds Washington Post, Guardian to
`Great Firewall' blacklist,'' The Washington Post.
---------------------------------------------------------------------------
Other search engines
DuckDuckGo, Baidu Japan, Baidu Brazil, Yahoo Hong Kong,
and Yahoo Taiwan are all blocked in China.\39\
---------------------------------------------------------------------------
\39\ Paige Leskin, ``Here are all the major U.S. tech companies
blocked behind China's `Great Firewall,' '' Business Insider, October
10, 2019, https://www.businessinsider.com/major-us-tech-companies-
blocked-from-operating-in-china-2019-5#duckduckgo-18.
---------------------------------------------------------------------------
Pinterest
Blocked in 2017.\40\
---------------------------------------------------------------------------
\40\ Sherisse Pham, ``China adds Pinterest to list of banned
sites,'' CNN Business, March 17, 2017, https://money.cnn.com/2017/03/
17/technology/pinterest-banned-china/.
---------------------------------------------------------------------------
Reddit
Blocked in August 2018.\41\
---------------------------------------------------------------------------
\41\ Alice Truong, ``Users in China found Reddit blocked over the
weekend,'' Quartz, August 13, 2018, https://qz.com/1354441/china-
blocked-reddit-but-access-is-returning-for-some-users/.
---------------------------------------------------------------------------
Slack
Access has been inconsistent for years, despite not being
completely blocked.\42\ China, along with a number of countries have
recently blocked certain online services, including AWS, which hosts
Slack, making it very difficult for such services to access those
markets.\43\
---------------------------------------------------------------------------
\42\ `` @SlackHQ: While we do not block Slack in China from our
end, we do know that our content delivery network is very often blocked
in China, and so accessing Slack there is somewhat inconsistent,''
Twitter, February 27, 2018, https://twitter.com/slackhq/status/
968526959213
936640?lang=en.
\43\ ``Slack Technologies filing to the United States Securities
and Exchange Commission (SEC),'' WEC website, May 31, 2019, https://
www.sec.gov/Archives/edgar/data/1764925/000162828019007428/slacks-
1a3.htm.
---------------------------------------------------------------------------
Snapchat
Unclear when first blocked, but Snap has a small research
office in China despite the block.\44\
---------------------------------------------------------------------------
\44\ Leskin, ``Here are all the major U.S. tech companies blocked
behind China's `Great Firewall' ''; Sherisse Pham, ``Why Snapchat's
owner is hiring in China,'' CNN Business, December 21, 2016, https://
money.cnn.com/2016/12/21/technology/snapchat-china-spectacles-shenzhen-
office/.
---------------------------------------------------------------------------
Twitter
Blocked in June 2009.\45\
---------------------------------------------------------------------------
\45\ Paul Mozur, ``Twitter Users in China Face Detention and
Threats in New Beijing Crackdown,'' New York Times, January 10, 2019,
https://www.nytimes.com/2019/01/10/business/china-twitter-censorship-
online.html.
The impact of China's censorship and blocking of U.S. firms varies
along a spectrum: from a minor, periodic constraint on service access
to a severely degraded connection that essentially makes it unviable
from an operational or commercial perspective to a complete block.
China has gradually been ratcheting up the restrictions so that it is
more often at the restrictive end of the spectrum. Frequent blocking
and unlocking of websites (and VPNs) can make it hard for firms to have
confidence they will have the communication services they need for day-
to-day operations and international trade.\46\ U.S. firms also report
that pushing all traffic through the Great Firewall adds transmission
delays that can significantly degrade the quality of the service, to
the point where it's commercially or operationally unacceptable (thus
cutting off market access).\47\ In a similar way, China has
``throttled'' access to foreign websites in order to make them so slow
as to be unusable. Throttling is often a precursor to being blocked
completely. For example, before Google got fully blocked, it was
throttled for a long time, which had the effect of making it appear as
if Google's search engine was slow and buggy. Furthermore, in 2007,
China temporarily re-directed all China-based requests for Google,
Yahoo, and Microsoft to Baidu.\48\
---------------------------------------------------------------------------
\46\ United States Trade Representative (USTR), 2018 Report to
Congress on China's WTO Compliance.
\47\ Ibid.
\48\ Victoria Ho, ``China accused of rerouting search traffic to
Baidu,'' CNET, October 22, 2007, https://www.cnet.com/news/china-
accused-of-rerouting-search-traffic-to-baidu/.
The case of Microsoft's Bing is typical. When it was blocked in
January 2019, Bing was the only major foreign search engine left in
China. News reports quote anonymous sources that stated that China
Unicom, one of China's major state-owned telecoms companies, had
received an order from the government to block Bing for ``illegal
content.''\49\ Attempts to access cn.bing.com from China resulted in a
(nameserver) connection error. As of December 2018, Bing held a 2-
percent market share in China (far behind Chinese industry leader
Baidu, with 70 percent), but it enjoyed a niche market for English-
language searches.\50\
---------------------------------------------------------------------------
\49\ Yuan Yang, ``China blocks Bing access in curb on last foreign
search engine,'' FT, January 24, 2019, https://www.ft.com/content/
714ac466-1f64-11e9-b126-46fc3ad87c65.
\50\ Ibid.
Google has been one of the major casualties of China's approach to
censorship and digital protectionism. It entered China in 2006 with a
local search engine, under an arrangement with the government that
required it to purge search results on banned topics.\51\ In a first
for Chinese users, Google placed a notice that content had been removed
when users searched for it, but this apparently wasn't popular with
regulators.\52\ From 2006 to 2010, Google China fought skirmishes with
the Chinese government over content restrictions.\53\ Google struggled
to comply with ever-tightening censorship requirements and a far-
reaching hacking attack (known as Operation Aurora) that targeted
everything from Google's intellectual property to the Gmail accounts of
Chinese human rights activists.\54\ So, in 2010, Google shut down its
search engine. China's state-controlled media quoted a State Council
Information Office official saying that ``Google has violated its
written promise it made when entering the Chinese market by stopping
filtering its search service and blaming China in insinuation for
alleged hacker attacks.''\55\
---------------------------------------------------------------------------
\51\ Miguel Helft and David Barboza, ``Google Shuts China Site in
Dispute Over Censorship,'' New York Times, March 22, 2010, https://
www.nytimes.com/2010/03/23/technology/23google.
html.
\52\ Matt Sheehan, ``How Google took on China--and lost,''
Technology Review, December 19, 2018, https://www.technologyreview.com/
s/612601/how-google-took-on-china-and-lost/.
\53\ Ibid.
\54\ Kim Zetter, ``Google Hack Attack Was Ultra Sophisticated, New
Details Show,'' Wired, January 14, 2010, https://www.wired.com/2010/01/
operation-aurora/.
\55\ Helft and Barboza, ``Google Shuts China Site in Dispute Over
Censorship.''
At this time, Google trailed its main Chinese rival, Baidu.com,
with 33 percent market share to Baidu's 63 percent.\56\ China has since
blocked the full suite of Google services (as listed above). In August
2018, media reports suggested that Google was working on a secret
prototype of a new, censored Chinese search engine, called Project
Dragonfly.\57\ In mid-December 2018, Google suspended its development
efforts, in part due to political opposition in the United States.\58\
China has gone so far as to block Google Scholar, a benign search
engine for academic literature that many researchers rely upon. Lack of
access to this service clearly inhibits China's broader innovation
goals.\59\ Media reports stated that Google Scholar was on a priority
list to be allowed back through the Great Firewall, but this hasn't
happened.\60\
---------------------------------------------------------------------------
\56\ Ibid.
\57\ Ryan Gallagher, ``Google's Secret China Project `Effectively
Ended' After Internal Confrontation,'' The Intercept, December 17,
2018, https://theintercept.com/2018/12/17/google-china-censored-search-
engine-2/.
\58\ Ibid.
\59\ Dennis Normile, ``Science suffers as China's Internet censors
plug holes in Great Firewall,'' Science, August 30, 2017, https://
www.sciencemag.org/news/2017/08/science-suffers-china-s-internet-
censors-plug-holes-great-firewall.
\60\ Nectar Gan, ``Is Google another step closer to being unblocked
in China?'', South China Morning Post, March 12, 2017, https://
www.scmp.com/news/china/policies-politics/article/2078173/google-
another-step-closer-being-unblocked-china.
Since 2010, Google has maintained only limited connections and
entry points into China. It has an active business distributing online
ads for desktop computers and mobile applications, and Chinese makers
of smartphones use its Android mobile device software. Google has setup
a research center that focuses on artificial intelligence (AI), but the
focus will be on developing AI for global products.\61\ In 2018,
Google's revenue in Greater China (which includes mainland China as
well as Hong Kong, Macau, and Taiwan) grew more than 60 percent to more
than $3 billion.\62\ In 2018, Google indirectly accessed China via a
$550 million investment in prominent Chinese online retailer JD.com. As
part of this, Google and JD.com formed a strategic partnership where
the latter connects its supply chain and logistics expertise with the
Google Shopping platform.\63\ JD.com also setup a Google Express site
in March, 2019.\64\ Together, the partners aim to compete with Amazon
and Alibaba, especially in fast-growing south east Asian markets.\65\
However, the Google Shopping portal is blocked in China.
---------------------------------------------------------------------------
\61\ Carlos Tejada, ``Google, Looking to Tiptoe Back Into China,
Announces A.I. Center,'' New York Times, December 13, 2017, https://
www.nytimes.com/2017/12/13/business/google-ai-china.html.
\62\ Yunan Zhang and Juro Osawa, ``Google's Ad Sales From China Are
Booming,'' The Information, February 27, 2019, https://
www.theinformation.com/articles/googles-ad-sales-from-china-are-
booming.
\63\ Karim Temsamani, ``A strategic partnership with JD.com,''
Google in Asia Blogpost, June 18, 2018, https://www.blog.google/topics/
google-asia/partnering-jdcom/.
\64\ Josh Horwitz, ``Chinese e-commerce company JD.Com launches
store on Google shopping site,'' Reuters, March 5, 2019, https://
www.reuters.com/article/us-jd-com-google/chinese-e-commerce-company-jd-
com-launches-store-on-google-shopping-site-idUSKCN1QM13Y.
\65\ Krystal Hu, ``How Google is revamping its e-commerce business
with JD.com's help,'' Yahoo Finance, August 9, 2019, https://
finance.yahoo.com/news/how-google-is-revamping-its-ecommerce-business-
with-j-dcoms-help-183825490.html.
Facebook's main social network site was blocked in 2009, followed
by Instagram in 2014, and Whatsapp in 2017. But this has not stopped
Facebook from repeated attempts to access the market.\66\ In 2016,
Facebook started developing software tools for third parties to use to
abide by censorship laws as it relates to stories and topics that may
appear on the social network.\67\ In 2017, Facebook developed a photo-
sharing app called ``Colorful Balloons'' that was released through a
separate local company (without carrying the firm's name).\68\ In 2018,
there were media reports that Facebook had gained approval to open a
subsidiary in the Chinese province of Zhejiang, which Facebook said it
would use for research. But then the registration disappeared and
references to the subsidiary were partly censored in Chinese media.
Media report state that the approval was rescinded after a disagreement
between officials in Zhejiang and the Cyberspace Administration of
China, which was angry that it had not been consulted more closely.\69\
This incident underscores how much of a challenge it is for Facebook--a
global social network-- to get into China in any meaningful way. It
also highlights how U.S. firms seeking to enter the market must
navigate multiple, often opaque rules and laws within a system in which
cities, provinces, and national government agencies all vie for
influence and can make key decisions.
---------------------------------------------------------------------------
\66\ Paul Mozur, ``In China, Facebook Tests the Waters With a
Stealth App,'' New York Times, August 11, 2017, https://
www.nytimes.com/2017/08/11/technology/facebook-china-moments-colorful-
balloons.html.
\67\ Mike Isaac, ``Facebook Said to Create Censorship Tool to Get
Back Into China,'' New York Times, November 22, 2016, https://
www.nytimes.com/2016/11/22/technology/facebook-censorship-tool-
china.html.
\68\ Mozur, ``In China, Facebook Tests the Waters With a Stealth
App.''
\69\ Paul Mozur, ``China Said to Quickly Withdraw Approval for New
Facebook Venture,'' New York Times, July 25, 2018, https://
www.nytimes.com/2018/07/25/business/facebook-china.html.
Facebook is now limited in how it can operate in China. Facebook
has setup an experience center through a Chinese advertising partner
(Meet Social), where potential customers learn how to advertise on
Facebook to access customers elsewhere around the world. In 2019, Meet
Social reportedly expected $1 billion to $2 billion in ad sales on
Facebook and Instagram.\70\ In total, Facebook's revenue from Chinese-
based advertisers reached an estimated $5 billion in 2018, or about 10
percent of its total sales.\71\
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\70\ Paul Mozur and Lin Qiqing, ``How Facebook's Tiny China Sales
Floor Helps Generate Big Ad Money,'' New York Times, February 7, 2019,
https://www.nytimes.com/2019/02/07/technology/facebook-china-
internet.html.
\71\ Ibid.
Apple has major operations in China. In the 2019 financial year,
Apple made $44bn of revenues in Greater China during, mostly from
selling iPhones.\72\ However, to do so it had to agree to Chinese user
data in the country and to remove offensive apps, such as news and VPN
apps, from its app store. Apple removed 805 apps in China from 2018 to
2019.\73\ Most recently, Apple removed the app game ``Plague''
following the coronavirus outbreak.\74\
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\72\ ``Apple's Chinese troubles,'' The Economist, February 20,
2020, https://www.economist.com/business/2020/02/20/apples-chinese-
troubles.
\73\ Masha Borak, ``Apple removed 805 apps in China from 2018 to
2019,'' Abacus News, January 29, 2020, https://www.abacusnews.com/tech/
apple-removed-805-apps-china-2018-2019/article/3047325; Nick Statt,
``Apple's iCloud partner in China will store user data on servers of
state-run telecom,'' The Verge, July 18, 2018, https://
www.theverge.com/2018/7/18/17587304/apple-icloud-china-user-data-state-
run-telecom-privacy-security.
\74\ Jay Peters, ``Plague Inc. pulled from the App Store in China
amid coronavirus outbreak,'' The Verge, February 27, 2020, https://
www.theverge.com/2020/2/27/21156162/plague-inc-pulled-china-ios-app-
store-coronavirus.
While standard iPhone services like iMessage work in China, many
paid offerings that help Apple generate revenue from services related
to its devices aren't available in China. Only 6 months after launching
in China, Apple closed the iTunes Store (Apple Books, Apple TV, Apple
News, and iTunes Movies) in April of 2016.\75\ While the Chinese
Government initially approved Apple's introduction of the services, for
whatever reason, this changed a few months later when the State
Administration of Press, Publication, Radio, Film and Television
demanded it be closed.\76\ China's blocking extends to newer services
like Apple TV+ video streaming, the Apple Card, Apple Arcade, and the
News+ subscription.\77\ While China is a huge market for Apple and its
smart devices, its ability to earn from associated services is severely
constrained. This puts a sort of cap on its current and future
profitability.\78\
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\75\ Paul Mozur and Jane Perlez, ``Apple no longer immune to
China's scrutiny of US tech firms,'' The New York Times, April 22,
2016, https://www.cnbc.com/2016/04/22/apple-itunes-movies-ibooks-store-
shut-down-in-china.html.
\76\ Ibid.
\77\ Yoni Heisler, ``Some of Apple's most ambitious services still
aren't available in China,'' BGR, November 7, 2019, https://bgr.com/
2019/11/07/apple-services-china-apple-tv-plus-arcade-not-available/.
\78\ Ibid; Mark Gurman, ``iPhones Are Big in China, But Apple's
Services Play Gets Mired in Censorship,'' Bloomberg, November 7, 2019,
https://www.bloomberg.com/news/articles/2019-11-07/apple-tv-apple-
arcade-other-apple-services-blocked-in-china.
LinkedIn is among the few prominent foreign tech platforms that are
legally allowed in China and that have been successful in the market.
In 2014, LinkedIn agreed to censor content when it decided to enter
China.\79\ In 2019, LinkedIn's transparency report shows that it
received two requests for member data from China's government (this
contrasts with 663 for the United States in the same time period) and
17 requests for content removal (of which it took action on 14).\80\
Part of LinkedIn's success is that it formed a partnership with two
influential Chinese venture capital investment funds to create a
separate China operation, who were also able to build a good
relationship and communication channel with the Chinese government.\81\
It also focused on the specific characteristics of the Chinese market.
It hired local staff who, in part, created a stand- alone app to bring
LinkedIn, a service built around email and computers, to China's
smartphone-dependent population.\82\ But even here, it has to adapt to
the fact that Chinese users rely on messaging apps and not email,
thereby pitching it against WeChat and other larger social networks.
LinkedIn isn't trying to compete against the ``super apps'' like
WeChat, but to grow as a career development platform.\83\ Despite all
these challenges, it has found a market with tens of millions of users
(reported at 47 million in 2019).\84\ While its success may be modest,
it is indicative of what should be possible for other U.S. firms if
given the chance to enter and compete in China.
---------------------------------------------------------------------------
\79\ Derek Shen, ``Introducing LinkedIn's Simplified Chinese Beta
Site,'' LinkedIn Official Blog, February 24, 2014, https://
blog.linkedin.com/2014/02/24/introducing-linkedins-simplified-chinese-
beta-site; Paul Mozur and Vindu Goel, ``To Reach China, LinkedIn Plays
by Local Rules,'' New York Times, October 5, 2014, https://
www.nytimes.com/2014/10/06/technology/to-reach-china-linkedin-plays-by-
local-rules.html.
\80\ ``Government Requests Report,'' LinkedIn Transparency website,
https://about.linkedin.com
/transparency/government-requests-report.
\81\ Paul Mozur and Vindu Goel, ``To Reach China, LinkedIn Plays by
Local Rules,'' New York Times, October 5, 2014, https://
www.nytimes.com/2014/10/06/technology/to-reach-china-linkedin-plays-by-
local-rules.html.
\82\ Mozur and Carolyn Zhang, ``Silicon Valley Giants Confront New
Walls in China.''
\83\ Zhang Erchi and David Kirton, ``LinkedIn's China President
Wants to Make Better Use of Career Site's Global Reach,'' June 24,
2019, https://www.caixinglobal.com/2019-06-24/linkedins-china-
president-wants-to-make-better-use-of-career-sites-global-reach-
101430839.html.
\84\ Ibid; and Mozur and Carolyn Zhang, ``Silicon Valley Giants
Confront New Walls in China.''
While Airbnb (the home sharing site) is not directly involved in
censorship related activities and content, it's indirect involvement
and compliance and cooperation with local laws and government agencies
has contributed to its success in China. It's among the few clear
examples where a foreign technology firm can be successful when given
the opportunity to compete on fair terms. For Airbnb, China is a
critical source of both outbound customers (Chinese tourists traveling
overseas) and local hosts for domestic and foreign tourists. As of
October 2016, more than 3.5 million Chinese travelers used Airbnb
listings around the world.\85\ Airbnb faces stiff competition from
Chinese rivals, such as Tujia.com and Xiaozhu.com, which also comply
with the same requirements as Airbnb. Airbnb used these outbound
Chinese tourists and its global network (which it's local competitors
don't have) to build up its domestic operations in China. In 2018,
Airbnb reported that 91 percent of total nights booked within China
were booked by locals.\86\ Airbnb has also introduced premium services
and expanded into many second and third-tier cities.
---------------------------------------------------------------------------
\85\ ``Supporting our community in China,'' Airbnb website, https:/
/blog.atairbnb.com/supporting-our-community-in-china/.
\86\ Tyler Sonnemaker, ``An Airbnb cofounder explained the strategy
behind its success in China, a market where most U.S. companies have
failed,'' Business Insider, June 14, 2018, https://
www.businessinsider.com/airbnb-cofounder-china-strategy-success-
focused-outbound-travel-2020-2.
Airbnb set up local operations to both abide by local laws and to
ensure its services were tailored to the market. In 2016, Airbnb setup
a new business entity to manage operations in China. It has moved to
store its data in China and has canceled bookings during politically
sensitive events (such as China's National People's Congress).\87\ In
March 2018, Airbnb stated that it will comply send customer details to
Chinese government authorities to abide by local regulations that
require foreigners to register their accommodation with police (hotels
have done this for a long time).\88\ Listings and non-China operations
are not affected by these requirements. In November 2019, Airbnb's
China president Tao Peng highlighted that localizing its platform is
the key to success in China. It has changed its local name (to Aibiying
in Chinese) and doubled its staff (to 500) in Beijing, in part, to
build a customized version of its platform to better suit local
preferences, such as the use of WeChat Pay and Alipay.\89\ Airbnb wants
to find a home in the notoriously difficult and cloistered market, and
thus far, it has done a pretty good job of doing so.\90\
---------------------------------------------------------------------------
\87\ Pei Li and Cate Cadell, ``Airbnb to start sharing Chinese host
information with government,'' Airbnb, March 28, 2018, https://
www.reuters.com/article/us-airbnb-china/airbnb-to-start-sharing-
chinese-host-information-with-government-idUSKBN1H41JJ; Tara Francis
Chan, ``Airbnb has removed listings in Beijing and canceled bookings
during China's annual parliament because it wants to be `good
neighbors,' '' Business Insider, March 5, 2018, https://
www.businessinsider.com/airbnb-removed-china-listings-during-national-
peoples-congress-2018-3.
\88\ ``What do I need to know in order to sign up for an Airbnb
account as a resident of China, or if I change my residence to
China?'', Airbnb website, https://www.airbnb.com/help/article/1035/
what-do-i-need-to-know-in-order-to-sign-up-for-an-airbnb-account-as-a-
resident-of-china-or-if-i-change-my-residence-to-china.
\89\ Sam Shead, ``Airbnb China president: Localization is key if we
want to be successful in the country,'' CNBC, November 19, 2019,
https://www.cnbc.com/2019/11/19/airbnb-china-president-localization-
abiyang.html.
\90\ Jessi Hempel, ``Airbnb Wants to Find a Home in China,'' Wired,
August 21, 2010, https://www.wired.com/story/airbnb-china-market/.
Both Airbnb and LinkedIn (among other cases above) shows that
foreign firms can successfully compete against Chinese competitors even
when there are local requirements related to data and content that are
significantly different to other major markets. They've found an
equilibrium between the laws of their home market and Chinese laws,
while still being successful. These experiences provide a blueprint,
and perhaps a cautionary lesson, for other foreign tech firms wanting
to enter China, but also to policymakers in recognizing what approach
is most effective in regard to both trade and human rights.\91\
---------------------------------------------------------------------------
\91\ Mozur and Goel, ``To Reach China, LinkedIn Plays by Local
Rules.''
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case study: zoom and censorship in china
Zoom--the video-chat service that operates in more than 80
countries--recently tripped two major landmines that demonstrate how
U.S. companies need to establish clear boundaries between operations
involving China and other markets given how censorship requests in the
former can quickly spillover to the later. No doubt, Zoom has made
mistakes, but it has admitted and addressed many of these in an effort
to operate by local laws in China and elsewhere.\92\ It made these
challenging adjustments while expanding from 10 million meetings a day
in December 2019 to doing 200 million meetings a day in March 2020.\93\
Its experience provides useful lessons for other U.S. firms and
policymakers.
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\92\ Bill Marczak and John Scott-Railton, ``Move Fast and Roll Your
Own Crypto: A Quick Look at the Confidentiality of Zoom Meetings,'' The
Citizen Lab, University of Toronto, April 3, 2020, https://
citizenlab.ca/2020/04/move-fast-roll-your-own-crypto-a-quick-look-at-
the-confidentiality-of-zoom-meetings/; Eric Yuan, ``A Message to Our
Users,'' Zoom blog post, April 1, 2020, https://blog.zoom.us/wordpress/
2020/04/01/a-message-to-our-users/.
\93\ Ibid.
Zoom is headquartered in San Jose, CA and is listed on the NASDAQ.
It has over 2,500 employees, with about 1,400 in the United States,
with the remainder overseas, including about 700 at subsidiaries in
China (doing research and development work).\94\ While not every mid-
sized U.S. technology company uses China-based research and
development, hundreds of multinational firms have R&D centers in
China.\95\ The main zoom website (zoom.us) and international app appear
blocked in China, but there are reportedly several third-party services
that allow access in China (e.g., zoom.cn, zoomvip.cn,
zoomcloud.cn).\96\ Zoom's local service and app (https://zoom.com.cn)
has reportedly been (generally) reliable and popular for users in calls
between China and the outside world, including in reaction to COVID-
19.\97\
---------------------------------------------------------------------------
\94\ ``Form 10-K: Zoom Video Communications, Inc. Annual Report to
the Securities and Exchange Commission (for the year ending January 31,
2020),'' Zoom website, https://investors.zoom.us/static-files/09a01665-
5f33-4007-8e90-de02219886aa.
\95\ Capucine Cogne, ``Is Zoom crazy to count on Chinese R&D?'',
TechNode, April 13, 2020, https://technode.com/2020/04/13/is-zoom-
crazy-to-count-on-chinese-rd/.
\96\ ``[Translation] Zoom suspended in China,'' Sohu, September 9,
2019, https://www.
sohu.com/a/339796981_115035.
\97\ Karen Chu, ``Why are people in China using Zoom?'', South
China Morning Post, June 18, 2020, https://www.scmp.com/abacus/tech/
article/3089667/why-are-people-china-using-zoom; Emma Lee, ``China's
Zoom users switch to local version after blockage,'' TechNode,
September 19, 2019, https://technode.com/2019/09/19/chinas-zoom-users-
switch-to-local-version-after-blockage/.
In April 2020, Zoom encountered significant public scrutiny when
the University of Toronto's Citizen Lab released a report that showed
that Zoom meeting encryption keys were sent via China-based servers and
that it used non-industry standard cryptographic techniques that may
mean calls could be intercepted (which raised concerns about China's
laws concerning encryption key disclosure).\98\ Zoom's CEO responded,
stating that the firm added sever capacity in China as part of its
efforts to rapidly scale capacity in response to COVID-19-related
demand, during which it failed to fully implement geo-fencing best
practices.\99\ As a result, certain non-China related meetings may have
been routed through these servers in China, when they otherwise would
not have. Zoom has removed these servers from the list of backup
servers for users outside of China. It also enacted new safeguards and
internal controls to prevent unauthorized access to data, including by
staff, regardless of where data gets routed. Most recently, it updated
its encryption protocols and that it will introduce end-to-end
encryption for all calls (for both free and paid services, but it will
be an optional feature as it limits some meeting functionality).\100\
Zoom services generally store data in the United States, though it
stores data locally where required or when customers choose to have
their data stored outside of the U.S. (in their geographic
vicinity).\101\
---------------------------------------------------------------------------
\98\ Marczak and Scott-Railton, ``Move Fast and Roll Your Own
Crypto: A Quick Look at the Confidentiality of Zoom Meetings''; Rogier
Creemers, Paul Triolo, and Graham Webster, ``Translation: Cybersecurity
Law of the People's Republic of China,'' New America blog post, June 1,
2017, https://www.newamerica.org/cybersecurity-initiative/digichina/
blog/translation-cybersecurity-law-peoples-republic-china/.
\99\ Eric Yuan, ``Response to Research From University of Toronto's
Citizen Lab,'' Zoom blog post, April 3, 2020, https://blog.zoom.us/
wordpress/2020/04/03/response-to-research-from-university-of-torontos-
citizen-lab/.
\100\ Kari Paul, ``Zoom will provide end-to-end encryption to all
users after privacy backlash,'' Guardian, June 17, 2020, https://
www.theguardian.com/technology/2020/jun/17/zoom-encryption-free-calls;
https://blog.zoom.us/end-to-end-encryption-update/.
\101\ [Archived] ``Zoom: Privacy Policy,'' March 29, 2020, http://
archive.fo/5gKKh#selection-2299.271-2299.426.
Zoom encountered another major issue when it briefly blocked, and
then restored, accounts of Chinese human rights activists (including
Zhou Fengsuo) who wanted to use the platform to organize a public
commemoration of the 1989 Tiananmen Square crackdown.\102\ Mr. Fengsuo
is an American who lives in the United States. China asked Zoom to
terminate four meetings scheduled to be hosted on Zoom and three
accounts (one in Hong Kong and two in the United States) hosting the
calls. Zoom canceled the three meetings that involved participants from
mainland China.\103\ It reportedly did this mid-event. U.S.-based staff
reviewed meeting metadata (such as IP addresses) to determine which
meetings had China-based participants. Zoom terminated the meetings as
(at that time) it did not have the ability to remove specific
participants from a meeting or block participants from a certain
country from joining a meeting. It states it did not provide any user
information or meeting content to the Chinese government.\104\
---------------------------------------------------------------------------
\102\ Paul Mozur, ``Zoom Blocks Activist in U.S. After China
Objects to Tiananmen Vigil,'' New York Times, June 11, 2020, https://
www.nytimes.com/2020/06/11/technology/zoom-china-tiananmen-square.html.
\103\ ``Improving Our Policies as We Continue to Enable Global
Collaboration,'' Zoom blog, June 11, 2020, https://blog.zoom.us/
wordpress/2020/06/11/improving-our-policies-as-we-continue-to-enable-
global-collaboration/.
\104\ Ibid.
While reactive and incomplete, Zoom's response and approach is the
right one in that it wants to manage operations so that they abide by
laws in each jurisdiction. This approach is comparable to every other
multinational firm in the world--just because a firm is foreign owned
does not make it immune from local laws, even if those laws are ones
that most Americans would disagree with. The degree and type of
segregation obviously depends on the nature of local laws, which in the
case of Internet-related firms in China, is becoming significant. Firms
are enacting administrative and technical firewalls between China and
non-China operations. This is the case for U.S. and other foreign firms
in China, but also Chinese firms that operate overseas. For example,
Chinese tech firm Bytedance separates its two key services (Douyin
inside of China and TikTok outside of China) to minimize cross-border
interaction on either platform. It recently implemented restrictions on
China-based employees from accessing the code bases for overseas
products.\105\ Zoom rightly committed to ``not allow requests from the
Chinese government to impact anyone outside of mainland China.''\106\
It has developed technology to remove or block participants based on
their country, which will allow the firm to take a much more granular
action in response to requests from local authorities when they
determine that certain activity on the platform is illegal in that
country.
---------------------------------------------------------------------------
\105\ Chen Du, ``Exclusive: ByteDance Cuts Domestic Engineers' Data
Access to TikTok, Other Overseas Products,'' PingWest, June 7, 2020,
https://en.pingwest.com/a/6875.
\106\ ``Improving Our Policies as We Continue to Enable Global
Collaboration,'' Zoom blog.
Zoom has also committed to release a transparency report that
details information related to requests for data, records, or
content.\107\ As you'd expect, given the need to follow local laws,
U.S. technology companies frequently turn over private information
requested by home and foreign governments, including those in the
United States. Businesses other than Zoom routinely submit to Chinese
government censorship demands in China, though there have been few
public, high-profile cases involving cross-border issues like this one
(besides Yahoo in 2005).\108\
---------------------------------------------------------------------------
\107\ Zoom's privacy policy notes that: ``In certain limited
circumstances, courts, law enforcement agencies, regulatory agencies,
or security authorities in those other countries may be entitled to
access your personal data.''
\108\ ``Chinese journalist Shi Tao, jailed for 8 years after Yahoo
gave up his identity, gets early release,'' Reuters, September 9, 2013,
https://www.scmp.com/news/china/article/1306818/chinese-journalist-shi-
tao-jailed-eight-years-after-yahoo-gave-his.
The onus should be on the United States government and like-minded
countries that value and advocate for human rights--not firms like
Zoom--in China, whether by engagement, negotiation, or confrontation.
As Zoom stated: ``It is not in Zoom's power to change the laws of
governments opposed to free speech. However, Zoom is committed to
modifying its processes to further protect its users from those who
wish to stifle their communications.''\109\ The time has long since
passed, if it ever existed, where an individual U.S. firm could change
Chinese government policy through such a public challenge or
withdrawal.
---------------------------------------------------------------------------
\109\ Gerry Shih, ``Zoom censors video talks on Hong Kong and
Tiananmen, drawing criticism,'' Washington Post, June 11, 2020, https:/
/www.washingtonpost.com/world/asia_pacific/zoom-censors-video-talks-on-
hong-kong-and-tiananmen-drawing-criticism/2020/06/11/0197dc94-ab90-
11ea-a43b-be9f6494a87d_story.html.
For those policymakers and advocates that want Zoom to leave China
or cut off services on moral grounds, they also need to recognize that
there are clear negative tradeoffs: Zoom is currently a rare channel of
relatively low-friction communication through the Great Firewall and
the myriad barriers to in-person meetings. The company, and everyone
else, should weigh the importance of that connectivity in deciding how
to best deal with the underlying challenge that is China's approach to
human rights.\110\
---------------------------------------------------------------------------
\110\ As raised by Graham Webster in: ``China's Zoom Bomb: A
ChinaFile Conversation,'' China File, June 16, 2020, https://
www.chinafile.com/conversation/chinas-zoom-bomb.
---------------------------------------------------------------------------
censorship's impact on market access for u.s. content creators
U.S. content creators face major market access and operational
issues that are directly and indirectly related to censorship. The
explicit censorship review process is just the tip of the iceberg in
terms of market restrictions U.S. content creators face in China.
Indicative of this, the International Intellectual Property Alliance
reported that the ability of U.S. producers to compete in the Chinese
marketplace for all audiovisual content was even more drastically
curtailed during 2019, with licensing opportunities on all distribution
platforms significantly hampered, through opaque regulations, obscure
content review processes, and a ``soft ban'' on new or never released
U.S. imports.\111\ This has effectively prevented access by U.S.
content creators and distributors to one of the largest consumer
markets in the world.
---------------------------------------------------------------------------
\111\ ``China: 2020 Special 301 Report on Copyright Protection and
Enforcement,'' The International Intellectual Property Alliance,
February 6, 2020, https://www.iipa.org/files/uploads/2020/02/
2020SPEC301CHINA.pdf.
The formal content review process that every movie and television
show goes through in China is based on vague and non-transparent
criteria, which are applied inconsistently, which together create an
unpredictable and burdensome market access restriction.\112\ Reviewers
may require various changes, such as edits in the script, obfuscated
translation, and title changes. Sometimes the censors simply don't
respond, thus denying access. Furthermore, U.S. content creators have
to submit full seasons of television shows (rather than as episodes are
developed), which also delays distribution, instead of allowing advance
registration and rolling approval for content as it's finalized. U.S.
films are also often locked out from prime release dates.
---------------------------------------------------------------------------
\112\ United States Trade Representative (USTR), 2018 Report to
Congress on China's WTO Compliance.
The discriminatory and restrictive conditions that U.S. content
creators face in China are similar to other sectors in that this review
mechanism is combined with other restrictions that exclude them (but
not domestic firms) from key services in the Chinese market. The State
Administration of Press, Publication, Radio, Film and Television
(SAPPRFT) and other Chinese regulatory authorities have taken actions
to prevent the cross- border supply of online video services (no doubt,
they'd inevitably cite some censorship-related rationale if pressed),
which may implicate China's WTO commitments relating to video
distribution.\113\ SAPPRFT also requires that video platforms all be
state-owned, thus preventing foreign suppliers from qualifying for a
license to distribute content. At the same time, several Chinese
companies (including Alibaba) appear exempt from some
requirements.\114\ Furthermore, China also doesn't allow foreign firms
to hold a majority share in entities engaged in the production and
publication of audiovisual content.
---------------------------------------------------------------------------
\113\ United States Trade Representative (USTR), 2018 Report to
Congress on China's WTO Compliance.
\114\ Ibid.
China uses explicit quotas to limit U.S. market access to their
theatrical film sector. Since 1994, China has placed a quota (at that
time it was 10) on the number of foreign films that can be shown in
Chinese theatres. In 2002, the quota increased to 20. In 2009, the
United States won a WTO trade dispute challenging China's restrictions
on foreign films (that they only be imported through a few government-
designated intermediaries) at the WTO.\115\ In 2012, the United States
and China negotiated an increase in the quota from 20 to 34.\116\ The
2012 agreement also allows foreign movie makers to keep a bigger share
of the box office takings, increasing from 13 percent to 25 percent. A
rate that is significantly lower than in market-based economies. This
quota mainly affects the major U.S. studios. A few dozen foreign
independent films also get approved for release each year. Both sides
agreed to re-negotiate the quota 5 years after this 2012 revision, but
there hasn't been any further progress as the issue got rolled into the
broader U.S.-China trade war.\117\ The formal quota comes on top of an
unofficial policy of manipulating the market to ensure Chinese movies
account for a 60-percent box office share.\118\ On top of all of this,
studios have had problems getting paid for what they are allowed to
distribute in China. For example, a Motion Pictures Association-
requested audit of the Chinese box office in 2016 showed that Chinese
cinemas underreported box office numbers by 9 percent, which given the
revenue sharing arrangement, meant U.S. studios were underpaid by about
$40 million.\119\
---------------------------------------------------------------------------
\115\ Keith Bradsher, ``WTO Rules Against China's Limits on
Imports,'' New York Times, August 12, 2009, https://www.nytimes.com/
2009/08/13/business/global/13trade.html.
\116\ Rogier Creemers, ``China increases foreign movie quota, so
what does it solve?'', China Copyright and Media blog, April 23, 2012,
https://chinacopyrightandmedia.wordpress.com/2012/02/20/china-
increases-foreign-movie-quota-but-what-does-that-mean/.
\117\ Pei Li and Michael Martina, ``Hollywood's China dreams get
tangled in trade talks,'' Reuters, May 19, 2018, https://
www.reuters.com/article/us-usa-trade-china-movies/hollywoods-china-
dreams-get-tangled-in-trade-talks-idUSKCN1IK0W0.
\118\ Patrick Frater, ``U.S. and China Struggle Over Film Quotas,''
Variety, February 9, 2017, https://variety.com/2017/biz/asia/u-s-and-
china-struggle-over-film-quotas-1201979720/.
\119\ Matthew Dresden, ``China Box Office Audit Results Are In--Now
What?'', China Law Blog, October 10, 2017, https://
www.chinalawblog.com/2017/10/china-box-office-audit-results-are-in-now-
what.html.
The impact of China's censorship and market restrictions on U.S.
movie exports has grown more costly over time. Before COVID-19 hit,
China was on track to overtake the United States as the world's largest
movie market in 2020.\120\ While U.S. movie-ticket sales (pre-COVID)
are relatively flat, China's have more than tripled since 2011.\121\
China has become an important market delivering profits that support
Hollywood's blockbuster franchise offerings. Overseas box office
revenue is what often turns somewhat new and ambitious films (like
Interstellar or Life of Pi) into blockbusters. The Hollywood releases
that break out in China are generally the same ones that succeed
globally.\122\ While China cannot be counted upon to bail out big-
budget movies that bomb in the United States, U.S. content producers
wants to (at least) be able to count on potential revenue to justify
the budgets that keeps the industry growing.
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\120\ ``Strong revenue growth continues in China's cinema market,''
PWC China, June 17, 2019, https://www.pwccn.com/en/press-room/press-
releases/pr-170619.html?mod=article_inline.
\121\ Erich Schwartzel, ``Hollywood's New Script: You Can't Make
Movies Without China,'' Wall Street Journal, April 18, 2017, https://
www.wsj.com/articles/hollywoods-new-script-you-cant-make-movies-
without-china-1492525636?mod=article_inline.
\122\ Scott Mendelson, ``Box Office: `Wolf Warrior 2's $600M+
Success Should Terrify Hollywood,'' Forbes, August 10, 2017, https://
www.forbes.com/sites/scottmendelson/2017/08/10/as-wolf-warrior-2-tops-
600m-what-chinas-box-office-blockbuster-means-to-hollywood/
#17981d101f61.
In a similar way, the State Administration of Press and
Publication's (SAPP) opaque, unpredictable, and restrictive Chinese
censorship has affected the approval and distribution of video games.
In 2018, China stopped all game license reviews, which severely
affected both domestic and foreign firms and game distributors (due to
a restructuring of departments and new rules for video game
oversight).\123\ While the actual content being censored is often not
political (such as intimacy, pornography, and violence), the criteria
is often vague and unevenly enforced. For example, ``anything that
harms public ethics or China's culture and traditions'' and ``anything
that violates China's constitution'' are both prohibited in Chinese
videogames. Once SAPP started reviewing game licenses again after a
nine-month hiatus, it quickly approved nearly 1,000 games, which
included 30 foreign games.\124\
---------------------------------------------------------------------------
\123\ Rick Lane, ``China freezes all game license approvals,'' PC
Gamer, August 15, 2018, https://www.pcgamer.com/china-freezes-all-game-
license-approvals/; Shannon Liao, ``Apple blames revenue loss on China
censoring video games,'' The Verge, January 29, 2019, https://
www.theverge.com/2019/1/29/18202812/chinese-censorship-hurt-apples-
bottom-line.
\124\ ``Nearly 1,000 games have received a license since the
restart of game approvals in China,'' Niko Partners, 2019, https://
nikopartners.com/nearly-1000-games-have-received-a-license-since-the-
restart-of-game-approvals-in-china/.
An anomaly in China's restrictive approach to video game censorship
is Steam (owned by Valve, an American video game developer), which
remains accessible (without a VPN) to Chinese users. With Steam, only
community features like forums and adult games on the platform are
blocked.\125\ Indicative of the opportunity for foreign firms if
they're able to abide by Chinese law and operate in these censored
sectors, it's become incredibly valuable for Steam: it has an estimated
40 million Chinese players and hundreds of game developers. Indicative
of how local Chinese developers can benefit from working with global
platforms like Steam, many local games have been very successful.\126\
In 2018, Valve announced that it was going to partner with a local firm
and develop a China-specific Steam platform.\127\
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\125\ Andy Chalk, ``Steam Community access has been blocked in
China,'' PC Gamer, December 19, 2017, https://www.pcgamer.com/steam-
community-access-has-been-blocked-in-china/.
\126\ ``The rise of Chinese games on Steam,'' ResetEra, January 18,
2019, https://www.resetera.com/threads/the-rise-of-chinese-games-on-
steam.94371/.
\127\ Chris Tapsell, ``Valve talks Steam China, curation and
exclusivity,'' EuroGamer, August 21, 2019, https://www.eurogamer.net/
articles/2019-08-21-valve-talks-steam-china-curation-exclusivity.
Having clear and predictable access to China's video game market is
a huge issue as China overtook the United States as the world's largest
video-game market in 2016.\128\ As an industry, video games are now
worth three times as movies globally.\129\ However, China is a daunting
market for foreign firms--93 percent of total spend on Apple's iOS
mobile operating system in China is spent on Chinese games, which is
more localized than any other country, including Japan or South
Korea.\130\ This shows that even without restrictions, U.S. firms would
have their work cut out given local preferences, complex distribution
systems, and how successful Chinese game developers and platforms have
been, but they (again) should have the opportunity to compete on the
same terms as local developers.
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\128\ ``Europe Meets China--How the Games Industry Is Evolving,''
Atomico, June 1, 2017, https://www.atomico.com/europe-meets-china/.
\129\ Ibid.
\130\ Ibid.
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case study: github: where china's censorship found a limit
and model for moderation and engagement
GitHub--the largest public code repository in the world that allows
developers to collaborate on projects--presents an interesting case as
to the potential limits of censorship given how it affects China's
broader digital development goals. GitHub (owned by Microsoft) is a
U.S.-based global company that provides hosting for software
development. It's known as a critical repository for open source code,
providing the vital digital infrastructure on which much of the
multibillion-dollar software business depends. While Microsoft does not
publish GitHub's financial information, if the number of developers is
a guide, China is its second most important market after America, and
one of the fastest growing.\131\
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\131\ ``Microsoft's GitHub mulls expansion in China,'' The
Economist, December 6, 2019, https://www.economist.com/business/2019/
12/06/microsofts-github-mulls-expansion-in-china.
On January 21, 2013, GitHub was blocked in China due to DNS
hijacking. The blocking of GitHub gained greater attention in the
country after the former head of Google's China operations, Kai-Fu Lee,
posted about it on Sina Weibo (China's version of Twitter), where it
was re-tweeted over 80,000 times.\132\ He made the case that ``blocking
GitHub is unjustifiable, and will only derail the nation's programmers
from the world, while bringing about a loss in competitiveness and
insight.''\133\ The block was lifted on January 23, 2013. However,
access to GitHub from China can still be slow and unreliable. More
recently, Chinese programmers have used GitHub to complain about
working conditions in China's tech sector.\134\ It also remains a
popular platform for creating and sharing anti-censorship software
tools within China.\135\ However, in this case, China did not block
Github. This placed Microsoft, which has extensive operations in China,
in a potentially difficult situation given it has introduced a tailored
version of Microsoft Office for Chinese government use. Microsoft also
owns LinkedIn.\136\ GitHub has already received notices from China's
government to remove content. In 2019 it received five notices from
China's Ministry of Public Security to take down content related to
Falun Gong (a religious group).\137\
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\132\ Michael Kan, ``GitHub unblocked in China after former Google
head slams its censorship,'' ComputerWorld, January 23, 2013, https://
www.computerworld.com/article/2493478/github-unblocked-in-china-after-
former-google-head-slams-its-censorship.html.
\133\ Ibid.
\134\ Yuan Yang, ``China tech worker protest against long working
hours goes viral,'' FT, April 3, 2019, https://www.ft.com/content/
72754638-55d1-11e9-91f9-b6515a54c5b1.
\135\ Emily Feng, ``GitHub Has Become a Haven for China's Censored
Internet Users,'' NPR, April 10, 2019, https://www.npr.org/2019/04/10/
709490855/github-has-become-a-haven-for-chinas-censored-internet-users.
\136\ Mozur and Goel, ``To Reach China, LinkedIn Plays by Local
Rules.''
\137\ Yuan Yang, ``GitHub keen to open subsidiary in China,'' FT,
December 9, 2019, https://www.ft.com/content/4c1f2d1c-1a63-11ea-97df-
cc63de1d73f4.
Similar to other U.S. firms, GitHub is looking to open a subsidiary
in China. In December 2019, media reports stated that GitHub was moving
to setup an office in China.\138\ In response to a question about
China, GitHub CEO Nat Friedman reportedly said that ``on net,'' the
company's approach ``is that we want to lean towards more access to
GitHub for every developer, even in countries that aren't democratic,
even in teams that are doing things that we might disagree with.''\139\
While a GitHub subsidiary in China will make it easier for it to censor
individual projects, such as Great Fire products, it would probably
provide greater regulatory and market certainty for the firm.
---------------------------------------------------------------------------
\138\ ``Microsoft's GitHub mulls expansion in China.''
\139\ Colin Lecher, ``GitHub CEO discussed `evolving' position on
China in private all-hands meeting,'' The Verge, October 10, 2019,
https://www.theverge.com/2019/10/10/20908713/github-ceo-china-
transcript-leak-microsoft.
---------------------------------------------------------------------------
china's pursuit of censorship and information control restricts
business connectivity to the global internet
China's censorship and information control efforts extend to
restrictions over all forms of connectivity, including how U.S. firms
use virtual private networks (VPNs) to allow intra-firm networks and
operations and cross-border sales and service. In the last few years,
China has tightened regulations and restrictions around these VPNs,
which seriously affects the reliability and quality of connections to
the global Internet for China-based U.S. firms and their staff.
China has a track record of targeting individuals (consumers)
wanting to use VPNs (such as by shutting down Chinese VPN providers).
As mentioned, China targets the development and distribution of these
services, often via intermediaries such as app stores and cloud storage
providers.\140\ Interestingly, periodic clamp-downs on VPNs (which are
relaxed afterwards) show that Chinese authorities realize that there is
some need for balance in how they restrict VPNs as they are used by
government officials, academics, researchers, and others as a lifeline
for must-have global services (such as allowing Chinese government
officials to access and use Twitter or for researchers to access
academic literature).
---------------------------------------------------------------------------
\140\ Paul Mozur, ``Apple Removes Apps From China Store That Help
Internet Users Evade Censorship,'' New York Times, July 30, 2017,
https://www.nytimes.com/2017/07/29/technology/china-apple-
censorhip.html; ``@Star_VPN: We just received notice that @Apple
removing all the @VPN apps from the @China app store,'' Twitter, July
29, 2017, https://twitter.com/star_vpn/status/891191888547651584; Paul
Mozur, ``Joining Apple, Amazon's China Cloud Service Bows to Censors,''
New York Times, August 1, 2017, https://www.nytimes.com/2017/08/01/
business/amazon-china-internet-censors-apple.html.
Restrictions on VPNs are also a barrier to the cross-border sale,
development, service, and use of software. U.S. software firms are
reportedly finding it increasingly difficult to license and sell
software to users in China (or existing customers that want to use the
same software when setting up in China, such as multinationals) that
rely on VPNs as these connections are increasingly poor and unreliable.
Similarly, some U.S. venture capital firms and software developers are
reportedly avoiding China-based investments or partners as poor
connectivity with the global Internet makes it uncertain whether the
firm would be able to scale globally even if their software product is
---------------------------------------------------------------------------
valuable.
Many U.S. and foreign firms use VPNs for corporate purposes to
connect locations and services inside of China with the rest of the
world and to protect their communications from hacking and government
surveillance.\141\ These firms typically use their own global VPN
infrastructure to connect users and business units around the world
(such as via Multiprotocol Label Switching (MPLS)). In 2018, China
started managing and limiting the connections that U.S. firms use so
that they maintain oversight of this connectivity. It enacted new
regulations that forced firms to buy and use expensive licensed VPN
services, which are from one of China's three state-own
telecommunication firms: China Telecom, China Unicom, and China
Mobile.\142\ The Ministry of Industry and Information Technology said
these restrictions are in accordance with goals and provisions set out
by the government created Cross-
border Data Telecommunications Industry Alliance.\143\
---------------------------------------------------------------------------
\141\ United States Trade Representative (USTR), 2018 Report to
Congress on China's WTO Compliance.
\142\ Yuan Yang and Lucy Hornby, ``China disrupts global companies'
web access as censorship bites,'' FT, January 16, 2018, https://
www.ft.com/content/80e50a6c-fa8a-11e7-9b32-d7d59aace
167; Linda Musthaler, ``An SD-WAN service that gets around the Great
Firewall of China legally,'' Network World, November 3, 2019, https://
www.networkworld.com/article/3451384/a-vpn-service-that-gets-around-
the-great-firewall-of-china-legally.html; (English translation)
``Notice of the Ministry of Industry and Information Technology on
Cleaning Up and Regulating the Internet Network Access Service
Market,'' Ministry of Industry and Information Technology of the
People's Republic of China, January 22, 2017, accessed via the Wayback
Machine Internet Archive, https://web.archive.org/web/20190203073845/
http://www.miit.gov.cn/n1146290/n43
88791/c5471946/content.html.
\143\ ``Notice on Invitation to Membership and Overseas Observers
of China Cross-border Data Telecommunications Industry Alliance,''
China Academy of Information and Communication Technology.
These restrictions were especially disruptive to businesses that
depended on their VPNs for access to cloud services and data security.
They can also be more expensive and unreliable, while exposing
communications to government surveillance. Indicative of this, the
Financial Times reported that an American non-profit group and a
British company told them that their company-built VPNs had been
blocked, disrupting their ability to do business.\144\ It also reported
another representative from an American Fortune 500 company as saying
that it had become increasingly difficult to access blocked websites
from their Beijing office, which similarly uses a corporate VPN.\145\
---------------------------------------------------------------------------
\144\ Yang and Hornby, ``China disrupts global companies' web
access as censorship bites.''
\145\ Ibid.
With these restrictions in place, U.S. firms have a few options to
maintain connectivity with the rest of the Internet--each with their
own disadvantages. Firms can use a managed IPSec VPN (one of two common
VPN protocols) from one of the Chinese telecommunication firms. But
this means that all outbound traffic is forced through the Great
Firewall. This allows the provider to block restricted traffic (which
of course is hardly ideal for firms) and causes connectivity
performance issues (i.e., delays in websites loading).\146\ Where firms
setup private connections (such as private leased VPN lines), Chinese
regulations state that ``the basic telecom operators shall establish a
centralized user archive and specify that the lines are leased for the
purpose of internal office use only and shall not be used to connect
data centers or service platforms at home or abroad for
telecommunication services.''\147\
---------------------------------------------------------------------------
\146\ Musthaler, ``An SD-WAN service that gets around the Great
Firewall of China legally.''
\147\ ``Annex 1 (Word Document) of Notice on Invitation to
Membership and Overseas Observers of China Cross-border Data
Telecommunications Industry Alliance,'' China Academy of Information
and Communication Technology, http://www.caict.ac.cn/english/news/
201809/P0201809
20452814498554.doc.
Otherwise, a foreign firm may use an authorized MLPS circuit from
within China to outside (such as to Hong Kong or Singapore) where it
then connects into the firm's existing VPN network. However, this is
very expensive, takes a long time to deliver, and is bandwidth-
constrained. A typical Chinese MPLS circuit is somewhere south of 20 MB
of bandwidth, and it could cost $15,000 to $20,000 for a single
circuit.\148\ Similarly, ``where multinational companies lease
international private lines to build their own office networks,
qualified third parties (including enterprises with licenses for
domestic IP-VPN services and fixed-network domestic data transmission
services) may be entrusted to provide outsourcing services such as
system integration and maintenance and management.''\149\ Some
providers have recently developed a software defined wide-area network
(WAN) that is supposedly compliant with China's new regulation, which
provides supposedly seamless and high-speed access between intra-China
and international networks.\150\ But these still provide the Chinese
government with access and oversight over these data transfers.\151\
---------------------------------------------------------------------------
\148\ ``Annex 1 (Word Document) of Notice on Invitation to
Membership and Overseas Observers of China Cross-border Data
Telecommunications Industry Alliance.''
\149\ ``Annex 1 (Word Document) of Notice on Invitation to
Membership and Overseas Observers of China Cross-border Data
Telecommunications Industry Alliance.''
\150\ ``Annex 1 (Word Document) of Notice on Invitation to
Membership and Overseas Observers of China Cross-border Data
Telecommunications Industry Alliance''; ``SD-WAN Service for China,''
Teridion website, https://www.teridion.com/china; Teridion, ``Teridion
Introduces Industry's First Compliant Cloud-Based Global SD-WAN Service
to Mainland China Delivering High-Performance and Cost-Effective
Access,'' news release, October 24, 2019, https://www.businesswire.com/
news/home/20191024005256/en/Teridion-Introduces-Industry%E2%80
%99s-Compliant-Cloud-Based-Global-SD-WAN.
\151\ ``Annex 1 (Word Document) of Notice on Invitation to
Membership and Overseas Observers of China Cross-border Data
Telecommunications Industry Alliance.''
At the heart of these restrictions is the Chinese government's
drive to control content it deems illegal. It tries to create a very
narrow and controlled lane for business-specific connections, while
strictly prohibiting the potential use of these connections for broader
dissemination to the public. Beyond the examples above, this approach
extends to those few, limited, and restricted U.S. cloud providers in
China. China restricts and manages how cloud service operators connect
their China-based cloud service platform servers with the overseas
network, which must be done through the international Internet service
portal approved by the Ministry of Industry and Information Technology
(MIIT), rather than private lines, VPNs or other channels.\152\ No
matter the connection, the Chinese government wants to have visibility
of the network and the data.
---------------------------------------------------------------------------
\152\ Ibid.
These restrictions give Chinese authorities the capability to
oversee and control flows of commercial information and data, but it
does not mean that they're necessarily examining company traffic (if
there's no specific reason for China's government to be focusing on a
firm's communications). Obviously, firms with sensitive intellectual
property may have legitimate fears about how these rules raise the risk
of inadvertent disclosures given China's aggressive and comprehensive
cyber theft of trade secrets. There are other ways and tools for U.S.
firms to mitigate this risk, such as encryption. However, the U.S.
government and firms should be concerned as China's restrictions over
commercial connectivity services that are needed for day-to-day trade
and business operations are unique, complicated, and act as yet another
regulatory hurdle for U.S. firms to clear in seeking to simply enter
and operate in China.
the cost of chinese censorship to u.s. search and cloud services
U.S. firms have lost significant revenue by being blocked or
inhibited in accessing the Chinese market, especially during such a
transformative stage of growth in China's economy. In 2019, China had
nearly 800 million Internet users (an increase of 25 million from
2018). The average download speed of mobile broadband has increased six
times in the last 5 years.\153\ The OECD's (narrow) definition of the
digital economy estimates it represents 6 percent of GDP in China as
compared to 8 to 10 percent in South Korea and Japan.\154\
---------------------------------------------------------------------------
\153\ Xiaoxia, ``China has 854 mln Internet users: report,'' Xinhua
Net, August 30, 2019, http://www.xinhuanet.com/english/2019-08/30/
c_138351278.htm.
\154\ Longmei Zhang and Sally Chen, ``China's Digital Economy:
Opportunities and Risks'' (Washington, DC: The International Monetary
Fund, January 17, 2019, https://www.imf.org/en/Publications/WP/Issues/
2019/01/17/Chinas-Digital-Economy-Opportunities-and-Risks-46459.
While China's overall digitalization still lags advanced economies,
China has emerged as a global leader in key new digital industries. In
e-commerce China accounts for over 40 percent of global transactions,
and the penetration of e-commerce (in percent of total retail sales)
stands now at 15 percent, compared to 10 percent in the United States.
On fintech, Chinese companies account for more than 70 percent of the
total global valuations. The value of China's consumption-related
mobile payments by individuals totaled US$790 billion in 2016, 11 times
that of the United States. On cloud computing, Alibaba cloud computing
has set up 14 data centers globally, with overseas cloud computing
revenues growing at 400 percent.\155\
---------------------------------------------------------------------------
\155\ Ibid.
There have been few attempts to quantify the trade impact of
China's censorship in part because any estimate is fraught with
difficulties and assumptions. For example, China's digital ecosystem--
with key ``super apps'' providing a single portal for a range of
integrated services--has evolved in a way that is very different to the
United States. This evolution has largely taken place since Google and
other major U.S. firms were blocked, so it's impossible to know how
market share would be divided if Google were able to remain. In many
regards, China is one of the most competitive places for consumer
services and technology. So the factors that affect a U.S. firm's
market share are beyond the impact that censorship has on U.S. firms'
---------------------------------------------------------------------------
market access and operations.
To develop an estimate of the economic impact of China's censorship
on U.S. firms, ITIF chose South Korea as a comparator market for U.S.
search firms (Google), while the Asia Pacific region was used for
estimating revenues and market share for cloud service providers
(Amazon and Microsoft). See the appendix for data. South Korea was
chosen as its digital economy has evolved in a way that is somewhat
similar to China, while obviously being substantially different to that
of the United States. Like other Asia Pacific countries, users in Korea
access the Internet primarily through their mobile phones (mobile first
culture). This meant that app and service developers had to find a way
to provide a variety of services in the simplest way possible, which
led to the development of ``super apps.'' While super apps exist in the
United States, the single aggregation of features never took center
stage the same way as in China and Asia, such as with WeChat.\156\
---------------------------------------------------------------------------
\156\ Julber Osio, ``China Leads Rise of Mobile `Super Apps,' ''
S&P Global Market Intelligence, August 9, 2019, https://
www.spglobal.com/marketintelligence/en/news-insights/blog/china-leads-
rise-of-mobile-super-apps; Coco Liu, ``Super apps: WeChat, Go-Jek and
rivals battle to do it all in Asia,'' Nikkei Asian Review, September 2,
2019, https://asia.nikkei.com/Business/Industry-in-focus/Super-apps-
WeChat-Go-Jek-and-rivals-battle-to-do-it-all-in-Asia.
In search, South Korea's local search service Naver had 77-percent
market share in 2007, while Google had only 1.7-percent. At this stage
Google did not have as much Korean language content to refine its
search services.\157\ Another data source (comScore) from 2009 gives
Naver 62 percent and Google 7.3 percent.\158\ However, over time Google
seized greater market share. However, we realize that other sources
give Google and Naver very different market shares. Nielson's
KoreanClick 2018 gives Naver around 39 percent of mobile search market
share, compared to 29 percent for Google.\159\ However, Nielson relies
on unique user counts while Stat Counter utilizes total page views,
with page views serving as a much better proxy for ad revenue, and
suggesting that Korean Google users are significantly more active than
Naver users.
---------------------------------------------------------------------------
\157\ Barry Schwartz, ``Naver, the Google of South Korea,'' Search
Engine Land, July 5, 2007, https://searchengineland.com/naver-the-
google-of-south-korea-11627.
\158\ ``Search engine market share around the world updated August
2009,'' Chandler Nguyen blog, August 1, 2009, http://
www.chandlernguyen.com/blog/2009/08/01/search-engine-market-share-
around-the-world-updated-aug-2009/.
\159\ Ibid.
Google's main revenue source is advertising through Google sites
and its network, such as Google Search and Google Maps. Revenue comes
via from ads served through its advertising programs, such as AdSense
for example. Assuming revenue is a proportionate measure for search
volume (and ad revenue), if Google's search market share hadn't fallen
from the 37 percent it held in 2010, it would have made a total of
$32.5 billion more in the period 2013 to 2019 (Appendix A).\160\ If it
had mirrored South Korea, where it held a similar market share to China
(39 percent) and trailed the domestic firm Naver in 2010, but later
became dominant, Google would have made $61.3 billion more over the
same period.\161\ These estimates suggest that without Chinese
interference, Google would have earned between $7.7 and $17.2 billion
more in search revenue in 2019 alone, a 5 to 11 percent increase of
Alphabet's $162 billion 2019 global revenue.\162\
---------------------------------------------------------------------------
\160\ For Search: Google's current revenue is estimated by
multiplying its market share of Chinese search engines with the total
revenue of search engine companies in China for each year. As
comparisons, we assume that total search engine revenue is unchanged
and repeat the calculations for Google maintaining its 2010 market
share of 37 percent and experiencing the same market share growth as it
experienced in South Korea.
\161\ iReasearch, ``Revenue of Search Engine Companies in China
2013-2020,'' April 1, 2019, http://www.iresearchchina.com/content/
details7_53447.html; statscounter, Search Market Share (China and South
Korea, 2010-2019), accessed February 27, 2020, https://
gs.statcounter.com/.
\162\ ``Alphabet Revenue 2006-2019 GOOG,'' https://
www.macrotrends.net/stocks/charts/GOOG/alphabet/revenue.
In the cloud service sector, we focused on Infrastructure as a
Service (IaaS) and used the Asia Pacific as the comparator. IaaS is a
form of cloud computing that provides virtualized computing resources
over the Internet. IaaS is highly scalable and allows businesses to
purchase resources on-demand and as-needed instead of having to buy
hardware outright. Amazon Web Services (AWS), Cisco Metacloud,
DigitalOcean, Google Cloud, Microsoft Azure, and Rackspace are popular
---------------------------------------------------------------------------
IaaS providers around the world.
Just using a simple direct estimation, if Amazon and Microsoft had
the market share in China for IaaS that they did in the Asia Pacific
region overall, they would have made $516 million and $140 million
more, respectively, in 2017 and 2018 (Appendix B).\163\ It's easier to
do a direct comparison for IaaS as it is a neutral service platform and
is not affected by different cultural and design preferences. Of
course, China makes up half of the region's spending on IaaS, so just
using their market shares in the rest of Asia Pacific, suggests that
these two firms they would have earned $1.03 billion and $571 million
more, respectively.
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\163\ For cloud services: Amazon's and Microsoft's Infrastructure
as a Service (IaaS) market shares in China are compared to their market
shares in the overall Asia Pacific region, estimating the revenues each
company would earn if they held their regional market share within
China. Additionally, the Chinese market is subtracted from the Asia
Pacific region to estimate the market share each company holds in the
rest of the region, which are once again substituted for the Chinese
market shares; China Internet Watch, ``Alibaba Cloud owns 43 percent
China's public cloud market in 2018,'' February 12, 2019, https://
www.chinainternetwatch.com/28150/public-cloud-h1-2018/; China Internet
Watch, ``China public cloud (IaaS) to reach US$6.21 bn in 2018; Amazon
fastest growth,'' October 10, 2018, https://www.chinainternetwatch.com/
26900/public-cloud-iaas-2018/; Business Wire, ``Alibaba Cloud Ranked
First in Asia Pacific(*) by Gartner Market Share: IT Services in IaaS
and IUS,'' April 24, 2019, https://www.businesswire.com/news/home/
20190424005371/en/; IDC, ``New IDC Forecast Reveals Asia/Pacific*
Spending on Public Cloud Services to Reach USD 76.1 Billion by 2023,''
August 7, 2019, https://www.idc.com/
getdoc.jsp?containerId=prAP45431219.
Collectively, ITIF's estimates losses for the search and cloud
sectors suggest that these companies would have made $5.8 to $10.6
billion more in 2017 and $7.5 to $14.3 billion more in 2018 (Appendix
C).\164\
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\164\ The tables in the appendix summarize the results estimating
the revenues of U.S. cloud and search companies in China in different
scenarios and provide estimates of cumulative losses. The high and low
assumptions for each are different. For search, we assume Google
maintained a consistent market share and then assume they beat out
Baidu like they beat out Naver in Korea. For cloud, we assume cloud
companies receive the market share equivalent to the average in the
Asia Pacific region including China, and then receiving the market
share equivalent to the regional average excluding China.
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u.s. firms should be allowed, and encouraged,
to operate inside a censored china
The trade and economic implications of the Great Firewall and
Chinese censorship more broadly, combined with other digital
protectionism, undermines U.S. firms and the U.S. economy overall. This
is problematic for America's position as the world's leading innovator.
Most technology-based industries have high barriers to entry. In
sectors that rely on AI, for example, firms spend hundreds of millions,
and years of effort, developing ever more sophisticated technical
capabilities. The initial investment can be quite high. While fixed
costs are extremely high, marginal costs are low as firms can deploy
their services over the Internet to many markets around the world.
If U.S. innovation industries lose market share to unfairly
competing firms supported by their innovation mercantilist governments,
it means two things. First, sales fall. This is true because global
sales are largely fixed, and if a mercantilist-supported competitor
(unfairly) gains market share, the market-based competitor loses share.
Second, because profits decline more than sales, it is now more
difficult for the market-based innovator to reinvest revenues in the
next generation of products or services, meaning that the mercantilist-
supported entrant has an advantage in creating the next generation of
products. Also, to the extent the United States continues to lose
technological capabilities to China, U.S. technological advantage in
defense over China will diminish, if not evaporate, as U.S.
capabilities whither and Chinese ones strengthen.
U.S. policymakers are obviously well within their rights to protest
against China's approach to human rights, such as freedom of
expression, which is affected by censorship. This can, and should,
continue to be done directly by the U.S. government with the Chinese
government and in relevant international forums. The United States has
benefited tremendously from a global trading system that allows firms
and people from all political systems and belief systems to improve
their standard of living through greater trade and innovation. However,
with limited exceptions (such as facilitating genocide, war crimes, or
some other heinous international crime), unilaterally holding U.S.
firms accountable for the values of the country they operate in is not
what has defined U.S. trade and foreign policy. Moreover, it works
against U.S. economic interests, especially the goal of leading China
technologically and economically.
As Google stated in a blog from when it withdrew in 2010,
``filtering our search results clearly compromises our mission'' but,
as it added, ``failing to offer Google search at all to a fifth of the
world's population, however, does so far more severely.''\165\ This is
a fair assessment of the tradeoff. Obviously, U.S. firms have the right
to decide whether to enter or stay out of China for whatever reason.
People talk about the decision about whether U.S. firms should enter
(or reenter) the world's largest, and one of its fastest growing
digital markets, and whether they will have to compromise the
principles and values of the United States. While firms like Google may
or may not have had more leverage to negotiate a better deal back in
2010 (as compared to today), the situation in relation to governance
intention and capability has clearly changed and solidified around
censorship and the control of information in China and between China
and the rest of the world. Under any rational business calculation, it
would be impractical to expect one of the world's largest Internet
companies to stay out of the world's largest digital economy,
especially when U.S. firms have shown that they can operate under the
Chinese government's intrusive rules.\166\
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\165\ Andrew McLaughlin, ``Google in China,'' January 27, 2006,
https://googleblog.blogspot.com
/2006/01/google-in-china.html.
\166\ Farhad Manjoo, ``Google Tried to Change China. China May End
Up Changing Google,'' New York Times, https://www.nytimes.com/2018/08/
22/technology/google-china-conventionality.html.
A realistic approach should recognize that it is far more
constructive to recognize a government's right to regulate content
online and debate about how these content moderation frameworks, even
if for political speech purposes, are designed and enforced. This
should be a legitimate part of the political and economic response in
ensuring that rules are clear, provide sufficient time for action,
build in notification processes, are no more onerous than necessary,
---------------------------------------------------------------------------
and are as precise as possible.
A key, and fair, concern is that changes U.S. firms make to abide
by Chinese censorship laws affect their actions and the goods and
services they provide in other markets around the world. Recent cases
with the NBA being penalized in China for remarks from one coach in the
United States is not only evidence of China's sensitive and punitive
nature, but its extra territorial application of censorship in
selectively targeting people and firms for what they say and do in the
United States. However, this is extraterritorial application of
domestic law is not unique to China. Privacy regulators in Europe have
tried to dictate what information U.S. firms make available to people
in Europe, but also the rest of the world, through their ``right to be
forgotten'' requirement that gives European Union citizens the power to
demand that data and information about them be deleted. Germany
requires social networks to remove Nazi symbols. In 2017, the Supreme
Court of Canada upheld orders for Google to ``de-index'' a website, and
asserted the jurisdiction of Canada's courts over Internet
intermediaries in other countries. The United States should focus on
ensuring that U.S. firms only apply these rules in local jurisdictions
and come up with other tools to counteract its spillover into the
United States.
overly broad censorship and trade law: applicable, but largely untested
Trade law allows countries to enact censorship for a range of
reasons, such as pornography, gambling, and faith-based objections, but
these must be necessary and proportionate. This raises the prospect for
a WTO dispute case based on the claim that China's approach to
censorship is overly broad, restrictive, and discriminatory as it can
unfairly restrict the domestic and cross-border supply of a service.
For as long as there has been international trade rules, there have
been exceptions, including for countries to enact measures to protect
public morals. Back in 2006, academics like Tim Wu from Colombia
University realized that countries were not considering the trade law
implications of overly broad online censorship.\167\ A 2009 WTO trade
dispute (initiated by the United States) represents the clearest
example of how trade law can address issues like censorship. This case
involved trading rights and distribution services for audiovisual
entertainment products. China sought to justify restrictions on foreign
firms involved in importing and distributing books, movies, and other
``culturally sensitive'' materials because it wanted to protect public
morals and control content. China claimed that control of cultural
content is a matter of fundamental importance, which was recognized as
legitimate by the WTO dispute panel.\168\ However, the panel's overall
verdict showed how China's desire to control online content does not
enable it to ignore WTO rules.\169\
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\167\ Tim Wu, ``The World Trade Law of Internet Filtering,''
Columbia University Law School, May 3, 2006, http://dx.doi.org/10.2139/
ssrn.882459.
\168\ ``DS363: China--Measures affecting trading rights and
distribution services for certain publications and audiovisual
entertainment products,'' World Trade Organization website, https://
www.wto.org/english/tratop_e/dispu_e/cases_e/ds363_e.htm.
\169\ Ibid.; ``Testimony: Commercial Espionage and Barriers to
Digital Trade in China,'' Matt Schruers, Computer and Communications
Industry Association, June 15, 2015, https://www.uscc.gov/sites/
default/files/Schruers%20Testimony.pdf.
The European Center for International Political Economy (ECIPE)
report Protectionism Online: Internet Censorship and International
Trade Law presents a detailed and convincing case that a WTO dispute
panel might rule that China's permanent blocks on search engines,
photo-sharing applications, and other services are inconsistent with
the General Agreement on Trade in Services (GATS) provisions, even with
the exceptions for morals and security.\170\ Less resourceful
countries, without means of filtering more selectively, and with a
censorship system based on moral and religious grounds, are more likely
to be able to defend broader censorship blocks in the WTO. But the
exceptions do not offer a blanket cover for the arbitrary and
disproportionate censorship that still occurs despite the availability
to the censoring government of selective filtering.
---------------------------------------------------------------------------
\170\ Fredrik Erixon, Brian Hindley, and Hosuk Lee-Makiyama,
``Protectionism Online: Internet Censorship and International Trade
Law'' (The European Center for International Political Economy, 2009),
https://ecipe.org/wp-content/uploads/2014/12/protectionism-online-
internet-censorship-and-international-trade-law.pdf.
Article XX of General Agreement on Tariffs and Trade (GATT) and
article XIV of GATS contain many relevant rules that govern the
potential use of censorship. GATT permits governments to take measures
``necessary to protect public morals.'' GATS permits measures
``necessary to protect public morals or to maintain public order.''
However, Article XX of GATTs outlines that, ``subject to the
requirement that such measures are not applied in a manner which would
constitute a means of arbitrary or unjustifiable discrimination between
countries where the same conditions prevail, or a disguised restriction
---------------------------------------------------------------------------
on international trade.''
However, as ECIPE explains, trade law sets limits to a country's
use of censorship for moral reasons. The conditions under which these
provisions can be applied tend to be quite strictly applied.\171\ GATS
article XIV is even annotated by a footnote stating that the paragraph
may only be invoked where a ``genuine and sufficiently serious threat
is posed'' to a ``fundamental interest'' of society.\172\ They need to
be deemed ``necessary'' when evaluated under a factor-based test. Such
factors include: the relative importance of the objective pursued by
the measure; the contribution of the measure to that objective; the
trade-restrictiveness of the measure; and the existence of ``reasonably
available'' alternative measures.\173\
---------------------------------------------------------------------------
\171\ Ibid.
\172\ Ibid.
\173\ See e.g., Appellate Body Report, EC--Seal Products, para.
5.169; Columbia--Textiles (AB), para. 5.74. (``As we have noted, in
most cases, a panel must then compare the challenged measure and
possible alternative measures that achieve the same level of protection
while being less trade restrictive. The Appellate Body has explained
that an alternative measure may be found not to be `reasonably
available' where `it is merely theoretical in nature,' for instance,
where the responding member is not capable of taking it, or where the
measure imposes an undue burden on that member, such as prohibitive
costs or substantial technical difficulties''). ``WTO Analytical Index:
Jurisprudence: Article XX,'' World Trade Organization, https://
www.wto.org/english/res_e/publications_e/ai17_e/gatt1994_art20_jur.pdf.
Given it has never been tested in a WTO dispute, it is unclear how
the necessity test relates to the footnote under article XIV. This
would be an extremely difficult question for a WTO dispute panel to
answer once faced with questions about how to assess and respond to the
threat from certain online content.\174\ As it relates to
proportionality, a WTO dispute panel would take into consideration the
capabilities of the state in considering whether a measure was
reasonable and whether there is a genuine alternative for the desired
level of protection. The burden of proof is on the complainant to prove
such a measure actually exists.\175\ On this factor alone, it seems
clear that active filtering is far less trade restrictive than a total,
permanent ban of a site and service. There's also the related aspect of
proportionality and discrimination in that censors in China tend to
block entire foreign websites, while a domestic site may simply be
asked to remove individual pages.
---------------------------------------------------------------------------
\174\ Erixon, Hindley, and Lee-Makiyama, ``Protectionism Online:
Internet Censorship and International Trade Law.''
\175\ Asbestos and audiovisuals cases: ``WTO Analytical Index:
Jurisprudence: Article XX,'' World Trade Organization, https://
www.wto.org/english/res_e/publications_e/ai17_e/gatt1994
_art20_jur.pdf.
The growing importance of digital content to trade makes it
important to challenge and (hopefully) rectify China's overly expansive
use of censorship as an NTB. A case brought before the WTO over
censorship would inevitably prompt a debate about sovereignty and the
scope of trade-related issues under the WTO, but it's a fair debate
given the original negotiators of GATT and GATS envisaged limits to how
countries could use public morals and other exceptions as disguised
forms of protectionism. There needs to be a debate about where and how
to draw the lines against disproportionate, arbitrary, and opaque
censorship. As ECIPE notes in conclusion, although the dispute
settlement mechanism of neither the WTO nor other trade instruments
could be used to eliminate Internet censorship, they might limit the
use of its more commercially damaging forms.\176\
---------------------------------------------------------------------------
\176\ Erixon, Hindley, and Lee-Makiyama, ``Protectionism Online:
Internet Censorship and International Trade Law.''
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recommendations
On March 8, 2000, former U.S. President Bill Clinton gave a speech
that touched on China's accession to the WTO, the Internet, and
censorship in China:
Membership in the WTO, of course, will not create a free
society in China overnight or guarantee that China will play by
global rules. But over time, I believe it will move China
faster and further in the right direction, and certainly will
do that more than rejection would. . . . Now there's no
question China has been trying to crack down on the Internet.
Good luck! That's sort of like trying to nail jello to the
wall. But I would argue to you that their effort to do that
just proves how real these changes are and how much they
threaten the status quo.\177\
---------------------------------------------------------------------------
\177\ ``Full Text of Clinton's Speech on China Trade Bill,'' New
York Times, March 9, 2000, https://archive.nytimes.com/www.nytimes.com/
library/world/asia/030900clinton-china-text.ht
ml?mcubz=2.
The United States would be ill served to simply wait and hope China
realizes the futility of its approach to censorship; the 20 years shows
that this is extremely unlikely. The United States will need to double
down and keep pushing for it as the track record shows limited and
uneven progress. Meanwhile, the stakes for U.S. firms and the broader
economy only increase given China's economic growth. Given this, it's
worth pursuing a fresh assessment of the issue and options to develop a
targeted, detailed, and broader strategy to that (at least) U.S. firms
can enter and operate on level terms in China. In line with this, there
are a number actions Congress and the administration can take to reduce
the economic impact of censorship on the U.S. economy. In addition to
the below, ITIF has called for a broader range of institutional and
policy changes to better respond to Chinese innovation mercantilism,
such as in the reports Constructive, Alliance-Backed Confrontation: How
the Trump Administration Can Stop Chinese Innovation Mercantilism and
Why and How to Mount a Strong, Trilateral Response to China's
Innovation Mercantilism.\178\
---------------------------------------------------------------------------
\178\ Nigel Cory and Robert D. Atkinson, ``Why and How to Mount a
Strong, Trilateral Response to China's Innovation Mercantilism'' (The
Information Technology and Innovation Foundation, January 13, 2020),
https://itif.org/publications/2020/01/13/why-and-how-mount-strong-
trilateral-response-chinas-innovation-mercantilism; Nigel Cory, Robert
D. Atkinson, and Stephen Ezell, ``Stopping China's Mercantilism: A
Doctrine of Constructive, Alliance-Backed Confrontation'' (The
Information Technology and Innovation Foundation, March, 2017), http://
www2.itif.org/2017-stopping-china-mercantilism.pdf.
---------------------------------------------------------------------------
congress should ask the united states international trade commission
for a detailed study into the trade impact of censorship
For such a significant trade issue, there is a surprising lack of
data and research done on the impact of censorship in China and
elsewhere on U.S. firms. To help fill this gap, the Senate Finance
Committee should ask the United States International Trade Commission
(ITC). The ITC has done and continues to do valuable research on global
digital trade and barriers to U.S. firms.\179\ Congress should ask ITC
to author an in-depth investigation into the trade implications of
censorship around the world, with a specific focus on China. This
analysis should include more detailed modeling estimates about the
trade impact of China's overly broad, onerous, and restrictive approach
to censorship.
---------------------------------------------------------------------------
\179\ ``USITC: Ongoing 332 Investigations,'' United States
International Trade Commission website, https://www.usitc.gov/
research_and_analysis/what_we_are_working_on.htm; Nigel Cory, ``Post-
Hearing Written Submission: Investigations Global Digital Trade 1 (No.
332-562) and Global Digital Trade 2 (No. 332-563)'' (The Information
Technology and Innovation Foundation, March 29, 2018), http://
www2.itif.org/2018-testimony-global-digital-trade.pdf; United States
International Trade Commission (USITC), Global Digital Trade I: Market
Opportunities and Key Foreign Trade Restrictions, USITC Publication
4716, (Washington, D.C.: USITC), https://www.usitc.gov/publications/
industry_econ_analysis_332/2017/global_digital_trade_1_
market_opportunities_and.htm.
---------------------------------------------------------------------------
push ustr to develop new trade law provisions to target
the countries use of censorship for protectionism
The United States should develop a digital trade policy response to
China's use of censorship as a barrier to trade. USTR addresses some
components in the United States-Mexico-Canada trade agreement and the
``Digital Two Dozen'' which formed the basis for U.S. negotiations in
the Trans-Pacific Partnership.\180\ However, USTR and other U.S.
Government agencies (such as the Department of Commerce) need to ensure
that U.S. trade policy addresses the individual elements as part of a
holistic and broader global digital economy agenda. USTR's recently
released 2020 Trade Policy Agenda and 2019 Annual Report details
individual digital provisions that relate to censorship, but without a
broader context or strategy to address the use of censorship and other
non-tariff barriers to digital trade as part of the growing trend
towards ``digital sovereignty'' in China, Europe, India, and elsewhere
around the world.\181\
---------------------------------------------------------------------------
\180\ Nigel Cory and Stephen Ezell, ``Comments to the U.S.
International Trade Commission Regarding the United States-Mexico-
Canada Agreement'' (The Information Technology and Innovation
Foundation, December 17, 2018), https://itif.org/publications/2018/12/
17/comments-us-international-trade-commission-regarding-united-states-
mexico; ``The Digital 2 Dozen,'' Office of the United States Trade
Representative, https://ustr.gov/about-us/policy-offices/press-office/
reports-and-publications/2016/digital-2-dozen.
\181\ United States Trade Representative (USTR), 2020 Trade Policy
Agenda and 2019 Annual Report (Washington, DC: USTR, February 28,
2020), https://ustr.gov/sites/default/files/
2020_Trade_Policy_Agenda_and_2019_Annual_Report.pdf.
The United States should prioritize these digital and censorship
issues as part of Phase Two trade talks with China. Thus far, China has
not made substantive or enforceable commitments on e-commerce or
digital trade as part of its trade agreements. China sees e-commerce
through the lens of traditional trade, where e-commerce platforms sell
physical goods that need facilitation through customs, while the United
States, Japan, and many other nations see it much broader, encompassing
both purely digital products and the digitally enabled delivery of
goods and services.\182\ However, in the event that China refuses to
change its restrictive approach to data governance and digital trade,
the United States should focus its efforts on enacting ambitious news
rules at the WTO's e-commerce negotiations to ensure that data
localization does not become the norm around the world.
---------------------------------------------------------------------------
\182\ Nigel Cory, ``Why China Should Be Disqualified From
Participating in WTO Negotiations on Digital Trade Rules'' (The
Information Technology and Innovation Foundation, May 9, 2019), https:/
/itif.org/publications/2019/05/09/why-china-should-be-disqualified-
participating-wto-negotiations-digital.
---------------------------------------------------------------------------
send a clear message that u.s. technology firms should
be encouraged to enter chinese markets
All too often policymakers have sent clear messages to U.S.
technology companies that entering the Chinese market is greedy,
immoral, and un-American. The fact that U.S. firms operate in China now
does not mean that they support the CCP, just as it doesn't imply that
U.S. firms working in other authoritarian countries support those
regimes.\183\ Pressuring U.S. companies to not serve the Chinese market
may feel good as a virtue signal, but not only will it do nothing to
improve the situation, it will hurt the interests of the United States
as it will cut off technology services exports.
---------------------------------------------------------------------------
\183\ Alice Su, ``The question of `patriotism' in U.S.-China tech
collaboration,'' Los Angeles Times, August 13, 2019, https://
www.latimes.com/world-nation/story/2019-08-12/china-us-tech-patriotism-
ethics-ai.
Forcing U.S. companies to not serve that market will do nothing to
change the situation on the ground in China. China is not a small
country that would be susceptible to boycotts. Furthermore, it's
impossible, and unrealistic, to expect U.S. firms to stand up to the
Chinese Government. It should be clear by now that foreign firms are
not going to change China's censorship regime. Even if foreign firms
responded as a group, it'd be unlikely to change Chinese Government
policy. If they left, it'd likely just create further space for
increasingly competitive Chinese firms to fill. This obviously doesn't
prevent firms from deciding to not operate in China, as they're free to
do. The basis for action lies with the U.S. Government, and its like-
---------------------------------------------------------------------------
minded partners, to advocate for their human rights values in China.
Over the long term, not supporting U.S. firms in China risks losing
the crucial ability to develop and shape the technologies that'll form
the basis of economic competitiveness. U.S. innovation thrives when its
firms are able to enter and compete in as many markets as possible.
Arthur Kroeber, the managing director of Gavekal Dragonomics (a
research firm in Beijing) makes this clear in a New Yorker article:
``Total revenue of U.S. companies and affiliates in China in 2017, for
1 year, was $544 billion. What's the chance these numbers can go down
80 or 90 percent? Almost no chance. We can remove a few of those
tangles, but the cost to the U.S. economy of removing them all would be
unacceptably high.''\184\
---------------------------------------------------------------------------
\184\ Evan Osnos, ``The Future of America's Contest With China,''
The New Yorker, January 6, 2020, https://www.newyorker.com/magazine/
2020/01/13/the-future-of-americas-contest-with-china.
---------------------------------------------------------------------------
conclusion
In recent years, Chinese officials have not only continued to
defend China's approach to censorship and ``Internet sovereignty'' but
called it a successful model that other countries should adopt. Beyond
the political, there are clear economic and trade implications as many
other countries would no doubt be attracted to China's censorship
model, in part, as it protects local firms from U.S. competitors. In
this way, China's model plays into other countries strategies for local
digital protectionism (just like in China) or even as the European
Union has recently proposed, ``digital sovereignty'' (to protect EU
firms against both Chinese and U.S. technology firms). The Unites
States needs to develop a better response to counter China's use of
censorship as an NTB, as well as its use in other countries that may
seek to replicate it. U.S. firms shouldn't (again) have to sit out
critical formative stages of digital development in mature or emerging
markets, only to watch local firms gain an unfair advantage and a
protected home market to use as a launch point to compete in third-
country markets and in the United States.
APPENDIX A: SEARCH
Google's current revenue is estimated by multiplying its market
share of Chinese search engines with the total revenue of search engine
companies in China for each year. As comparisons, the estimate assumes
that total search engine revenue is unchanged and repeat the
calculations for Google maintaining its 2010 market share of 37 percent
and experiencing the same market share growth as it experienced in
South Korea.
[GRAPHIC] [TIFF OMITTED] T3020.002
Sources:
iReasearch, ``Revenue of Search Engine Companies in China 2013-
2020,'' April 1, 2019, http://www.iresearchchina.com/content/
details7_53447.html.
statscounter, Search Market Share (China and South Korea, 2010-
2019), accessed February 27, 2020, https://gs.statcounter.com/.
APPENDIX B: CLOUD SERVICES
For cloud services: Amazon's and Microsoft's Infrastructure as a
Service (IaaS) market shares in China are compared to their market
shares in the overall Asia Pacific region, estimating the revenues each
company would earn if they held their regional market share within
China. Additionally, the Chinese market is subtracted from the Asia
Pacific region to estimate the market share each company holds in the
rest of the region, which are once again substituted for the Chinese
market shares.
[GRAPHIC] [TIFF OMITTED] T3020.003
Sources:
China Internet Watch, ``Alibaba Cloud owns 43 percent China's
public cloud market in 2018,'' February 12, 2019, https://
www.chinainternetwatch.com/28150/public-cloud-h1-2018/.
China Internet Watch, ``China public cloud (IaaS) to reach
US$6.21 bn in 2018; Amazon fastest growth,'' October 10, 2018, https://
www.chinainternet
watch.com/26900/public-cloud-iaas-2018/.
Business Wire, ``Alibaba Cloud Ranked First in Asia Pacific(*)
by Gartner Market Share: IT Services in IaaS and IUS,'' April 24, 2019,
https://www.
businesswire.com/news/home/20190424005371/en/.
IDC, ``New IDC Forecast Reveals Asia/Pacific* Spending on Public
Cloud Services to Reach USD 76.1 Billion by 2023,'' August 7, 2019,
https://www.idc.com/getdoc.jsp?containerId=prAP45431219.
APPENDIX C: AGGREGATE IMPACT
This table summarizes the results estimating the revenues of U.S.
cloud and search companies in China in different scenarios and provide
estimates of cumulative losses. The high and low assumptions for each
are different. For search, the estimate assumes Google maintained a
consistent market share and then assume they beat out Baidu like they
beat out Naver in Korea. For cloud, the estimate assumes cloud
companies receive the market share equivalent to the average in the
Asia Pacific region including China, and then receiving the market
share equivalent to the regional average excluding China.
[GRAPHIC] [TIFF OMITTED] T3020.004
______
Questions Submitted for the Record to Nigel Cory
Questions Submitted by Hon. John Cornyn
Question. Our Nation's technology companies are increasingly being
blocked from access to the Chinese market. Meanwhile, the Chinese
Government is subsidizing its own technology development through
companies such as Huawei. Some technology companies are censored
entirely out of the market. This has caused billions of dollars in
damage to our economy and contributed to our Nation's outsized trade
deficit with China. The cost has to be much more.
What kind of barriers do tech companies face in entering the
Chinese market and what are the short- and long-term costs?
What should we be focusing on to ensure censorship is removed as a
barrier to digital trade as talks on a Phase Two deal progress?
Answer. China is the leader in digital protectionism. The impact on
U.S. firms can be categorized as either direct or indirect:
The direct blocking of market access via the Great Firewall,
restrictive and discriminatory licensing arrangements, and other market
access restrictions.
The direct blocking of digital content (movies, TV shows, and
video games) via opaque, restrictive, and/or discriminatory content-
review processes.
The indirect impact on how U.S. firms can operate and compete
in China by forcing all Internet traffic through the Great Firewall,
which degrades or cuts off data connectivity with the global Internet.
For example, this hinders the cross-border sale and service of
software.
The direct impact on how U.S. firms can use corporate virtual
private networks (VPN) to connect to intra-firm networks outside of
China, which can undermine connectivity, be expensive, and potentially
expose corporate communications to Chinese government agencies.
At the macro level, there is the direct impact of U.S. firms
being excluded from China during a formative period of rapid growth in
China's digital economy. This leads to the indirect and long- term
impact that Chinese firms use their protected domestic market to grow
and become competitive, before taking market share from U.S. and other
foreign firms in third-country markets.
The Great Firewall of China represents a rare case where U.S.
digital exports face a barrier at the border. Most of the foreign
online services, apps, or intermediaries that China blocks are rarely
revised and lifted (as the list above shows). Firms that have their web
services temporarily blocked typically find that this is simply a
prelude to a total and permanent block. The impact of being blocked is
cumulative in its trade impact, as for many services that are already
blocked, if they add innovative new services and products, the block is
automatically extended. For example, China's initial blocking of
foreign search engines has expanded to encompass many email, cloud
storage, and other services. This shows that even if there was a
specific politically or socially offensive article to prompt a block,
the extension of this block to new services makes it much more
impactful from a trade and economic perspective. ITIF's Senate
testimony outlines the long list of major U.S. tech firms that have
been blocked by the Great Firewall over the last 2 decades.
The trade impact of censorship in China is much broader than
website blocking via the Great Firewall of China. Behind this clear
market access barrier, U.S. firms face a complicated, opaque, and
changing regulatory framework tied to content moderation and
information control. China's use of censorship affects both market
entry and operations in China and the provision of digital services and
products from overseas.
Moreover, in many cases, China's approach to censorship is
unwritten, with enforcement often being arbitrary and delegated to
private firms. This is in large part a conscious decision to avoid
disputes at the World Trade Organization, which would be much easier to
put in place if the rules were on paper.
The trade-related impact of censorship no doubt plays a role in
China's decision to prohibit wholly or partially owned foreign firms
from key digital sectors. For example, China uses licenses to strictly
control which parties can offer value-added telecommunication services,
such as voice-over-Internet protocol (VOIP) calls, online database
storing and searching, electronic data exchange, online data processing
and transactions processing, domestic multiparty communication
services, VPN services, and video teleconferencing and as well as
limiting what parties can interconnect these services with public
telecommunication networks.\1\ Similarly, foreign ownership in basic
telecommunication services (fixed line, mobile, and broadband) is
capped at 49 percent.\2\
---------------------------------------------------------------------------
\1\ United States Trade Representative (USTR), Section 1377 Review
on Compliance With Telecommunications Trade Agreements (Washington, DC:
USTR, 2015), https://ustr.gov/sites/default/files/2015-Section-1377-
Report_FINAL.pdf.
\2\ State Council, Provisions on Administration of Foreign-Invested
Telecommunications Enterprises. Decree of the State Council of the
People's Republic China No. 333, December 11, 2001.
In terms of how China's approach to censorship and protectionism
affects how U.S. firms operate (in terms of connectivity) in China, it
varies along a spectrum: from a minor, periodic constraint on service
access to a severely degraded connection that essentially makes it
unviable from an operational or commercial perspective to a complete
block. Frequent blocking and unlocking of websites (and VPNs) can make
it hard for firms to have confidence they will have the communication
services they need for day-to-day operations and international
trade.\3\ U.S. firms also report that pushing all traffic through the
Great Firewall adds transmission delays that can significantly degrade
the quality of the service, to the point where it's commercially or
operationally unacceptable (thus cutting off market access).\4\ In a
similar way, China has ``throttled'' access to foreign websites in
order to make them so slow as to be unusable. Throttling is also often
a precursor to being blocked completely. For example, before Google was
fully blocked in 2010, it was throttled for a long time, which had the
effect of making it appear as if Google's search engine was slow and
buggy.
---------------------------------------------------------------------------
\3\ United States Trade Representative (USTR), 2018 Report to
Congress on China's WTO Compliance (Washington, DC: USTR, 2019),
(Washington, DC: USTR, 2015).
\4\ Ibid.
The economic impact of being kept out of China due to censorship
and protectionism is significant. A generation of Chinese consumers
have grown up without knowing that their Internet and consumer
experience is completely different than what's available in most other
countries. They have little or no idea about Google, Twitter, Facebook,
or other U.S. firms and their products, even as Chinese Government
officials and party ``apparatchiks'' use these platforms to spread
propaganda in the United States.\5\
---------------------------------------------------------------------------
\5\ Li Yuan, ``A Generation Grows Up in China Without Google,
Facebook or Twitter,'' New York Times, August 6, 2018, https://
www.nytimes.com/2018/08/06/technology/china-generation-blocked-
internet.html.
As detailed in ITIF's written testimony, a host of U.S. industries
and firms, in sectors ranging from Internet services to cloud
computing, video games, and movies, have likely lost hundreds of
billions of dollars in revenues due to Chinese censorship and related
market restrictions.\6\ Importantly, these revenues would have
supported innovation and job creation in the United States, while
limiting Chinese firms' ability to grow and capture global market
share. While it is not possible to calculate an exact figure, ITIF
conservatively estimates (based on market-share comparisons) that
Google, which withdrew from the Chinese market in 2010, subsequently
lost $32.5 billion in search revenue from 2013 to 2019, while Amazon
and Microsoft's cloud services (IaaS, which is restricted in China)
lost a combined $1.6 billion over the 2-year period from 2017 to 2018.
As the China market continues to rapidly grow, these losses will also
grow significantly. Beyond this more-immediate impact, the longer-term,
indirect impact is that is has provided Chinese competitors with a
protected market from which to launch competitive challenges in other
regions, such as South America, the rest of Asia, and Africa. This cost
will only grow as the global digital economy grows.
---------------------------------------------------------------------------
\6\ Nigel Cory, ``Testimony: Censorship as a Non-Tariff Barrier to
Trade'' (The Information Technology and Innovation Foundation, June 30,
2020), https://itif.org/publications/2020/06/30/testimony-us-senate-
subcommittee-trade-regarding-censorship-non-tariff.
The United States needs to prioritize and seek as part of bilateral
negotiations with China: clear, meaningful, and enforceable commitments
on market access for a range of Internet services; fair, transparent,
and predictable digital content review processes for movies, TV shows,
and video games; and rules to protect the free flow of data and digital
goods. The United States has the model trade law provisions to use for
these issues (such as its other modern trade agreements, including the
U.S.-Mexico-Canada (USMCA) free trade agreement). The main thing is
that the United States needs to prioritize these tech and digital
issues as they are of far greater size and significance (in terms of
economic productivity, innovation, and competitiveness) as compared to
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agricultural and commodity exports.
The United States also needs to develop new trade rules to ensure
China does not seek to apply its censorship laws and regulations extra-
territorially. It's one thing for U.S. firms to abide by local laws and
regulations around censorship and content moderation in China, but it's
completely different--and unacceptable--for them to change their
operations or content outside of China. Alongside this, the United
States should explore new domestic transparency and policy tools to
identify, track, and respond to cases where China seeks to enforce its
censorship on U.S. firms outside of China (detailed below in response
to Senator Grassley's question).
Question. The ongoing pandemic has accelerated the vulnerability of
America's ability to produce its own critical equipment and supplies.
One area of special focus is the semiconductor space. It underpins
everything in the digital trade space--from 5G to the equipment we use
to work from home. I recently introduced the CHIPS for America act that
incentivizes the production of semiconductors back home. This will not
only help us be prepared for the future but allow the U.S. to remain
the global defender of free speech online.
Can you talk about the global Internet landscape today and where
you see it going in the future?
Specifically, I am concerned about China's export of its
authoritarian model of a closed off Internet to the world. What are
China and other countries doing to support authoritarian regimes via
digital trade and infrastructure?
Answer. There are three major models for digital governance in the
world today. Along a sliding scale of restrictiveness (from low to
high), there's the United States' and the Asia-Pacific Economic
Cooperation's Cross-Border Privacy Rules (CBPR) risk-based approach to
data regulations; the European Union's (EU's) onerous and restrictive
precautionary principle-based General Data Protection Regulation (GDPR)
and emerging restrictions around artificial intelligence; and finally,
China's sovereignty-based model of digital control and
protectionism.\7\
---------------------------------------------------------------------------
\7\ Nigel Cory, ``Cross-Border Data Flows: Where Are the Barriers,
and What Do They Cost?'' (The Information Technology and Innovation
Foundation, May 1, 2017), https://itif.org/publications/2017/05/01/
cross-border-data-flows-where-are-barriers-and-what-do-they-cost; Nigel
Cory, ``China and the United States: Digital Protectionism vs. Digital
Free Trade'' (The Information Technology and Innovation Foundation,
October 18, 2019), https://itif.org/publications/2019/10/18/china-and-
united-states-digital-protectionism-vs-digital-free-trade; Nigel Cory,
``Why China Should Be Disqualified From Participating in WTO
Negotiations on Digital Trade Rules'' (The Information Technology and
Innovation Foundation, May 9, 2019), https://itif.org/publications/
2019/05/09/why-china-should-be-disqualified-participating-wto-
negotiations-digital.
China provides a master class in how to enact behind-the-border
barriers to digital trade in order to give local firms and products an
unfair advantage, especially as it relates to digital products, cross-
border data flows, and the intellectual property (IP) closely
associated with digital trade (such as protections for source code and
algorithms).\8\ In contrast to the United States and many others, China
treats local data storage as the norm and data flows as the exception,
asserting that data privacy and cybersecurity are associated with
location and control.\9\ Data localization is a central theme of
China's data governance framework. For example, China's cybersecurity
law requires personal data and ``important data''--a vague term
encompassing data related to China's national security, economy, and
other public interests--held by key information communications and
technology (ICT) operators to be stored within China. This is in
addition to existing data localization measures for health, mapping,
and financial data and other data-restrictive policies.\10\ Against
this backdrop, China has made few substantive commitments on digital
governance in its trade agreements, especially on data flows. Nor has
it signed on to other international data transfer mechanisms, such as
the CBPR.\11\
---------------------------------------------------------------------------
\8\ Cory, ``Why China Should Be Disqualified From Participating in
WTO Negotiations on Digital Trade Rules''; Cory, ``Cross-Border Data
Flows: Where Are the Barriers, and What Do They Cost?''; Stephen Ezell,
``ITIF Filing to USTR on Section 301 Investigation of China's Policies
and Practices Related to Tech Transfer, IP, and Innovation'' (The
Information Technology and Innovation Foundation, October 25, 2017),
https://itif.org/publications/2017/10/25/itif-filing-ustr-section-301-
investigation-chinas-policies-and-practices.
\9\ Cory, ``Why China Should Be Disqualified From Participating in
WTO Negotiations on Digital Trade Rules.''
\10\ Cory, ``Cross-Border Data Flows''; Nigel Cory, ``The Ten Worst
Digital Protectionism and Innovation Mercantilist Policies of 2018,''
Information Technology and Innovation Foundation, January 28, 2019,
https://itif.org/publications/2019/01/28/ten-worst-digital-
protectionism-and-innovation-mercantilist-policies-2018; Nigel Cory,
``The Worst Innovation Mercantilist Policies of 2017,'' Information
Technology and Innovation Foundation, January 22, 2019, https://
itif.org/publications/2018/01/22/worst-innovation-mercantilist-
policies-2017; Robert Atkinson and Nigel Cory, ``Comments: Circular of
the State Internet Information Office on the Public Consultation on the
Measures for the Assessment of Personal Information and Important Data
Exit Security,'' Information and Technology and Innovation Foundation,
May 11, 2017, http://www2.itif.org/2017-china-handling-data.pdf;
Martina F. Ferracane and Erik van der Marel, ``Patterns of Trade
Restrictiveness in Online Platforms: A First Look'' (European Center
for International Political Economy, January 2019), https://ecipe.org/
publications/pat-terns-of-trade-restrictiveness/.
\11\ Cory, ``Why China Should Be Disqualified From Participating in
WTO Negotiations on Digital Trade Rules.''
In separating itself from the global Internet over the last 2
decades, China is a major contributor to the fragmentation of the
global Internet, but its impact is much broader as it provides a poor
model of governance--in terms of technology and policies--for other
countries to emulate. China's success in exporting its model of digital
control is most evident in similarly authoritarian countries, such as
---------------------------------------------------------------------------
Iran, Russia, Venezuela Vietnam, and elsewhere.
These countries' eager embrace of China's model is sad evidence
that the global Internet is increasingly fragmented as countries--
across every stage of development--have erected barriers to a seamless
global digital economy. This includes enacting data-residency
requirements that confine data within a country's borders, a concept
known as ``data localization.''\12\ It also includes requiring only
local firms to manage certain types of data and using arbitrary app or
content review processes to ban foreign providers and content.
---------------------------------------------------------------------------
\12\ Cory, ``Cross-Border Data Flows: Where Are the Barriers, and
What Do They Cost?''.
China's overall approach of restricting and controlling the
Internet has also no doubt provided some sort of permissions structure
that countries use when enacting broad and arbitrary restrictions on
their countries' use and connection to the global Internet. For
example, in 2018 alone, at least 25 nations throttled down users'
bandwidth, shut off their mobile or broadband Internet services
altogether, or blocked access to mainstream Internet sites or
applications.\13\
---------------------------------------------------------------------------
\13\ Berhan Taye, ``The State of Internet Shutdowns Around the
World'' (Access Now, July 2019), https://www.accessnow.org/cms/assets/
uploads/2019/07/KeepItOn-2018-Report.pdf.
Many countries like China's model of digital protectionism as they
like how it has kept out leading U.S. tech companies and led to the
emergence of local tech firms, like Alibaba and Baidu. This makes it
easy for China to export its restrictive model and the key technologies
that facilitate it. However, enacting China's full range of
restrictions is beyond the capacity of most nations, so many developing
countries (but also parts of the EU) pick and choose parts of China's
model when it suits them to either allow control over digital content
or tilt the local market in favor of domestic firms. This is especially
the case in India, but Brazil, Indonesia, Nigeria, Vietnam, Russia, and
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others have also sought at times to emulate parts of China's approach.
However, it's important to note that China is not the only model
that contributes to the fragmentation of the global Internet. The EU's
GDPR is problematic because it pushes for harmonization and tries to
make foreign countries responsible for enforcing European data privacy
standards instead of using domestic regulations to hold companies
responsible for breaches of European data privacy laws. The GDPR
imposes a general prohibition on transfers of EU personal data to all
but a small group of foreign countries it has determined (as part of an
opaque and ad hoc process) provide an ``adequate'' level of protection
equal to data protection at home. A critical flaw in the European
Union's approach is the mistaken logic that this
country-by-country assessment approach is effective in promoting better
data privacy and protection by companies that manage personal data.\14\
---------------------------------------------------------------------------
\14\ See Robert Atkinson, ``Don't Just Fix Safe Harbor, Fix the
Data Protection Regulation,'' Euractiv, December 18, 2015, https://
www.euractiv.com/section/digital/opinion/don-t-just-fix-safe-harbour-
fix-the-data-protection-regulation/.
Furthermore, the EU's top-down approach is ultimately untenable, as
differences in social, cultural, and political values, norms, and
institutions are behind countries not regulating privacy the same way.
For example, given the country's approach to data protection and
privacy, it is inconceivable China would ever be deemed ``adequate''
from a European perspective. Yet, the fact that Europe has not applied
to China the same standards it applies to the United States with regard
to EU personal data highlights the arbitrary nature of its
approach.\15\
---------------------------------------------------------------------------
\15\ For example, a report for the European Parliament on data
protection in China states that there is ``no common ground . . . found
between two fundamentally different systems both in their wording and
in their raison d'etre.'' The report takes a relativist approach by
saying China's culture and approach to human rights means the European
Union should treat China differently when it comes to trade and privacy
issues, despite the fact that ``China does not have a general data
protection act but traces of data protection may be found in a
multitude of sector-specific legal instruments.'' Paul de Hert and
Vagelis Papakonstantinou, ``The Data Protection Regime in China''
(Brussels: report for the European Parliament's Policy Department for
Citizens' Rights and Constitutional Affairs, October 2015), http://
www.europarl.europa.eu/RegData/etudes/IDAN/2015/536472/
IPOL_IDA(2015)536472_EN.pdf.
Ultimately, success will depend on whether the United States and
like-minded digital trade allies can work with, and convince, the many
undecided countries in the middle--those that have not yet chosen which
model they want to follow--that theirs is the best approach from both
an economic and regulatory perspective. The United States and its like-
minded trading partners--Australia, Canada, Chile, Japan, Mexico, New
Zealand, Singapore, the United Kingdom, and others--which want global
norms around new technology to reflect their values and trading
practices, need to proactively engage with each other and the many
undecided countries regarding their preferred model. New digital trade
rules are definitely needed to prohibit and roll back the growing range
of barriers to digital trade, but these are insufficient on their own
to create frameworks that allow firms to engage in seamless digital
trade and data-driven innovation across borders.\16\ The United States
also needs to use its trade agreements and economic statecraft
(resources and programs managed by the U.S. Agency for International
Development (USAID), the State Department, the Department of Commerce,
and others) to help build new norms and rules around data and digital
trade.
---------------------------------------------------------------------------
\16\ Cory, ``Testimony: Censorship as a Non-Tariff Barrier to
Trade''; Cory, ``Cross-Border Data Flows: Where Are the Barriers, and
What Do They Cost?''; Nigel Cory, ``Response to the Public Consultation
for the European Commission's White Paper on a European Approach to
Artificial Intelligence'' (The Information Technology and Innovation
Foundation, June 12, 2020), https://itif.org/publications/2020/06/12/
response-public-consultation-european-commissions-white-paper-european.
The United States also needs to do a better job of articulating and
advocating for its preferred model of risk-based, permission-less
innovation. The U.S. model should be based on the fact that modern
technology, especially the Internet and cloud data storage and
processing, means that each country's domestic regulatory regime for
data (such as for privacy) needs to be globally interoperable given
that each country faces the same challenge in applying its laws to
firms that may transfer data between jurisdictions.\17\ An
interoperable system would focus on ``global protections through local
accountability.'' The principle idea is that a country can enforce its
rules on any foreign or domestic organization with legal nexus.
Moreover, a country can enforce its rules on these organizations based
on how they handle the data they collect, even if that data handling
occurs abroad or with a third party. This accountability-based approach
is shared by most nations, after all, including for data privacy,
including the United States. For example, foreign companies operating
in the United States must comply with the privacy provisions of the
Health Insurance Portability and Accountability Act (HIPAA), which
regulates U.S. citizens' privacy rights for health data--even if they
move data outside the United States. And, if a foreign company's
affiliates overseas violate HIPAA, then U.S. regulators can bring legal
action against the foreign company's operations in the United States.
---------------------------------------------------------------------------
\17\ Nigel Cory, Robert Atkinson, and Daniel Castro, ``Principles
and Policies for `Data Free Flow With Trust' '' (The Information
Technology and Innovation Foundation, May 27, 2019), https://itif.org/
publications/2019/05/27/principles-and-policies-data-free-flow-trust.
The United States has already embedded the rules that support this
model in its trade agreements, such as the USMCA and the United States-
Japan digital trade agreement. But the country needs to be far more
---------------------------------------------------------------------------
proactive in advocating for its preferred model.
One idea to do this would be to negotiate an ambitious digital
trade agreement with its ``Five Eyes'' partners (Australia, Canada, New
Zealand, and the United Kingdom). Just as the United States works with
them on intelligence sharing and to standardize operating practices and
technical specifications for defense equipment and operations, it
should seek to build out a trade and innovation framework, doing the
same for digital trade. It should seek to do likewise with other
similarly ambitious partners such as Chile, Japan, and Singapore. An
easy way for the United States to engage with a broader range of
ambitious countries would be to join the Comprehensive and Progressive
Agreement for Trans-Pacific Partnership (CPTPP).
china's efforts to export its restrictive approach to standards
China's model is not just censorship and restrictions on data.
China is increasingly trying to export its own restrictive standards as
part of an effort to unfairly influence international standards-setting
organizations, potentially giving its firms an advantage in gaining
global market share and influence in new and emerging technologies.
This involves international technical standards for AI, robotics, self-
driving vehicles, the Internet of Things, and other new technologies.
Standards are one part of Chinese President Xi Jinping's plans for
China to become a ``cyber superpower.''\18\
---------------------------------------------------------------------------
\18\ For example, the CCP's ``Office of the Central Cyberspace
Affairs Commission'' depicted China's tech giants' growing global
market share, the spread of Chinese standards, and increasing influence
on discourse and legal norms as part of the same effort. Thomas Eder,
Rebecca Arcesati, and Jacob Mardell, ``Networking the `Belt and Road'--
The future is digital'' (The Mercator Institute for China Studies,
August 28, 2019), https://www.merics.org/en/bri-tracker/networking-the-
belt-and-road; (translation) ``In-depth implementation of General
Secretary Xi Jinping's strategic thinking of network power, solidly
promote network security and informationization,'' Central Information
Office network theory study group, September 15, 2017, http://
www.qstheory.cn/dukan/qs/2017-09/15/c_1121647633.htm; Elsa Kania et.
al, ``China's Strategic Thinking on Building Power in Cyberspace'' (New
America, September 25, 2017), https://www.newamerica.org/cybersecurity-
initiative/blog/chinas-strategic-thinking-building-power-cyberspace/.
Standards are an important (but often overlooked) component of
global trade, as they foster economies of scale by making it relatively
easy for firms to produce a good or service to a mutually accepted
standard across markets. China pursues indigenous (i.e., China-
specific) technology standards (both at home and internationally)
because it believes it will advantage China's domestic producers while
blocking foreign competitors and reducing the royalties Chinese firms
pay for foreign technologies.\19\
---------------------------------------------------------------------------
\19\ Stephen J. Ezell and Robert D. Atkinson, ``The Middle Kingdom
Galapagos Island Syndrome'' (The Information Technology and Innovation
Foundation, December 15, 2014), https://itif.org/publications/2014/12/
15/middle-kingdom-galapagos-island-syndrome-cul-de-sac-chinese-
technology.
At home, China provides a clear example of how country-specific
standards can be used to act as a barrier to trade for high-tech goods
and services.\20\ As ITIF's report ``The Middle Kingdom Galapagos
Island Syndrome: The Cul-De-Sac of Chinese Technology Standards''
argues, China has made the development of indigenous technology
standards, particularly for ICT products, a core component of its
industrial development strategy.\21\ Most recently, in 2018, China
introduced a new standardization law that will likely favor local firms
and their goods and services, as it references ``indigenous
innovation'' while failing to reference either its WTO commitments
(thereby raising questions about WTO compliance) or its acceptance of
existing international standards (approved by the various standards-
development organizations (SDOs)).\22\ Indicative of China's approach,
a report by the German think tank, the Mercator Institute for China
Studies (MERICS), shows that Chinese standards for basic smart
manufacturing correlate with about 70 percent of relevant international
standards--which falls to around 53 percent for key smart manufacturing
technology standards, and to 0 percent for standards relating to cloud
computing, industrial software, and big data.\23\
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\20\ Office of the United States Trade Representative (USTR),
``2018 National Trade Estimate Report on Foreign Trade Barriers''
(Washington, DC: USTR, 2018), https://ustr.gov/sites/default/files/
files/Press/Reports/2018%20National%20Trade%20Estimate%20Report.pdf.
\21\ Stephen J. Ezell and Robert D. Atkinson, ``The Middle Kingdom
Galapagos Island Syndrome: The Cul-De-Sac of Chinese Technology
Standards'' (Information Technology and Innovation Foundation, December
2014), https://itif.org/publications/2014/12/15/middle-kingdom-
galapagos-island-syndrome-cul-de-sac-chinese-technology.
\22\ Cory, ``The Ten Worst Digital Protectionism and Innovation
Mercantilist Policies of 2018.''
\23\ Bjorn Conrad, Jaqueline Ives, Mirjam Meissner, Jost Wubbeke,
and Max Zenglein, ``Made in China 2025'' (MERICS, August 12, 2016),
https://merics.org/en/report/made-china-2025.
The United States needs to pay greater attention to China's efforts
to export its restrictive domestic standards as part of efforts to
influence SDOs. Thus far, China's approach to international standards--
focusing on a large number of submissions, often of relatively poor
quality--has not been overly successful, indicating SDOs are largely
working as intended. However, as the MERICs report explained, ``The
ongoing reform of [China's] standardization system and the revision of
the standardization law point to a liberalization and
internationalization.''\24\ This transition, from inward-looking
protectionism to outward-facing ambition, represents both an
opportunity and a threat. There is an opportunity to better integrate
the Chinese market with the rest of the world through unified, globally
standardized technologies and equipment. However, there is also
evidence China has and will attempt to unfairly influence international
standards-setting bodies to ensure Chinese technology is at the heart
of (i.e., considered essential to) the international standard.
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\24\ Ibid.
For example, the United States needs to monitor where China's
government and its firms use their own restrictive domestic standards
as the basis for efforts to influence standards in third countries via
government-to-government engagement, foreign investment projects, and
commercial contracts (such as those associated with its ``Belt and Road
Initiative'' (BRI)). One of the three main motivations of the ``Digital
Silk Road'' (the digital component of BRI) is to leverage the strength
of China's ICT sector to spread its domestic standards.\25\
---------------------------------------------------------------------------
\25\ Thomas Eder, Rebecca Arcesati, and Jacob Mardell, ``Networking
the `Belt and Road' '' (MERICS, August 28, 2019), https://merics.org/
en/analysis/networking-belt-and-road-future-digital.
The United States also needs to be vigilant for where China tries
to unfairly coerce its own and foreign firms (such as those relying on
financing from China for projects) in supporting votes on standards
that favor its local companies and their standards, rather than
supporting the best technological solution, such as for 5G technology
standards. In particular, the United States should remain wary of
attempts by the Chinese government to direct Chinese firms to support a
particular proposal for key technologies. The Chinese state media
report ``Lenovo 5G Incident Shows Need for Chinese Companies to Cease
Mindless Competition'' is indicative of this scenario, wherein Lenovo
was forced to make a public apology after supporting U.S. firm
Qualcomm's proposal, rather than Huawei's, for a key coding method for
5G data transmissions.\26\
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\26\ Ben Sin, ``The Key for Huawei, and China, in 5G Race Is a
Turkish Professor,'' Forbes, July 27, 2018, https://www.forbes.com/
sites/bensin/2018/07/27/the-key-for-huawei-and-china-in-5g-race-
against-the-u-s-is-a-turkish-professor/#5f335880222b; Xiao Xin,
``Lenovo 5G incident shows need for Chinese companies to cease mindless
competition,'' Global Times, May 16, 2018, http://www.globaltimes.cn/
content/1102630.shtml.
China is also seeking to export its model through state-supported
or private-
sector-led foreign investment projects. China could potentially use
commercial contracts and operations as part of a ``bottom-up'' strategy
to build acceptance and use of restrictive Chinese standards for new
and emerging technologies in markets around the world. China's
government and firms follow provisions that stipulate projects must use
Chinese standards and equipment, thereby ``socializing'' them in
foreign markets and standards agencies. China has used this approach
most extensively for projects involving heavy industry (e.g., oil, gas,
and infrastructure), but is expected to take a similar approach with
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ICT-related projects.
China complements this with top-down efforts by the government as
part of engagements with specific countries and regions on digital-
economy issues. For example, in 2017, standards were part of China's
Digital Economy International Cooperation Initiative, which it launched
as part of its BRI engagement with Egypt, Laos, Saudi Arabia, Serbia,
Thailand, Turkey, and the United Arab Emirates.\27\ In other words,
Lenovo decided it was in its interest to support the Qualcomm standard,
but the Chinese Government overruled it.
---------------------------------------------------------------------------
\27\ Guo Yiming, ``Digital economy cooperation to empower Belt,
Road,'' China News, December 4, 2017, http://www.china.org.cn/world/
2017-12/04/content_50083923.htm.
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semiconductors: supporting the technology at
the heart of the global digital economy
The United States needs to do much more to develop and advocate for
its preferred model in terms of building an open, rules-based, and
innovative digital economy. But it's much more than digital trade and
data governance. Ensuring continued American leadership in the world's
most important industry--semiconductors--is a critical component.\28\
Put simply, a country's leadership in the global digital economy starts
with its leadership in semiconductors. American leadership in
semiconductors is not pre-ordained, and others crave it--especially
China, whose $150 billion National Integrated Circuit strategy seeks to
dispossess the United States of its world-leading position, while
ideally eliminating all imports ofU.S. semiconductors by 2035.\29\
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\28\ Stephen Ezell, ``New legislation required to secure U.S.
semiconductor leadership,'' The Hill, June 30, 2020, https://
thehill.com/opinion/technology/505054-new-legislation-required-to-
secure-us-semiconductor-leadership.
\29\ John VerWey, ``Chinese Semiconductor Industrial Policy: Past
and Present'' (United States International Trade Commission, July
2019), https://www.usitc.gov/publications/332/journals/
chinese_semiconductor_industrial_policy_past_and_present_jice_july_2019.
pdf.
The Creating Helpful Incentives to Produce Semiconductors
(``CHIPS'') for America Act introduced by Senators John Cornyn (R-TX)
and Mark Warner (D-VA) and the American Foundries Act of 2020
introduced by Senators Tom Cotton (R-AR) and Chuck Schumer (D-NY) go a
long way toward ensuring this. Between them, the proposed legislation
would expand Federal investment in semiconductor research and
technology development, introduce incentives to locate semiconductor
manufacturing facilities in the United States, and provide expanded tax
credits for investment in the sector. ITIF strongly supports the
legislation, which has since been merged as part of the National
Defense Authorization Act (NDAA) process, and encourages Congress to
fully appropriate funding in the legislation to the maximum extent
envisioned. As important as any of this, the CHIPS Act also represents
congressional and bipartisan recognition that the United States is
engaged in a fierce contest for leadership in technologies of the
future--from biotech and clean energy, to 5G, AI, quantum, and
semiconductors--and that effective government policy--innovation
policy, not industrial policy--can empower and enable America's private
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sector to continue to lead in this critical industry.
Some of the important proposals of the CHIPS Act include its
commitment to a total of $12 billion for semiconductor research,
including $3 billion for a new National Semiconductor Technology Center
to research and prototype advanced semiconductors, and its proposal to
create a new Manufacturing USA Institute for Semiconductor
Manufacturing. It will encourage both U.S. and foreign semiconductor
manufacturers to locate new fabs here, with a $10 billion Federal
matching grant for State/local incentives to attract manufacturers.
This will help level the playing field with other nations' incentives,
and--unlike China's practices--would be entirely WTO-consistent.
While national, including U.S., policies to spur semiconductor R&D
and production are important, it's also important to recognize that
self-sufficiency cannot and should not be the goal. The increasing
expense, complexity, and scale required to innovate and manufacture
semiconductors means that no single nation can afford to go it alone.
ITIF's recent report ``An Allied Approach to Semiconductor
Leadership,'' outlines why the United States needs to work with a like-
minded set of nations committed to open trade and fair economic
competition to collaborate in ways that collectively empower the
competitiveness of their semiconductor industries.\30\
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\30\ Stephen Ezell, ``An Allied Approach to Semiconductor
Leadership'' (Information Technology and Innovation Foundation,
September 17, 2020), https://itif.org/publications/2020/09/17/allied-
approach-semiconductor-leadership.
______
Questions Submitted by Hon. Chuck Grassley
Question. Critics charge that U.S. businesses should simply not do
business in China because of Chinese Government censorship. The problem
I have with that is that it doesn't change the fact that the Chinese
Government is still going to impose censorship on its people regardless
of whether we do business there or not. If we're not there, the Chinese
people would simply have to resort to buying goods and services from
Chinese firms that are likely more inclined to accept censorship. I'm
interested in figuring out how to protect American businesses.
What steps should American companies take when entering the Chinese
market to minimize the risk that they'll fall prey to Chinese
Government censorship practices?
overview
Answer. The United States and its firms should do four key things
to minimize the impact of censorship in China: ensure U.S. firms take
reasonable steps to separate operations in China from others around the
world; the U.S. Government--not U.S. firms--should lead the effort to
advocate for free speech and democracy in China; the U.S. should
develop tools to identify and counteract any ``spillover'' whereby
Chinese censorships impacts U.S. firms, goods, and services in the
United States (as well as extra-territorial access to data); and the
United States should work with like-minded, value-sharing partners to
develop new trade and economic arrangements as part of broader efforts
to develop a better, alternative model for digital governance.
ensure u.s. firms enact administrative and technical
firewalls between china and non-china operations
If WTO rules and global norms around international trade and
commerce fully applied in China, U.S. and other foreign firms would be
able to operate in China and other markets in a fairly seamless manner.
Sadly, the last 2 decades show that China simply decides to ignore or
breach the many rules that otherwise create a clear and fair framework
for international trade and investment. It means that U.S. and other
foreign firms have to enact clear administrative and technical
firewalls between China and non-China operations in order to minimize
the growing risks that they'll be accused of breaking local laws. The
degree and type of segregation obviously depends on the nature of local
laws, which, in the case of Internet-related firms in China, is
becoming major risk for many firms.
The U.S. Government should expect, and respect, when U.S. firms do
this to abide by legitimate local laws, such as data privacy and
censorship (even if the U.S. Government dislikes the laws themselves).
Firms do this as it shows that they're committed to following the laws
of the country in which they operate, while minimizing potential risks
in other countries, including back in the United States. Advocating for
U.S. firms to ignore local laws in China is to essentially support
anarchy. U.S. policymakers expect Chinese firms to do the same in the
United States. Until the United States can negotiate new and improved
commitments for its firms in China, U.S. policymaker should not be
surprised when U.S. firms segregate their operations to help, in part,
ensure that Chinese censorship is contained to China. However, this
expectation obviously should not extend to U.S. firms abiding by
activities that breach U.S. and international laws around egregious
human rights issues, such as playing a role in, or benefiting from, the
mass detention camps China operates for ethnic minorities in
Xinjiang.\31\
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\31\ Austin Ramzy and Chris Buckley, `` `Absolutely No Mercy':
Leaked Files Expose How China Organized Mass Detentions of Muslims,''
New York Times, November 16, 2019, https://www.nytimes.com/interactive/
2019/11/16/world/asia/china-xinjiang-documents.html.
Take Apple, Airbnb, and Zoom as examples. Apple has major
operations in China. In the 2019 financial year, Apple made $44 billion
of revenues in Greater China, mostly from selling iPhones.\32\ However,
to do so it had to agree to host Chinese user data rules in the country
and to remove offensive apps (as requested by government authorities),
such as news and VPN apps, from its Chinese app store. Apple removed
805 apps in China from 2018 to 2019.\33\
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\32\ ``Apple's Chinese troubles,'' The Economist, February 20,
2020, https://www.economist.com/business/2020/02/20/apples-chinese-
troubles.
\33\ Masha Borak, ``Apple removed 805 apps in China from 2018 to
2019,'' Abacus News, January 29, 2020, https://www.abacusnews.com/tech/
apple-removed-805-apps-china-2018-2019/article/3047325; Nick Statt,
``Apple's iCloud partner in China will store user data on servers of
state-run telecom,'' The Verge, July 18, 2018, https://
www.theverge.com/2018/7/18/17587304/apple-icloud-china-user-data-state-
run-telecom-privacy-security.
Airbnb setup local operations to both abide by local laws and to
ensure its services were tailored to the market. In 2016, Airbnb setup
a new business entity to manage operations in China. It has moved to
store its data in China and has canceled bookings during politically
sensitive events (such as China's National People's Congress).\34\ In
March 2018, Airbnb stated that it will send customer details to Chinese
Government authorities to abide by local regulations that require
foreigners to register their accommodations with police (hotels have
done this for a long time).\35\ Listings and non-China operations are
not affected by these requirements. In November 2019, Airbnb's China
president Tao Peng highlighted that localizing its platform is the key
to the company's success in China.
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\34\ Pei Li and Cate Cadell, ``Airbnb to start sharing Chinese host
information with government,'' Reuters, March 28, 2018, https://
www.reuters.com/article/us-airbnb-china/airbnb-to-start-sharing-
chinese-host-information-with-government-idUSKBN1H41JJ; Tara Francis
Chan, ``Airbnb has removed listings in Beijing and canceled bookings
during China's annual parliament because it wants to be `good
neighbors,' '' Business Insider, March 5, 2018, https://
www.businessinsider.com/airbnb-removed-china-listings-during-national-
peoples-congress-2018-3.
\35\ ``What do I need to know in order to sign up for an Airbnb
account as a resident of China, or if I change my residence to
China?'', Airbnb website, https://www.airbnb.com/help/article/1035/
what-do-i-need-to-know-in-order-to-sign-up-for-an-airbnb-account-as-a-
resident-of-china-or-if-i-change-my-residence-to-china.
Zoom provides a case study in why (and how) U.S. firms need to
separate and contain their operations in China from the rest of the
world. It (rightly) faced considerable criticism in how it was dealing
with Chinese users and user data. In April 2020, Zoom encountered
significant public scrutiny when the University of Toronto's Citizen
Lab released a report that showed that Zoom meeting encryption keys
were sent via China-based servers and that it used non-industry
standard cryptographic techniques that may mean calls could be
intercepted (which raised concerns about China's laws concerning
encryption key disclosure).\36\ Zoom responded, removing these servers
from the list of backup servers for users outside of China. It also
enacted new safeguards and internal controls to prevent unauthorized
access to data, including by staff, regardless of where data gets
routed. Most recently, it updated its encryption protocols and said
that it will introduce end-to-end encryption for all calls (for both
free and paid services, but it will be an optional feature as it limits
some meeting functionality).\37\
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\36\ Marczak and Scott-Railton, ``Move Fast and Roll Your Own
Crypto: A Quick Look at the Confidentiality of Zoom Meetings''; Rogier
Creemers, Paul Triolo, and Graham Webster, ``Translation: Cybersecurity
Law of the People's Republic of China,'' New America blog post, June 1,
2017, https://www.newamerica.org/cybersecurity-initiative/digichina/
blog/translation-cybersecurity-law-peoples-republic-china/.
\37\ Kari Paul, ``Zoom will provide end-to-end encryption to all
users after privacy backlash,'' Guardian, June 17, 2020, https://
www.theguardian.com/technology/2020/jun/17/zoom-encryption-free-calls;
https://blog.zoom.us/end-to-end-encryption-update/.
Zoom encountered another major issue when it briefly blocked, and
then restored, the accounts of Chinese human rights activists
(including Zhou Fengsuo) who wanted to use the platform to organize a
public commemoration of the 1989 Tiananmen Square crackdown.\38\ Mr.
Fengsuo is an American who lives in the United States. China asked Zoom
to terminate four meetings scheduled to be hosted on Zoom and three
accounts (one in Hong Kong and two in the United States) hosting the
calls. Zoom canceled the three meetings that involved participants from
mainland China.\39\ Zoom rightly committed to ``not allow requests from
the Chinese Government to impact anyone outside of mainland
China.''\40\ It has developed technology to remove or block
participants based on their country, which will allow the firm to take
a much more granular action in response to requests from local
authorities when they determine that certain activity on the platform
is illegal in that country.
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\38\ Paul Mozur, ``Zoom Blocks Activist in U.S. After China Objects
to Tiananmen Vigil,'' New York Times, June 11, 2020, https://
www.nytimes.com/2020/06/11/technology/zoom-china-tiananmen-square.html.
\39\ ``Improving Our Policies as We Continue to Enable Global
Collaboration,'' Zoom blog, June 11, 2020, https://blog.zoom.us/
wordpress/2020/06/11/improving-our-policies-as-we-continue-to-enable-
global-collaboration/.
\40\ ``Improving Our Policies as We Continue to Enable Global
Collaboration,'' Zoom blog.
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develop mechanisms to identify, and respond to, cases of
extra-territorial censorship (and access to data) by china
The U.S. Government should focus on ensuring that U.S. firms only
apply local laws--like those for censorship and government requests for
data--in local jurisdictions and come up with tools to counteract it if
it spills over into the United States. Recent cases with the NBA being
penalized in China for remarks from one coach in the United States is
not only evidence of China's sensitive and punitive nature, but also
its extra-territorial application of censorship in selectively
targeting people and firms for what they say and do in the United
States. This is unacceptable. However, there are few mechanisms and
details about the true extent of the issue and few tools for the United
States to use in response. As a first step, the U.S. Congress should
discuss the issue of extra-territoriality in today's global digital
economy and enact transparency arrangements to better understand the
extent of the key issues (censorship and access to data).
The new national security law in Hong Kong is the latest and
clearest example of the challenge that U.S. policymakers need to
respond to, as it targets content removal and access to data on a
potentially global basis.\41\ While observers don't yet know how China
will use the new law (Macau has had a similar law in place for 11 years
and there have been no enforcement cases), there's the potential for it
to be used on a global basis as it applies to offences committed
outside Hong Kong and it allows authorities to ask the publisher,
platform, host, or network service provider to remove or restrict
access to ``illegal content'' or produce information about a user.\42\
Furthermore, investigations into national security crimes can be deemed
a state secret, any trials may be heard in closed court, and tech
companies may be forbidden from disclosing what the police ask them
for.
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\41\ ``Silicon Valley weighs whether to leave Hong Kong,'' FT, July
8, 2020, https://www.ft.com/content/9c06e9df-0ca2-485b-8afe-
98e51f529373; Bill Bishop, ``One country, one Internet?; TikTok;
Gaokao; Floods in China; U.S. FBI head on China.'' Sinocism, July 7,
2020, https://sinocism.com/p/one-country-one-internet-tiktok-gaokao.
\42\ Articles 38 and 43.
Hong Kong is important to U.S. tech companies, in part, as it's
often their base for marketing their global advertising services to
customers in mainland China. In 2019, Hong Kong's government made just
over 5,500 requests for user data and just over 4,400 requests for
removal of content.\43\ Microsoft, Facebook, Telegram, Twitter,
LinkedIn, and Zoom have suspended processing of requests for data from
Hong Kong government authorities. While admirable, this does not
absolve them of complying with the law.\44\ The Hong Kong and Chinese
government would surely retaliate against these firms if they did this.
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\43\ ``Council question: Requests made to information and
communication technology companies for disclosure and removal of
information,'' May 6, 2020, https://www.charlesmok.hk/legco/council-
question-requests-made-to-information-and-communication-technology-
companies-for-disclosure-and-removal-of-information/.
\44\ Newley Purnell, ``Google, Facebook and Twitter Suspend Review
of Hong Kong Requests for User Data,'' Wall Street Journal, https://
www.wsj.com/articles/whatsapp-to-suspend-processing-law-enforcement-
requests-for-user-data-in-hong-kong-11594034580.
The potential extraterritorial application of domestic law for
Internet-related issues is not unique to China. Privacy regulators in
Europe have tried to dictate what information U.S. firms make available
to people in Europe, but also to the rest of the world, through their
``right to be forgotten'' requirement that gives European Union
citizens the power to demand that data and information about them be
deleted. Germany requires social networks to remove Nazi symbols. In
2017, the Supreme Court of Canada upheld orders for Google to ``de-
index'' a website, and asserted the jurisdiction of Canada's courts
---------------------------------------------------------------------------
over Internet intermediaries in other countries.
The United States needs to identify and respond to cases where
China (and other governments) try to enforce censorship (as well as
access to data) overseas. Some of these cases (like the NBA case) are
easy to identify, but there may well be others. There is a lack of
transparency about the extra-territorial application of Chinese
censorship and requests for data. Some recent draft legislation in the
U.S. Congress provides some ideas for analysis and potential action.
For example, it's misguided to force firms to publicly disclose
where their data is stored, such as in China, (as Congressman Jeff
Duncan's (R-SC) TELL Act does) as labeling and treating all firms from
China as guilty does not address the underlying question about
countries respecting each other's sovereignty.\45\ It's one thing for
these firms to be held accountable for any breach of U.S. laws in the
United States, but it's another to assume (without evidence) that
Chinese firms (and U.S. firms with operations in China) are
automatically breaching U.S. law. Using such a broad brush could also
easily be reused by China or other nations to discriminate against U.S.
firms given the Snowden revelations. The same applies to Congressman
Adam Kinzinger's (R-IL) Internet Application Integrity and Disclosure
Act's requirement for websites or apps owned by the Chinese Communist
Party or any Chinese firm to be made clear.\46\
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\45\ ``Duncan Introduces the `TELL' Act,'' Press Release, May 26,
2020, https://jeffduncan.house.gov/media/press-releases/duncan-
introduces-tell-act.
\46\ ``H.R. 6942 (IH)--Internet Application Integrity and
Disclosure Act,'' https://www.govinfo.gov/app/details/BILLS-
116hr6942ih.
There is a potential policy path ahead. Senator Cory Gardner (R-CO)
and Senator Jeff Merkley's (D-OR) bill (S. 2743) establishes the China
Censorship Monitor and Action Group (an interagency taskforce) to
develop and maintain a public database describing all punitive actions
taken by the People's Republic of China toward U.S. companies that
involve economic or diplomatic retaliation for the exercise of free
speech by those companies.\47\ It would meet and report to Congress
periodically, including an annual report.
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\47\ ``S. 2743--A bill to establish the China Censorship Monitor
and Action Group, and for other purposes,'' https://www.congress.gov/
bill/116th-congress/senate-bill/2743/text.
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There are some ways this bill could be improved:
Focus on the extra-territorial enforcement of censorship and
requests for data: It should not seek to punish U.S. firms for having
to abide by censorship laws in China.
Bring transparency to the vagueness of China's laws: At the
heart of the issue is the lack of transparency about how China applies
its laws extraterritorially in both seeking to remove content and
access data stored in another jurisdiction. The transparency mechanism
is a good idea, but it should include coverage of both issues.
Broad open source research, (voluntary) firm engagement, and
cross-checking of details: U.S. agencies should use both public and
confidential sources to gather information about relevant cases.
However, reporting by firms should be voluntary and confidential (in
order to protect U.S. firms from retaliation in China). Any cases
should be verified to avoid companies submitting anecdotal stories
about other firms (like their competitors) that may not be correct and
otherwise smear their reputation. Sensitive reporting could be covered
in unidentified general, aggregated analysis.
Cover cases involving U.S. trading partners: Any U.S.
reporting mechanism should use publicly available information to detail
cases of extra-territoriality involving firms in U.S. trading partners.
do more with value-sharing, digital free trade partners:
``dato'' and ``five eyes'' trade negotiations
China's approach to human rights is abhorrent. Its use of digital
protectionism runs counter to U.S. interests and values. The U.S.
government should directly make the case to the Chinese Communist Party
that it improve its approach to both issues and to also highlight them
in international forums as part of broader efforts to build
international pressure on China to change its policies. However, the
United States needs to be putting similar energy and attention into
developing an alternative model of trade that better reflects its
values.
On April 4, 1949, compelled by the threat of Soviet military
aggression, the United States and 11 other nations formed the North
Atlantic Treaty Organization (NATO), a security pact holding that an
attack against any of the signatories would be considered an attack
against them all. Today, Chinese economic aggression requires that the
United States and its allies form a NATO for trade.\48\ In many ways,
this would be an extension of the ``Five Eyes''-based model detailed
above, given that Australia, Canada, New Zealand, and the United
Kingdom also share similar political, economic, and social values.
However, it could obviously be expanded beyond this to the many other
trading partners that are also finding themselves in China's cross-
hairs for economic retaliation due to cases whereby China thinks it's
been ``unfairly'' singled out over action they've taken against China.
---------------------------------------------------------------------------
\48\ Robert Atkinson and Clyde Prestowitz, ``China's reaction to
the pandemic shows why the U.S. and its allies need a NATO for trade,''
The Washington Post, May 20, 2020, https://www.washingtonpost.com/
opinions/2020/05/20/chinas-reaction-pandemic-shows-why-us-its-allies-
need-nato-trade/.
The campaigns of intimidation usually begin with claims of
victimhood and accusations that any criticism smacks of racism or of
efforts to deflect attention away from the critics' domestic failures.
But if that fails to produce the desired obsequious result, China
quickly moves to direct economic threats. Australian Prime Minister
Scott Morrison found this out when he did nothing more than call for a
formal inquiry into China's actions at the outset of the pandemic. In
response, Beijing threatened a boycott of Australian universities and
tourist operators as well as trade sanctions against Australian beef
and wine.\49\ Likewise, when Sweden supported human rights victims in
China, Beijing's ambassador responded, ``For our enemies, we have
shotguns.'' The ambassador threatened that China would restrict Swedish
exports. When Germany considered banning procurement of 5G gear from
the Chinese telecom giant Huawei due to security concerns, China's
ambassador in Berlin abandoned any pretext of global trade rules,
asking: ``Could German cars be deemed unsafe by Chinese
authorities?''\50\
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\49\ Gerry Shih, ``Bristling at calls for coronavirus inquiry,
China cuts Australian beef imports,'' The Washington Post, May 12,
2020, https://www.washingtonpost.com/world/asia_pacific/bristling-at-
calls-for-coronavirus-inquiry-china-fires-trade-salvo-at-australia/
2020/05/12/29c53058-93fe-11ea-87a3-22d324235636_story.html.
\50\ Joseph de Weck, ``China's COVID-19 Diplomacy Is Backfiring in
Europe,'' Foreign Policy Research Institute, April 21, 2020, https://
www.fpri.org/article/2020/04/chinas-covid-19-diplomacy-is-backfiring-
in-europe/.
Such an organization would be broader than just new digital trade
rules. It could become a new approach under which democratic, rule-of-
law nations agree to come to each other's economic aid against an
outside adversary. This new organization--call it the Democratically
Allied Trade Organization (DATO)--should be governed by a council of
participating countries, and if any member is threatened or attacked
unjustly with trade measures that inflict economic harm, DATO would
quickly convene and consider whether to take joint action to defend the
member nation. Success would depend upon DATO members not engaging in
economic aggression against each other, as the Trump administration
regrettably did in 2018 when it imposed tariffs on Canadian and
---------------------------------------------------------------------------
European steel products.
DATO nations should cooperate to deter individual episodes of
Chinese economic aggression against individual members and to provide a
mutual defense umbrella against broad Chinese policies that harm all
nations--particularly mercantilist policies such as the ``Made in China
2025'' initiative, which is crafted with a goal of achieving global
dominance in strategically important technologies. Given the United
States' still-indispensable role in defending freedom globally, only it
can lead in establishing a DATO. The next administration, whether it be
Republican or Democratic, should embrace the idea. Any democratic
government, including Taiwan, should be welcome to join, but all must
be prepared to take the steps necessary to enact a DATO decision, or
lose the right to membership.
______
Questions Submitted by Hon. Todd Young
Question. As noted in your testimony, China has currently blocked
over 10,000 websites and has shut down another 3,000 websites in 2018.
I see a troubling nexus between a booming tech sector and an
inability--or severely restricted ability--to access the Chinese
market. In my home State of Indiana, we have seen multiple tech
companies choose us to open business, which creates jobs and
opportunity for families in need. These exciting trends have also led
to career pathways and better business collaboration and partnership
that is truly engrained in our communities. Because of brazen
censorship in China, much uncertainty faces the tech sector when trying
to predict access to international markets. This has an impact on
entrepreneurship and job creation.
What do barriers like the Great Firewall mean for the future of the
digital economy? More specifically, how could these barriers impact job
creation?
Answer. As per the response to question 2 from Senator Cornyn
(above), China represents one of the biggest threats--both in terms of
its digital protectionism, but also its broad use of censorship and
surveillance--to the U.S. goal for an open, rules-based, and innovative
global digital economy. Its approach at home is obviously problematic
for U.S. firms (and runs counter to U.S. values), but the broader risk
is that it represents a model that other countries want to emulate. As
countries grapple with the challenge of adapting local laws and
regulations to the Internet and other new digital technologies to
address (in many cases, legitimate) concerns over data privacy,
security, and other issues, they're looking for models to follow.
Policymakers in some countries are simply misguided in
inadvertently considering or enacting restrictive policies like data
localization. This is understandable to an extent, given there is no
one way to address many of these issues, and these issues can be
complicated. However, policymakers in many countries are using debates
around legitimate policy objectives (like privacy and cybersecurity) as
cover to pursue other China-like political or economic objectives, such
as digital protectionism and censorship.
The challenge for the United States and other value-sharing, free
trade-
supporting partners is to both demonstrate the best approach at home
and to work together in advocating in third-party countries how they
should follow their policy model--and not China's. This is a
complicated and challenging task given the constantly changing nature
of technology and given that it involves a broad range of government
agencies, but it'll be essential if the United States wants to build a
global digital economy around its human rights and trade values.
Ultimately, if the United States does not lead the charge in
advocating and helping other countries adopt its preferred policy
model, it'll undermine the major role that global markets play in
supporting job creation in firms across the country, as data and
digital technologies become central to their ability to compete and
innovate. As ITIF's report ``Cross-Border Data Flows Enable Growth in
All Industries'' highlights, the global Internet matters greatly to
agriculture, manufacturing, retail, services, and every other sector of
the economy.\51\ If these companies' ability to enter and operate
across markets becomes restricted, it would restrict their ability to
support well-paying jobs back in the United States.
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\51\ Daniel Castro and Alan McQuinn, ``Cross-Border Data Flows
Enable Growth in All Industries'' (Information Technology and
Innovation Foundation, February 24, 2015), https://itif.org/
publications/2015/02/24/cross-border-data-flows-enable-growth-all-
industries.
Indeed, the economic evidence shows the importance of foreign
operations and sales to the U.S. economy. Dartmouth University
Professor Matt Slaughter has found that ``investment at U.S. parents
and foreign affiliates also tend to complement each other.'' He cites
research that finds that ``a 10-percent increase in
foreign-affiliate employee compensation causes an average response of a
3.7-percent increase in that affiliate's U.S. parent employee
compensation. Growth in affiliates tends to bring growth in parents as
well.''\52\ In other words, preventing American companies in China from
using Chinese apps or Internet platforms to gain access to Chinese
customers will directly hurt U.S. workers back home.
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\52\ Matthew Slaughter, ``How U.S. Multinational Companies
Strengthen the U.S. Economy'' (Business Roundtable and The United
States Council Foundation, 2009), https://www.
uscib.org/docs/foundation_multinationals.pdf.
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the global digital economy and american competitiveness
Question. How can market access for the digital economy improve
America's global competitiveness? If we continue to see Chinese actions
that escalate and uphold censorship practices, how can Congress and the
administration work with American firms to ensure we retain a
competitive advantage?
Answer. The openness of the global Internet has been instrumental
in helping U.S. firms become leaders in the global digital economy.
Open market access provides critical economies of scale for U.S. firms
to use the Internet to access more customers via a relatively small
investment footprint (e.g., a single global ICT system), thus earning
them revenues they can use to support U.S. jobs, R&D, and other
investments.
In no small part due to China, the nearly default openness of the
Internet has been shrinking bit-by-bit over the last 20 years as
countries realize that the digital economy is central to the battle for
technological and economic competitiveness and that they can use non-
tariff barriers to favor local firms and products over foreign ones.
The EU and countries like China realize that current trade rules at the
WTO are non-existent, woefully out-of-date, and/or not enforced as it
relates to the digital economy, so they can get away with enacting
barriers at home, while still allowing their local firms to take
advantage of countries that remain committed to the rules-based global
trading system.
U.S. firms have long championed new digital trade rules to provide
protected, enforceable market access. The United States has enacted,
and continues to pursue, digital trade rules in new bilateral trade
negotiations and as part of e-commerce negotiations at the WTO. But
it's incumbent upon firms and the U.S. Congress and government to
continuously revise and update digital trade objectives given the
changing nature of technology and the barriers trade partners are
enacting. For example, U.S. digital trade strategy is currently based
on USMCA, but this is based in large part on the discussions that
immediately followed the Trade Promotion Authority as provided by the
Bipartisan Congressional Trade Priorities and Accountability Act of
2015. USTR and the U.S. International Trade Commission hold
investigations and hearings into specific issues and negotiations, but
this would benefit from broader, higher level direction and discussion.
The U.S. Congress needs to continuously push for new hearings about the
latest state of digital trade and new ideas for U.S. trade and economic
policy.
For example, Congress could go further by holding hearings about
what the United States should be doing (in terms of a holistic
strategy) to support its overall model of digital trade and
development. As China and the EU's own models have evolved, so too has
the need for the United States to develop a more-comprehensive response
to better push back on those parts that don't align with U.S. values
and interests (whether this is censorship, data-driven innovation, and
digital free trade).
However, a more comprehensive U.S. strategy for an open, rules-
based, and innovative global digital economy won't mean as much without
a supportive domestic innovation agenda, including in advanced-industry
production. For many decades after WWII, the United States could afford
its ad hoc innovation strategy which mostly worked by throwing massive
amounts of money at defense and space spending (in the early 1960s, the
U.S. Federal Government invested more in R&D than all other nations',
public and business funding, combined). But after 3 decades of
declining government support for R&D as a share of GDP, the U.S.
strategy of winning innovation through overwhelming ``force'' can no
longer work.
The United States needs to be strategic. Thankfully there is a
growing consensus from both Democrats and Republicans that the Federal
Government needs to play a stronger role in that process. First, as
ITIF has long argued, the United States needs to recognize the nature
of the challenge and the need for a detailed response. One place to
start would be to pass the Senate Global Economic Security Strategy Act
of 2019, introduced by Senators Young (R-IN), Merkley (D-OR), Rubio (R-
FL), and Coons (D-DE).\53\ Further, ITIF's report ``The Case for a
National Industrial Strategy to Counter China's Technological Rise''
provides the ``why, what, and how'' of a national industrial strategy--
explaining why advanced industrial competitiveness is important,
particularly vis-a-vis China; what is the nature of the U.S. advanced
industry competitiveness challenge and why markets acting alone are not
enough to address the challenge; what a strategy should look like, both
institutionally and substantively, and how policymakers should approach
developing one; and finally, why common objections to such a strategy
are misguided.\54\
---------------------------------------------------------------------------
\53\ Robert Atkinson, ``How the U.S. Government Falters on Support
for Innovation,'' Innovation Files Post, August 28, 2019, https://
itif.org/publications/2019/08/28/how-us-government-falters-support-
innovation.
\54\ Robert Atkinson, ``The Case for a National Industrial Strategy
to Counter China's Technological Rise'' (Information Technology and
Innovation Foundation, April 13, 2020), https://itif.org/publications/
2020/04/13/case-national-industrial-strategy-counter-chinas-
technological-rise.
America needs a national strategy that fortifies traded-sector
technology industries that are ``too critical to fail,'' such as
advanced machinery, aerospace, biopharma, electrical equipment,
semiconductors and computing, software, transportation, and more.\55\
To develop and implement a national industrial strategy, the Federal
Government will need to significantly strengthen its institutional
capabilities to conduct thorough sectoral analysis. This is because
when it comes to industrial strategy, America's institutional
structures are holdovers from the Cold War era while our thinking
remains stuck in the 1990s' free- market, globalist-based Washington
Consensus. Congress should also act in four key areas: support for R&D
targeted to key technologies, tax incentives for key building blocks of
advanced production, financing for domestic production scaleup, and
adding a competitiveness screen for regulation. Congress should task
the administration with creating a national advanced industry strategy,
as Senators Chris Coons (D-DE), Jeff Merkley (D-OR), Marco Rubio (R-
FL), and Todd Young (R-IN) have proposed.
---------------------------------------------------------------------------
\55\ Ibid.
Question. In examining Chinese strategies to insert censorship, the
use of the social credit system should not be overlooked. China has
developed a systemized process for determining how much or how little a
business adheres to government-
sanctioned ideals and principles. The social credit system then rewards
or punishes a business by increasing or restricting market access. This
seems obvious that the Chinese Government is simply picking winners and
losers, which is not what we, as Americans, believe to be the role of
the Federal Government. Adhering to the Chinese Government's rules has
its benefits--ability to conduct business and secure market access.
But, companies who secure market access are not guaranteed it, and can
---------------------------------------------------------------------------
lose it at any time as we have seen in numerous circumstances.
In your opinion, how should American businesses consider the
implications of participating in the social credit system when trying
to secure access to the Chinese market? Does the social credit system
provide meaningful stability or certainty to businesses that are simply
trying to expand on a global playing field?
How should American companies be more vigilant in evaluating the
risks associated with entering the Chinese market and participating in
this government-
sponsored ranking system?
Answer. ITIF has not commented on the impact of China's social
credit system.
Question. Adverse action taken against American enterprise can
impact our relationship with other countries as well. In fact, China
has imposed the same censorship retaliation on other countries for
adhering to our rules or aligning with free speech and free market
principles. Chinese influence also transcends into other international
markets; other nations have taken proactive action by using censorship
as a regulation tool for e-commerce and digital markets.
How can the United States proactively work with other international
partners on e-commerce regulation, particularly by not using censorship
as a default strategy to protect domestic enterprises?
How should Congress think about the broader effects of Chinese
censorship on the U.S. relationships with other international countries
when designing trade policy?
Answer. As per the answers to questions from Senator Cornyn and the
question from Senator Grassley, the United States will need to develop
new censorship-
related trade rules to ask for in its negotiations for a Phase Two deal
with China, to embed these in its other trade agreements (thus building
defenses against the spread of China's use of censorship for
protectionism), and to advocate for like-minded trading partners to do
the same (thus helping build a new global norm). As a world leader in
the global digital economy, U.S. firms have faced the brunt of China's
use of censorship for protectionism. However, they're far from alone.
But, thus far, other countries have not prioritized the issue and
developed a plan and policies to respond to it (both in China and
elsewhere around the world).
Given that censorship may relate to legitimate content moderation
concerns online (whether related to inciting violence and terrorism,
fraud, intellectual property theft, or other valid issues), the United
States should work with value-sharing trade partners and international
organizations (such as the Organisation for Economic Co-operation and
Development (OECD)) on how to build a policy framework that balances
these objectives alongside free speech and other related values, while
also including clear guidance and a fair legal process for both firms
and users to navigate what can be a tricky issue.
This is important as the United States needs to be able to present
an alternative set of policies for countries to use to address their
legitimate concerns about illegal material online so that they don't
feel they have to resort to overly broad censorship policies, like in
China. Having a better, alternative framework to account for legitimate
content moderation concerns would make it harder for countries to
misuse censorship or content moderation as a disguised trade barrier
given there is a clear alternative that is non or least trade
restrictive.
______
Prepared Statement of Richard Gere, Chairman,
International Campaign for Tibet
Chairman Cornyn, Ranking Member Casey, members of this committee,
thank you for your introduction and for inviting me to testify today. I
think it's been 35 years since I first testified in Congress--first, on
behalf of our Central American brothers and sisters, and then of
course, on Tibet and China for the last 30 years.
Tibet is the compass that orients me and navigates me through the
world and through Washington and through life.
I have always had enormous respect and admiration for so many of
the Senators I have met and worked with over these years, many of whom
have wholeheartedly supported this cause in which I've been deeply
involved, and which the American people certainly care do about, in
particular, the well-being of His Holiness the Dalai Lama and the
Tibetan people and their extraordinary culture. I do thank you for
that. And the American people thank you for that.
This is the first time I've testified since I last met with one of
your greatest colleagues. Allow me for a moment, to pay homage to
Senator John McCain. He was a good man and a good friend of His
Holiness and of the Tibetan people. We spoke deeply of their plight. I
respected him enormously and want to remember him for his principled
leadership against authoritarianism, corruption, and short-sighted
ignorance here and around the world. His was a life of bravery,
integrity and dignity throughout . . . until the very end.
He was the best of us.
Like John McCain--and many of you--I hope that our government can
deliver at its best, not only for the American people, but also for the
millions all over the world who have looked to the United States--and
its democracy--as a source of inspiration and refuge, while they live
under oppression and violence. American leadership is at its best when
it sets its view beyond the horizon, and looks with balanced confidence
to the challenges and opportunities that lie ahead. We can help others
and help ourselves. That's what we do. That's why we've been loved and
admired. We can inspire again.
But the rise of China in the world today is not something far off.
It is not beyond our horizon. It is right here in front of us, and
affects our daily lives, our workplaces, our freedoms, our privacy, our
health, our elections and will certainly shape the future of our world.
China's 100-year marathon to world dominance is almost complete and
certainly well-ahead of schedule.
So, when I received the invitation from Senators Cornyn and Casey,
I was pleased to see that this issue is now taken seriously not only by
committees that deal with foreign policy or human rights--which is
where I have traditionally testified--but by the Finance Committee, and
by others.
After looking at the work this committee has done over the last few
years, reflecting strategically and profoundly on what the Chinese
Government has been planning to do since 1949--that is, to replace the
U.S. on the world stage and advance its authoritarian model
everywhere--I thought I would offer my experience and whatever
contribution I can make to this existentially important conversation.
The conversation about the future of our relationship with China,
as well as our past missteps, is crucial not only for the United
States--and frankly, we have been tragically naive for a very long
time, under both Republican and Democratic administrations--but it is
equally crucial for our democratic allies all over the world to
understand this. It is crucial for India and Japan, for central Asian
democracies like Mongolia or fragile democracies like Nepal and Bhutan,
for all of Europe, for African countries, Australia and South America,
where Chinese influence has been growing exponentially, while ours
diminishes and recedes.
And please believe me that unless we join forces with our
democratic friends and allies all over the world, unless we cherish and
strengthen them, and their democratic visions, China's very patient and
opportunistic strategy to divide and conquer will continue and most
certainly prevail.
As you know, I have been involved in supporting Tibet, the people
of Tibet, and the vision of His Holiness the Dalai Lama for peaceful
coexistence with the Chinese Communist Party for almost 40 years now.
When it comes to China, we Tibet supporters have been in for the long
haul. We knew what was happening in Tibet would not stop there, and
that China's authoritarian influence would expand well beyond Tibet,
well beyond the Uyghurs in Xinjiang, well-beyond the people of Hong
Kong, beyond its borders with Mongolia, Nepal, India, Bhutan, Myanmar--
the whole world.
We have no quarrel with the Chinese people. We wish them to enjoy
the same development and quality-of-life improvements that we have
here. Of course, they deserve that. What I fear is a model of
development led by the Chinese Communist Party that denies their own
people their basic freedoms and is predicated on control, dominance and
violence. Chinese leaders have often quoted an old Chinese proverb in
private: ``Wai ru, nei fa''--``On the outside, be benevolent. On the
inside, be ruthless.''
I recall vividly in the 1990s, when a strong bipartisan coalition
of members of Congress called on the White House many times--both
Democrat and Republican administrations--to condition China's most-
favored nation status for trade relations, on clear criteria and
benchmarks that would protect the rule of law and human rights. But
that coalition was defeated, frankly, by powerful interests with
shortsighted financial goals and a naive understanding of China's 100-
year plan.
The conventional wisdom was then--and some important people still
feel this way now, although they are clearly in the minority--that by
opening our markets to China, this would somehow and by itself--thanks
to the rise of a vast Chinese middle class--produce meaningful
political and social reforms in China. As we know, the opposite has
proven to be true, with more restrictions imposed, Communist Party
control of religion, mass incarceration, crackdowns on all forms of
dissent, and freethinking, including--and this is just the latest
example--concealing critical information about the spread of the
coronavirus. We have also had the unanimous proclamation of Xi Jinping
as Chairman for life by the Chinese Communist Party--the new Emperor.
We see the Chinese Government increasingly using its economic policies
to prey on weaker countries in every part of the world, through the
dangerous Belt and Road Initiative, their long-term plan to control
natural resources, supply chains, trade, ports, and sea lanes.
The point I'd like to make is that those rule of law reforms, those
environmental, human rights, and workers' rights reforms that we
advocated for in China in the 1990s would have also protected the
larger economic interests of the United States and our allies if they
had been made part of those deals. Instead, China won and gave up
nothing in return.
Let me give you an example. The United States has largely opened
its doors to Chinese products and investment, but also to various forms
of Chinese cultural influence, including their state media. We've even
allowed State-sponsored Confucius Institutes to gain a foothold in our
universities. As I speak, the Chinese company Huawei has already spent
a huge amount of money on lobbying here in the United States so that it
can enter the American market, with the economic and security dangers
that you are all aware of. But as you know, China does not reciprocate.
It limits access to its markets in key sectors, and does not allow any
American media to broadcast within China. This lack of reciprocity,
fueled by an Orwellian system of state censorship--far beyond what
Orwell imagined--limits both the freedom of access to information by
the Chinese people, and the right of American and other foreign media
companies to engage one of the largest media markets in the world.
Surveillance and managed information are the Party imperative.
China has repeatedly insisted that major U.S. tech companies accept
strict censorship to be allowed access. How can we continue to accept
this as normal? How is this sustainable? How is it in our interest or
ultimately, in the interest of a growing Chinese middle class
completely dominated and controlled by the Chinese Communist Party?
Another example is freedom of movement. Americans have a strong
interest and appreciation for the Tibetan people, their unique Buddhist
culture and their beautiful, fragile land; it is the roof of our world.
It is the Third Pole. It is the greatest source of the world's fresh
water.
But here's what happens in Tibet: the Chinese Government highly
restricts access to Tibet, especially for American citizens. This
includes diplomats, journalists, politicians--like no other areas of
China--while Chinese citizens face no such limitations when they visit
the United States. Journalist friends have told me it is easier for
them to get into North Korea than Tibet.
This complete lack of reciprocity in U.S.-China relations, one that
is not limited to economic issues, as the current administration has
rightly pointed out, but one that extends to key civil liberties and
human rights, and unfairly targets legitimate U.S. interests.
Congress recently took action and passed the Reciprocal Access to
Tibet Act with strong bipartisan support, a bill that requires the
State Department to target Chinese officials who are responsible for
blocking Americans from having access to Tibet. This is a good
systematic response, these are smart sanctions, and we hope the State
Department will implement it soon as required by law.
As an actor, I know you are interested in hearing more about my
experience in the entertainment industry and the growing Chinese
influence there. While I cannot say that my speaking out for human
rights in China has directly affected my career--I may well be an
unusual case (we'll speak of that later)--there is no doubt that the
combination of Chinese Government censorship coupled with the desire of
American studios to have access to China's market--soon to be the
largest movie market in the world--and vast Chinese financing
possibilities, can lead to self-
censorship and to not engaging social issues that great American films
and American studios once addressed. Imagine Martin Scorsese's
``Kundun'' or my own film, ``Red Corner,'' being made today. It simply
would not happen.
I urge the United States, along with its true friends and allies,
to continue to engage with China while standing strongly on the
fundamental issues of reciprocity, basic human rights, freedom of
expression, and freedom of religion.
As I conclude my remarks, I would like to bring your attention to
two bills that are before the Senate right now and ask for your serious
consideration and support. The first bill--sponsored by Senators
Cardin, Casey, Cornyn, Rubio, and Wyden, among others--passed the House
with overwhelming support in January. It is the Tibetan Policy and
Support Act and overall strengthens U.S. policy on Tibet, while
addressing in particular one key issue: the selection of the next Dalai
Lama which, cannot be allowed to be controlled by the Chinese Communist
Party, but only by Tibetan Buddhists. I am sure you all support this
basic principle, and the fact that we even have to pass legislation
about this speaks volumes about the approach of the Chinese Government
toward Tibet and its people--and its lack of respect for religion in
general.
I want to thank those who have already signed on and for those who
have not yet, I am asking you to cosponsor this bill and raise it with
Senate leadership for a swift passage.
The second bill is the Mongolia Third Neighbor Trade Act, which
would grant a democratic and independent Mongolia better access to the
U.S. market for cashmere products manufactured in Mongolia and would
not displace one American job. Today, our Nation imports its cashmere
almost exclusively from China--although it's mostly Mongolian. This
will greatly diversify the Mongolian economy, deepen trade ties between
our two countries, create countless jobs for Mongolian women and
reinforce its democratic institutions. The bill is a concrete way to
strengthen democracy, workers' rights and free market capitalism in the
region at a most critical time in the Indo-Pacific.
I applaud Senators Cardin and Sullivan for authoring this bill, as
well as Ranking Member Wyden and Majority Whip Thune for being
cosponsors.
Entirely surrounded by Russia and China, this legislation is the
strongest tool Washington has to help Mongolia remain an independent
democracy. I ask this committee and the full Senate to support this
bill as soon as possible.
Thank you each for your attention and the opportunity to testify. I
look forward to your questions.
______
Questions Submitted for the Record to Richard Gere
Questions Submitted by Hon. Benjamin L. Cardin
Question. The Third Neighbor Trade Act proposes improved economic
and trade ties between the United States and Mongolia, chiefly by
lowering barriers on the import of Mongolian cashmere.
What other initiatives can the United States take to expand
bilateral economic ties for mutual benefit?
What other opportunities exist for Mongolia to diversify its
economy sustainably and break away from over reliance on extractive
industries?
Answer. Mongolia is perhaps the last chance to have a successful,
working democracy in Central Asia--and is likely the only impediment to
China's expansionist designs in the entire region. You are well-aware
of the extraordinary pressures the Mongolians deal with every day as
they continue to defy geopolitical odds and actively try to forge
strong relationships with the West, and most especially the United
States.
In President Battulga, the United States may be seeing the last
opportunity to give priority to a significant democratic point of view,
and create a genuine partner in an area that the United States has
invested little energy thus far. These are extremely important
questions you ask which require much more study and discussion. I hope
they will also be posed to the witnesses I testified alongside.
The United States could adopt a three-tiered approach to produce
tangible results in expanding bilateral economic ties.
In the short-term, passing the Third Neighbor Trade Act would be a
huge gesture toward Mongolia. The economic impact of the bill will be
significant for Mongolia with little, if any, impact on the United
States. It will not only help the Mongolian people remain economically
independent, it will send a strong signal to China. I think any
expertise and or guidance the United States might be able to lend to
Mongolia's development of a legislative framework to support greater
foreign investment would also be of benefit to both short and long term
health of the country.
In the mid-term, the U.S. International Development Finance
Corporation (DFC) might consider investing in Mongolia's nascent
industries like its blossoming information technology industry, AI and
new types of financial services as well as its banking and capital
markets. Unlike other countries in the region involved in China's Belt
and Road Initiative, Mongolia is the strongest democracy in the belt
and eager to cooperate with American companies because of our high
standards and accountability. If we can demonstrate our commitment to
advancing democratic governance, this will empower Mongolia's vibrant
civil society and not only help keep the national discourse focused on
an arc toward greater accountability but will increase resiliency
against Chinese-funded corruption and interference.
In the long-term, it might be prudent for the United States to sign
a Free Trade Agreement (FTA) with Mongolia as the only functioning
democracy in the Asia-
Pacific region and as an active contributor of troops in NATO
operations. The strategic and symbolic importance of an FTA would
ensure that China does not succeed in isolating or economically
marginalizing Mongolia while simultaneously helping Mongolia rebalance
its power and remain a critical counter to Chinese Government influence
in the region.
______
Prepared Statement of Clete R. Willems, Partner,
Akin, Gump, Strauss, Hauer, and Feld LLP
Chairman Cornyn, Ranking Member Casey, distinguished members of the
committee, thank you for the opportunity to appear before you today to
discuss ``Censorship as a Non-Tariff Barrier to Trade.'' Your attention
to this issue is warranted. China continues to expand the use of
censorship to promote national interests, with adverse implications for
the United States, other countries, and Chinese citizens themselves.
This has recently been driven home by the global impact of China's
suppression of information related to the coronavirus. While that issue
remains critical, it is also worthwhile to consider the role of
censorship in the context of international trade. To date,
international trade rules, negotiations, and policy responses have
largely focused on other issues, making a thorough discussion of this
matter long overdue.
At the outset, I would like to clarify that I am appearing before
you today in my personal capacity. Although I served in the White House
from April 2017 until April 2019, including in the role of Deputy
Assistant to the President for International Economics, Deputy Director
of the National Economic Council, and as one of the negotiators on the
U.S.-China Phase One trade deal, my testimony does not represent the
administration's position. It also does not necessarily align with the
positions of Akin Gump's many clients. Indeed, the views I am sharing
are solely my own.
In my opening remarks, I will focus on three issues: (1) the scope
of the problem, as exemplified by the many types of Chinese censorship;
(2) applicable international trade rules, which are somewhat non-
specific and untested; and (3) potential ideas to help begin addressing
the serious problems caused by censorship.
the scope of china's ``explicit'' and ``implicit'' censorship
China is far from the only country to use censorship to achieve
government objectives. Pervasive censorship is a serious problem in
Cuba, Iran, North Korea, and many other countries. But the economic and
geopolitical impact of China's practices stand alone. We are also at a
critical moment with respect to the U.S.-China relationship. The Trump
administration's willingness to take tough trade action on China has
completely changed the dynamic between our two countries. I was proud
to be part of the team that helped shape a much more clear-eyed and
realistic policy toward China's economic aggression over the past few
years, and I am glad that congressional policymakers are now focusing
on multiple aspects of China's many unfair trade practices. To help
better inform this effort, my testimony centers almost entirely on
China.
Censorship is one of many tools that China uses to make it more
difficult for U.S. companies to access its market. China also restricts
market access through tools like tariffs, equity caps, and onerous
licensing requirements. And it heavily subsidizes favored companies to
create national champions in industries it deems strategic, including
technology and the Internet. As a result, addressing censorship alone
will not solve all of our market access problems with China. But it is
an area that has not been adequately prioritized and is ripe for
additional policymaking.
China's censorship activities manifest themselves in many ways,
both explicitly and implicitly. China imposes explicit censorship
through laws and other actions that restrict free speech on the
Internet. China's ``Great Firewall'' utilizes a variety of techniques
to block access to websites and content deemed objectionable. According
to USTR's 2019 Report to Congress on China's WTO Compliance, ``China
currently blocks most of the largest global sites . . . and more than
10,000 sites are blocked, affecting billions of dollars in business,
including communications, networking, app stores, news and other
sites.''\1\ The report goes on to state that ``[e]ven when sites are
not permanently blocked, the often arbitrary implementation of
blocking, and the performance-degrading effect of filtering all traffic
into and outside of China, significantly impair the supply of many
cross-border services, often to the point of making them unviable.''\2\
---------------------------------------------------------------------------
\1\ Office of the United States Trade Representative, 2019 Report
to Congress on China's WTO Compliance, March 2020, p. 50, available at:
https://ustr.gov/sites/default/files/2019_Report_
on_China%E2%80%99s_WTO_Compliance.pdf.
\2\ Id at 50.
Additionally, China controls the major press instruments in China--
both on- and off-line--and suppresses views inconsistent with the
Party's objectives. The leading news agencies in China are unambiguous
instruments of the government. As a result, the U.S. State Department's
recent decision to treat these agencies as foreign government
functionaries, subject to similar rules as diplomats stationed in the
United States, is entirely appropriate.\3\ Predictably, China's
response was not to provide the news agencies with more freedom, but to
expel journalists from The Washington Post, The New York Times, and The
Wall Street Journal from China, thereby further limiting the number of
free voices in the country.
---------------------------------------------------------------------------
\3\ U.S. Department of State, ``Senior State Department Officials
on the Office of Foreign Mission's Designation of Chinese Media
Entities as Foreign Missions,'' Special Briefing, February 18, 2020,
available at: https://www.state.gov/senior-state-department-officials-
on-the-office-of-foreign-missions-designation-of-chinese-media-
entities-as-foreign-missions/. U.S. Department of State, ``Designation
of Additional Chinese Media Entities as Foreign Missions,'' press
statement, June 22, 2020, available at: https://www.state.gov/
designation-of-additional-chinese-media-entities-as-foreign-missions/.
This is just one recent example of China's decision to double down
on policies of suppression and control. The latest U.S.-China Economic
and Security Review Commission Report highlighted China's growing
censorship of economic news, noting that ``[i]n the past year, Beijing
has directed media outlets to avoid stories on declining consumer
confidence, local government debt risks, and other unwelcome economic
news.''\4\ In December, China promulgated a new Internet censorship law
prohibiting online content providers from making, reproducing, or
publishing information that could harm the nation's honor and
interests, disseminate rumors, or insult others, among other vaguely
defined terms.\5\ And of course, too many sources to count have
highlighted China's suppression of information related to the
coronavirus.\6\
---------------------------------------------------------------------------
\4\ U.S.-China Economic and Security Review Commission, ``2019
Report to Congress,'' November 2019, p. 50, available at: https://
www.uscc.gov/sites/default/files/2019-11/2019%20Annual
%20Report%20to%20Congress.pdf.
\5\ State Internet Information Office, ``Provisions on the
Governance of the Online Information Content Ecosystem,'' Chapter I,
Article 6, December 15, 2019, English translation available at: https:/
/www.chinalawtranslate.com/en/provisions-on-the-governance-of-the-
online-information-content-ecosystem/.
\6\ E.g., Foreign Affairs, ``China's Coronavirus Information
Offensive,'' April 22, 2020, available at: https://
www.foreignaffairs.com/articles/china/2020-04-22/chinas-coronavirus-
information-offensive; NPR, ``Critics Say China Has Suppressed and
Censored Information in Coronavirus Outbreak,'' February 8, 2020,
available at: https://www.npr.org/sections/goatsandsoda/2020/02/08/
803766743/critics-say-china-has-suppressed-and-censored-information-in-
coronavirus-outbrea; Wall Street Journal, ``China's Virus and
Propaganda Draw Backlash,'' February 25, 2020, available at: https://
www.wsj.com/articles/chinas-virus-censorship-and-propaganda-draw-
backlash-11582632006.
China's implicit censorship efforts are equally troubling, with an
impact beyond China's borders. The best example is perhaps last
summer's NBA Twitter controversy. After Daryl Morey, general manager of
the Houston Rockets, tweeted an image with the slogan ``Fight for
Freedom, Stand with Hong Kong,'' China ceased its cooperation with the
Rockets, suspended the broadcast of NBA games, and pressured the NBA to
fire Mr. Morey.\7\ To put it another way, in retaliation for a single
tweet by a single individual associated with a single NBA team, China
prohibited the broadcast of all games by all teams in China. And it
sought retaliation against an individual who simply shared an opinion
widely held in the United States. Clearly, China did not intend its
response to be proportional, but sought to intimidate others from
exercising their free speech rights outside China out of fear of
jeopardizing a Chinese business interest. Undoubtedly, China's tactics
have worked and other U.S. executives with China exposure have since
refrained from expressing their opinion in the United States out of
fear of repercussions in China.
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\7\ E.g., New York Times, ``NBA Commissioner: China Asked Us to
Fire Daryl Morey,'' October 17, 2019, available at: https://
www.nytimes.com/2019/10/17/sports/basketball/nba-china-adam-
silver.html.
Unfortunately, this may be just the tip of the iceberg. China is in
the process of implementing another form of ``implicit'' censorship
through its social credit scoring system for individuals and
corporations. The details of the system for corporations is not well
understood, but it appears to be a state-run data-sharing and
algorithmic scoring mechanism that enables regulators to
comprehensively monitor and influence corporate behavior in real-time
across China's business ecosystem.\8\ Good ratings are expected to lead
to better tax rates, lower inspection rates, and better access to
public procurement opportunities, while bad ratings could make it more
difficult to get loans, buy real estate, or even lead to blacklisting.
And among the many criteria is certain to be whether a company and its
employees pay fealty to the Communist party line. Equally troubling are
recent reports that China may start monitoring U.S. companies operating
internationally, and in particular, within the Belt and Road Initiative
countries.
---------------------------------------------------------------------------
\8\ European Chamber of Commerce in China and Sinolytics, ``The
Digital Hand: How China's Corporate Social Credit System Conditions
Market Actors,'' August 28, 2019, available at: https://
www.europeanchamber.com.cn/en/publications-corporate-social-credit-
system.
The economic impact of these many forms of censorship is impossible
to quantify, but the greatest impact to date is likely on lost market
share in China for U.S. technology companies that provide Internet or
mobile device services, such as search, social networking, and
communications. Some U.S. companies have tried to navigate China's
pervasive set of laws, while others have abandoned the market
completely. In this regard, it is worth observing that some of the
Chinese national champions that have benefited from a ban on U.S.
competition, such as Baidu, had revenues of roughly $15 billion in
2018,\9\ despite offering a much narrower set of products than would-be
competitors. Clearly, U.S. companies should be and could be reaping
this type of benefit if allowed to compete fairly.
---------------------------------------------------------------------------
\9\ Macrotrends, ``Baidu Revenue 2006-2019,'' available at: https:/
/www.macrotrends.net/stocks
/charts/BIDU/baidu/revenue.
---------------------------------------------------------------------------
wto provisions addressing censorship
The WTO does not have explicit rules governing censorship per se,
but there are at least some rules that may be applicable. However,
these rules are untested with respect to issues like censorship on the
Internet, which adds uncertainty to any challenge.
The most likely avenue for a WTO claim against China's restrictions
on U.S. Internet services providers is under the General Agreement on
Trade in Services (GATS). In particular, the United States could allege
that China violates prohibitions on market access (because it bans U.S.
service providers from conducting certain activities)\10\ and non-
discrimination (because it treats China-based Internet service
providers different than foreign-based providers),\11\ among other
potential complaints. The nature of China's activities clearly lend
themselves to these claims.
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\10\ WTO General Agreement on Trade in Services (GATS), Art. XVI.
\11\ GATS Art. XVII.
One complication could arise from the fact that many of the
specific types of services China prohibits on the Internet did not
exist at the time that the GATS agreement was negotiated, which could
allow China to argue that its behavior with respect to these activities
falls outside WTO rules. The United States made a similar argument in
defense of its regulation of online gambling in its WTO dispute with
Antigua and Barbuda and lost,\12\ which suggests that the United States
should win this threshold question here. However, there is some risk
for the U.S. position in light of the WTO's lack of precedent and U.S.
complaints that the decision in the U.S.--Gambling dispute was a clear
case of WTO overreach.
---------------------------------------------------------------------------
\12\ Appellate Body report, United States--Measures Affecting the
Cross-Border Supply of Gambling and Betting Services (Antigua and
Barbuda), WT/DS285/AB/R, adopted April 20, 2005.
If the United States prevails on its fundamental GATS claim, China
could still seek to defend its behavior by relying on certain WTO
exceptions. The GATS public morals exception permits members to deviate
from WTO commitments where such action is ``necessary for public morals
or to maintain public order''\13\ and the measure taken is not more
trade restrictive than necessary to achieve that goal, taking certain
factors into account. China sought to defend restrictions on the
distribution of foreign films in the China--Publications and
Audiovisual Products dispute on this basis and lost, but that decision
was predicated on the determination that China's measure was an
ineffective means of achieving its goal.\14\ It may be somewhat more
difficult to make such a determination with respect to a policy that
clearly does permit the Chinese Government to promote its party's
objectives by suppressing contrary views. That said, the United States
could argue that China's policy is more restrictive than needed, which
would help defeat this defense.
---------------------------------------------------------------------------
\13\ GATS Art. XIV(a).
\14\ Appellate Body report, China--Measures Affecting Trading
Rights and Distribution Services for Certain Publications and
Audiovisual Entertainment Products (United States), WT/DS363/AB/R,
adopted January 19, 2010.
If China loses on the public morals exemption, it could also
theoretically invoke national security as a defense.\15\ Unlike the
public morals defense, the United States consistently argues that the
national security exception is self-judging,\16\ which could allow
China's assertion to go unchallenged. While such an argument might seem
like a stretch, China increasingly equates any threat to the
government's policies and Communist party control writ large as threats
to national security.
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\15\ GATS Art. XIV bis.
\16\ See, e.g., First Written Submission of the United States of
America, United States--Certain Measures on Steel and Aluminum Products
(China), WT/DS544, June 12, 2019 (making this argument with respect to
a similar national security exception under the General Agreement on
Tariffs and Trade (GATT)).
Therefore, while a WTO dispute has serious merit, existing rules
may be ambiguous enough to give the United States pause. The United
States would also be rightly concerned that for political reasons, the
WTO may be hesitant to issue an ``explosive'' ruling that declares a
core tenet of China's government policies in breach of WTO rules,
especially in the absence of more explicit direction from WTO members
on the topic.
recommendations for moving forward
In light of the foregoing, what is the best way to begin to deal
with this difficult and under-developed trade issue? This is something
we all need to further consider, but as a starting point, I would like
to share a few ideas to help start the conversation.
First, the U.S. Government must consistently highlight the
pervasive nature of China's activities and make clear that this
behavior is unacceptable and inconsistent with global norms. This means
that both the administration and Congress should forcefully denounce
all forms of Chinese censorship--explicit, implicit, and in-between--at
every opportunity and at the highest levels. Governments are better
positioned by virtue of their size and role in society to push back
against intimidation than individual companies who fear damaging
retaliation. China may complain, noting that the United States is
interfering in its internal affairs. But as China increasingly seeks to
impose its model of censorship on American companies and export it to
the rest of the world, the United States is justified in advocating for
a clear alternative.
Second, the U.S. Government should strongly encourage key U.S.
allies to do the same. Countries that share U.S. values on free speech,
such as the European Union (EU) member states, must not equivocate on
this topic, and must not hedge their bets with respect to the type of
world that they want their citizens to live in. China will find it more
difficult to ignore critiques of its behavior or stir up anti-U.S.
nationalism to excuse it if other major countries stand by theU.S.
side. At the same time, the EU and others must also be very careful not
to adopt Internet policies, such as data localization and other forms
of Internet control, that drift closer to the Chinese model, thereby
sending the wrong signal to China's policymakers about what is
acceptable. A recent report from the EU Parliament that advocates for a
European Firewall and glowingly speaks of China's efforts to promote
innovation through its own firewall is particularly disconcerting.\17\
---------------------------------------------------------------------------
\17\ ``New Developments in Digital Services,'' European Parliament,
study prepared for the IMCO Committee by the Policy Department for
Economic, Scientific and Quality of Life Policies, May 2020, available
at: https://www.europarl.europa.eu/RegData/etudes/STUD/2020/6487
84/IPOL_STU(2020)648784_EN.pdf.
Third, this same advice goes for the United States. As we seek to
counter the economic threat posed by China, we must be very careful not
to adopt the very same policies we are condemning. Policies that stifle
free speech in the United States or increase market access barriers
through tariffs or discrimination would directly contravene the
policies that made American democracy and the American economy the envy
of the world in the first place. These policies will not only backfire
on us economically, but they will also cause us to lose the moral high
ground that is so important to building an international coalition to
---------------------------------------------------------------------------
effectively push back on China.
Fourth, the U.S. government should consider how to better address
these issues at the WTO as part of a much broader reform initiative. In
particular, if USTR's lawyers do not believe that the current rules
support a winning dispute on censorship-related issues, they should
advocate for explicit rules on this topic in the context of the e-
commerce negotiations. The United States should also seek to include
new rules on forced technology transfer, industrial subsidies, and
intellectual property theft, require China to classify itself as a
developed country that must commit to the same rules as the United
States, and improve the dispute settlement system so it can be used
more effectively by the United States to challenge China's bad
behavior. To be clear, the WTO is not meeting our expectations at the
moment, but abandoning the system that we (not China) helped create
will not solve our problems. In fact it may be exactly what China
desires. After all, a reformed rules-based international trading system
that paints China as an international outlier remains the most
promising way for us to pressure China to change its behavior, and
China would like nothing more than to see the U.S.-created system
evaporate.
Fifth, the United States should also expand its efforts to include
provisions banning censorship in a broad range of FTAs, especially with
countries on China's periphery. The United States has begun moving in
this direction with the United States-Mexico-Canada Agreement (USMCA)
digital trade chapter and U.S.-Japan Digital Trade Agreement, but these
provisions could be strengthened and new negotiating partners
identified. In this regard, the United States should seek more explicit
anti-censorship provisions in the context of the U.S.-EU-Japan
trilateral, negotiate enhanced digital trade agreements with existing
FTA partners, consider an FTA with Taiwan, and begin negotiating the
terms of its reentry into the Trans-Pacific Partnership (TPP). Putting
politics aside, the longer the United States ignores the TPP, the
longer it ignores an opportunity to encircle China with policies that
oppose its economic model. The United States should immediately state
that it will seek to renegotiate the terms of reentry and condition
this reentry on the inclusion of provisions banning censorship,
stronger provisions governing additional pernicious Chinese practices,
and other changes the United States deems necessary.
Sixth, the United States must find better ways to help protect the
interests of U.S. companies that want to access a market of over one
billion people, but have been pressured into censoring their activities
or have been retaliated against for voicing their opinion. One idea
that has been floated by members of Congress is legislation to protect
employees from being terminated for voicing opinions about foreign
governments.\18\ Another idea that has been discussed is to prohibit
companies from complying with certain Chinese laws or requests for
censorship, at the very least with respect to their activities in our
jurisdiction. A related idea is to require U.S. companies to disclose
any pressure received from the Chinese government to censor their
activities.\19\ This last idea, which could also theoretically be
applied to other pressures like forced technology transfer, could help
insulate U.S. companies from specific retaliation by focusing the blame
on U.S. law. Ideas like this deserve debate, but the full implications
on U.S. business interests should be considered before they are
adopted.
---------------------------------------------------------------------------
\18\ H.R. 5830, ``Preventing Foreign Censorship in America Act,''
introduced February 10, 2020.
\19\ S. 2743, ``To establish the China Censorship Monitor and
Action Group, and for other purposes,'' introduced October 30, 2019.
Finally, we must be very careful in our policymaking efforts with
respect to both censorship issues and China more broadly not to draw a
false equivalence between the Chinese Government and its people. Many
good Chinese citizens have suffered for years under these troubling
policies, and their views and interests should in no way be equated
with that of the Chinese Government. Indeed, many Chinese people tried
earlier this year to speak out with respect to the coronavirus only to
have their voices muffled. A Chinese commentary briefly posted online
before being deleted stated: ``These days, everyone's saying the
openness of information is the best vaccine. Blocked ears and eyes are
also a contagious disease, and no one can escape.''\20\ And in the
words of Dr. Li, the late Chinese doctor who was reprimanded by police
for raising early awareness of the disease, ``I believe a healthy
society should not have just one voice.''\21\ We need to be clear that
our concern is with the unfair practices of the Chinese Government, not
the Chinese people, and do everything we can to empower reformers in
Chinese society to improve the country that they live in.
---------------------------------------------------------------------------
\20\ The Wall Street Journal, ``China's Virus and Propaganda Draw
Backlash,'' February 25, 2020.
\21\ Id.
______
Questions Submitted for the Record to Clete R. Willems
Questions Submitted by Hon. John Cornyn
Question. The World Trade Organization has two core principles. The
first is national treatment, which requires a country to treat domestic
and international products the same. The second is most-favored nation
that requires a nation to treat all countries under the WTO equally.
There are two exceptions to these principles for public morals and
national security. These exceptions, intentionally or not, align well
with the definition of censorship which allows for the blocking of
media due to obscenity or security. The third piece in that definition
is content deemed ``politically unacceptable.'' The WTO does not
provide for an exception to that one.
Can you discuss these concepts and how they apply to the practice
of censorship in conjunction with our trade laws?
Answer. As the question notes, the WTO agreements most relevant to
censorship--include exceptions to normal WTO disciplines for measures
``necessary to protect public morals''\1\ or ``necessary for the
protection of [a member's] essential security interests.''\2\
Theoretically, either or both of these exceptions could be invoked by
China in a WTO dispute involving its censorship practices.
---------------------------------------------------------------------------
\1\ Article XIV(a) of the GATS; Article XX(a) of the GATT 1994.
\2\ Article XV of the GATS; Article XXI of the GATT 1994.
With respect to the public morals exception, past WTO panel and
Appellate Body decisions have indicated that this exception is not
unfettered and the same logic used in those disputes could be used to
undermine a defense by China. More specifically, past reports have
noted that this exception cannot be used to justify an otherwise WTO-
inconsistent measure if that measure is either not ``necessary'' to
achieve the WTO member's goal of protecting public morals, is applied
in a manner that constitutes ``a means of arbitrary or unjustifiable
discrimination between countries where the same conditions prevail,''
or is ``a disguised restriction on international trade.''\3\ Many
factors go into the legal analysis of these various requirements, but
one key one is to examine whether the measure is more trade restrictive
than necessary to achieve its intended goal and whether there are other
less trade-restrictive alternatives that would suffice. In this
instance, the United States would have a strong argument that China's
broad ban on all different types of free speech and outright
prohibitions on certain applications and communications tools is much
more restrictive than necessary to achieve its goal.
---------------------------------------------------------------------------
\3\ E.g., Appellate Body report, China--Measures Affecting Trading
Rights and Distribution Services for Certain Publications and
Audiovisual Entertainment Products (United States), WT/DS363/AB/R,
adopted January 19, 2010.
The exception for ``essential security interests'' presents a more
challenging situation. The United States has consistently argued that
this exception is self-judging and not subject to WTO scrutiny.
Therefore, unless the United States changed this longstanding view,
such a defense by China would be fatal to the U.S. claim. Other
countries, however, have argued that WTO adjudicators should actually
examine essential security claims, and a WTO panel in a recent dispute
involving Russia and Ukraine agreed. In that dispute, the panel
examined whether there was an ``emergency in international relations,''
whether the action was taken ``at the time of'' that emergency,'' and
whether there was a plausible relationship between the measures and the
emergency, among other factors.\4\ It is easy to see how the WTO might
actually decide against China if it applied the same logic given that
these measures were not adopted in response to any sort of emergency in
international relations. But even going down this path is risky given
the sensitivity of the issue for China and longstanding U.S. views on
the justicability of ``essential security interest'' issues in the
first place.
---------------------------------------------------------------------------
\4\ See panel report, Russia--Measures Concerning Traffic in
Transit (Ukraine), WT/DS/512/R, adopted April 26, 2019.
With respect to the question of political acceptability, it is
accurate that there is no relevant exception under WTO rules.
Presumably, China would invoke one of the two aforementioned examples,
if not both, and defend its measures on those grounds instead. In such
a dispute, the United States could argue that China's invocation of
``public morals'' is not its true objective, but rather that it is a
question of ``political acceptability,'' which is not subject to an
exception. However, the United States has historically been hesitant to
have an international adjudicator question the motives of a particular
member so may not believe that making such an argument is in its
---------------------------------------------------------------------------
institutional interests.
Question. What should be done as conversations on e-commerce and
WTO reform progress to ensure censorship is not used as a trade barrier
in the future?
Answer. In a negotiation involving China, such as the current e-
commerce negotiations, it may be difficult to gain consensus on rules
prohibiting censorship per se as China would clearly see such rules as
being targeted at its practices. As an alternative, the United States
and other like-minded members could instead pursue disciplines that
guarantee market access for mobile applications or other types of
digital services that China currently bans or prohibit discrimination
with respect to such services.
Another option that the United States should consider is to more
explicitly ban censorship in negotiations that do not involve China.
This could help create a global standard on censorship that others
eventually try to multi-lateralize, putting China in a very defensive
position where it is either seen as an international outlier by other
countries, forced to compromise, or forced to make concessions on other
issues as a trade-off.
______
Question Submitted by Hon. Chuck Grassley
Question. China's censorship regime is just one more way that the
Chinese economy profoundly differs from other WTO members. China
refuses to accept the rules that govern a free-market because they
threaten a closed society.
Are there WTO rules that could potentially reign in some of China's
censorship practices? If not, what type of rules could we negotiate to
tackle this issue?
Answer. It may be possible to conceive a challenge to China's
censorship practices using existing WTO rules. For example, as noted in
my testimony, the United States could allege that China violates
prohibitions on market access (because it bans U.S. service providers
from conducting certain activities)\5\ and non-discrimination (because
it treats China-based Internet service providers different than
foreign-based providers),\6\ among many other potential complaints. As
also noted, however, these claims could be difficult to sustain because
the services rules under which the United States would be challenging
China were negotiated in advance of the Internet age, which has
significantly altered the primary means through which China exercises
censorship, as well as issues with potential WTO exceptions. Thus, to
avoid these problems, new rules could be negotiated that are much more
explicit on prohibiting censorship outright, or at very least, that
clearly apply to discrimination and market access when it comes to the
use of the Internet or other products that China censors.
---------------------------------------------------------------------------
\5\ WTO General Agreement on Trade in Services (GATS), Art. XVI.
\6\ GATS Art. XVII.
______
Communication
----------
Center for Fiscal Equity
14448 Parkvale Road, #6
Rockville, Maryland 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.
Limiting information is the most important element of restraining free
markets and competition. When western capitalists do this, it is called
public relations. When Chinese state capitalists and the Communist
Party of China do it, it is called censorship. In both environments, it
is a difference in intensity, but not in kind.
Product faults, wage and salary conditions, internal security matters
(both, whether law enforcement is involved or a part of the
conspiracy), product pricing and other ``trade secrets'' show that
Capitalism is toxic everywhere it is tried.
The question of Tibet and the Yugurs, the treatment of families on our
southern border, workers in the fields and food plants (and their
children) whether documented or not, in congressional offices and on
the casting couch all show how rampant censoring reality can be.
The sad fact of the matter is that while there are some owners and
executives who are not aware of what is behind the veil, it is more
common that executives and co-workers know what is happening in their
organizations, companies and societies, as well as those of their
competition (both corporate and international). It is only the public
that is in the dark, or worse, who look the other way.
What keeps all of this in play is shame. It is cultural in China and
Asia, but it is also so in all parts of America. With shame as a
societal agreement, censorship is self-enforcing. This is why
progressives embrace diversity and openness. With these, shame and
censorship are impossible.
Economic empowerment makes shame easier to defeat, although workers and
their organizers can be co-opted. It is part of the human condition.
The best disinfectant is empowering the individual, from whistleblowers
in the Intelligence Community to a protestor challenging a tank in
Tiananmen Square. Individuals change cultures. With the conviction of
Harvey Weinstein, we know that the darkness can never win.
Another inevitable development is more democracy and ownership in the
American workplace. Mutual empowerment leads to open information, the
end of both shame and the cover that shame brings. What starts here
must spread.
To protect themselves from job loss from their own supply chain and
subsidiaries, employee-owned firms and cooperatives 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.
While there will always be organizations that hide their dirty linen,
this usually comes from less democracy, not more.
American workers must seek the change they want but are afraid to ask
for. The existing cooperative and employee-owned sector is the best
place to start, but it will only come from below. Management never
likes change. As Frederick Douglass once said, ``Power concedes nothing
without a struggle.'' It is courage which ends both shame and
censorship.
Thank you for the opportunity to comment. As always, we are
available to answer questions from members and staff and to provide
direct testimony.
[all]