[Senate Hearing 116-564]
[From the U.S. Government Publishing Office]
S. Hrg. 116-564
CHINA: CHALLENGES FOR U.S. COMMERCE
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HEARING
before the
SUBCOMMITTEE ON SECURITY
of the
COMMITTEE ON COMMERCE,
SCIENCE, AND TRANSPORTATION
UNITED STATES SENATE
ONE HUNDRED SIXTEENTH CONGRESS
FIRST SESSION
__________
MARCH 7, 2019
__________
Printed for the use of the Committee on Commerce, Science, and
Transportation
[GRAPHIC(S) NOT AVAILABLE IN TIFF FORMAT]
Available online: http://www.govinfo.gov
_________
U.S. GOVERNMENT PUBLISHING OFFICE
52-567 PDF WASHINGTON : 2023
SENATE COMMITTEE ON COMMERCE, SCIENCE, AND TRANSPORTATION
ONE HUNDRED SIXTEENTH CONGRESS
FIRST SESSION
ROGER WICKER, Mississippi, Chairman
JOHN THUNE, South Dakota MARIA CANTWELL, Washington,
ROY BLUNT, Missouri Ranking
TED CRUZ, Texas AMY KLOBUCHAR, Minnesota
DEB FISCHER, Nebraska RICHARD BLUMENTHAL, Connecticut
JERRY MORAN, Kansas BRIAN SCHATZ, Hawaii
DAN SULLIVAN, Alaska EDWARD MARKEY, Massachusetts
CORY GARDNER, Colorado TOM UDALL, New Mexico
MARSHA BLACKBURN, Tennessee GARY PETERS, Michigan
SHELLEY MOORE CAPITO, West Virginia TAMMY BALDWIN, Wisconsin
MIKE LEE, Utah TAMMY DUCKWORTH, Illinois
RON JOHNSON, Wisconsin JON TESTER, Montana
TODD YOUNG, Indiana KYRSTEN SINEMA, Arizona
RICK SCOTT, Florida JACKY ROSEN, Nevada
John Keast, Staff Director
Crystal Tully, Deputy Staff Director
Steven Wall, General Counsel
Kim Lipsky, Democratic Staff Director
Chris Day, Democratic Deputy Staff Director
Renae Black, Senior Counsel
------
SUBCOMMITTEE ON SECURITY
DAN SULLIVAN, Alaska, Chairman EDWARD MARKEY, Massachusetts,
ROY BLUNT, Missouri Ranking
TED CRUZ, Texas, AMY KLOBUCHAR, Minnesota
DEB FISCHER, Nebraska RICHARD BLUMENTHAL, Connecticut
MARSHA BLACKBURN, Tennessee BRIAN SCHATZ, Hawaii
MIKE LEE, Utah TOM UDALL, New Mexico
RON JOHNSON, Wisconsin TAMMY DUCKWORTH, Illinois
TODD YOUNG, Indiana KYRSTEN SINEMA, Arizona
RICK SCOTT, Florida JACKY ROSEN, Nevada
C O N T E N T S
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Page
Hearing held on March 7, 2019.................................... 1
Statement of Senator Sullivan.................................... 1
Article from the Wall Street Journal dated January 7, 2019
entitled ``WSJ Investigation: China Offered to Bail Out
Troubled Malaysian Fund in Return for Deals--The Secret
discussions show how China uses its political and financial
clout to bolster its position overseas'' by Tom Wright and
Bradley Hope............................................... 48
Statement of Senator Markey...................................... 3
Statement of Senator Wicker...................................... 29
Statement of Senator Fischer..................................... 34
Statement of Senator Blackburn................................... 36
Statement of Senator Klobuchar................................... 37
Statement of Senator Blunt....................................... 39
Statement of Senator Rosen....................................... 43
Statement of Senator Blumenthal.................................. 57
Witnesses
Daniel H. Rosen, Partner, Rhodium Group.......................... 5
Prepared statement........................................... 7
Josh Kallmer, Executive Vice President of Policy, Information
Technology Industry Council (ITI).............................. 10
Prepared statement........................................... 12
Samm Sacks, Cybersecurity Policy and China Digital Economy
Fellow, New America............................................ 17
Prepared statement........................................... 18
Hon. Eric Rosenbach, Co-Director, Belfer Center for Science and
International Affairs, Harvard Kennedy School, Former DoD Chief
of Staff; former Assistant Secretary of Defense for Homeland
Defense and Global Security.................................... 23
Prepared statement........................................... 25
Appendix
Letter dated March 6, 2019 to Hon. Dan Sullivan from Erik Robert
Olson, Vice President, Rail Security Alliance.................. 63
Response to written question submitted to Daniel H. Rosen by:
Hon. Marsha Blackburn........................................ 114
Response to written questions to Josh Kallmer submitted by:
Hon. Todd Young.............................................. 115
Response to written question submitted to Samm Sacks by:
Hon. Marsha Blackburn........................................ 115
Hon. Todd Young.............................................. 116
Response to written questions submitted to Hon. Eric Rosenbach
by:
Hon. Marsha Blackburn........................................ 117
Hon. Todd Young.............................................. 117
CHINA: CHALLENGES FOR U.S. COMMERCE
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THURSDAY, MARCH 7, 2019
U.S. Senate,
Subcommittee on Security,
Committee on Commerce, Science, and Transportation,
Washington, DC.
The Subcommittee met, pursuant to notice, at 10:02 a.m. in
room SD-562, Dirksen Senate Office Building, Hon. Dan Sullivan,
Chairman of the Subcommittee, presiding.
Present: Senators Sullivan [presiding], Markey, Blunt,
Fischer, Blackburn, Wicker, Klobuchar, Blumenthal, and Rosen.
OPENING STATEMENT OF HON. DAN SULLIVAN,
U.S. SENATOR FROM ALASKA
Senator Sullivan. Good morning. The Subcommittee on
Economics and Security of the Commerce Committee will now come
to order.
This is our inaugural meeting of the newly created
Subcommittee on Economics and Security, and I want to commend
Chairman Wicker on his leadership in creating this subcommittee
to provide a venue in Congress to focus on the nexus between
commerce, economic issues, and security, and his constant focus
to bolster national security and the economic competitiveness
of the United States.
I'm very honored to be named as the Subcommittee Chair and
I am excited to be serving with my good friend, Senator Markey,
as the Subcommittee's Ranking Member.
Senator Markey has a long and accomplished career and
history of public service, including his work in the House on
homeland security, to close gaps in our Nation's defenses, and
I look forward to working with you, Senator Markey, and the
members of this Subcommittee on these important issues.
Be forewarned, we will be a very active subcommittee. There
is a lot of territory and ground to cover and the Ranking
Member and I have already had a number of good discussions on
where we want to begin.
So where are we beginning? Well, there's no more relevant
issue today in terms of the effect on our economy and our
security than the strategic challenge posed by the rise of
China and its subsequent retrenchment into authoritarianism and
rejection of international norms and standards, which in many
ways has helped so much with their own rise and lifting
millions and millions of their citizens out of poverty.
The stakes are high. China is now the largest U.S.
merchandise trading partner, biggest source of imports, and
largest destination market for U.S. exports, outside of North
America.
The bilateral relationship supports approximately one
million jobs in the United States. Even in places like my great
state, the great state of Alaska, China has quickly eclipsed
other long-established trading partners to become our largest
trading partner.
China remains a critical market for American companies and
our economic and commercial ties have long been the
underpinning of the relationship between our two nations. If
steps are not taken by China and soon to address some of the
concerns we are going to raise today, this relationship could
be needlessly at risk.
While it has been suggested during the Trump
Administration's ongoing trade discussions with the Chinese
that they are receptive to offsetting the trade imbalance by
increasing purchases of American goods, like farm products or
LNG, it is imperative that the Chinese also commit to
structural changes in their economy.
Those changes would include the curbing of industrial
subsidies, state-owned enterprises, the bolstering of
intellectual property protection, and an end to forced
technology transfers, which the Chinese deny they do but we all
know they do do. Also, the issue of officially sanctioned
corruption globally is another issue that they need to address.
Additionally, when the United States supported China's
entry into the World Trade Organization in late 2001, the
expectations were that China would lower its trade barriers and
follow WTO trade practices, including respecting intellectual
property rights, promoting basic safety standards for exports,
and not subjecting imports to illegal non-tariff barriers.
China has not kept these commitments.
I saw this up close many, many years ago when I was a
staffer on the National Security Council staff working for
Condoleeza Rice and President George W. Bush. In a meeting I
attended in the Oval Office in 2003, then Vice Premier Madam Wu
Yi told the President of the United States that it was in
China's interest to address the intellectual property theft
that often occurs between our two countries and she would
personally take steps to make sure this happened. That meeting
was over 16 years ago and the IPR theft problem between the
United States and China is actually worse.
President Obama also tried to stem these blatantly unfair
trade practices but Beijing has not honored the ``common
understanding'' reached between President Obama and Xi Jinping
on curbing cyber hacking of government and corporate data for
economic gain.
The U.S. Trade Representative estimates that Chinese theft
of American intellectual property costs the U.S. economy as
much as $600 billion per year, not to mention thousands of
American jobs.
From foreign equity restrictions with joint venture
requirements to intellectual property theft, China is pursuing
its narrow economic interests in ways that contradict and
undermine the global trading system, practices and a system
that has fostered decades of global growth and stability and
allowed China its own strong economic rise.
The Trump Administration should be commended for its
reorientation of the U.S.-China relationship under its current
trade negotiations. The United States must insist that the
bilateral trade relationship with China be defined by something
understood by every American citizen: reciprocity and fairness,
reciprocity and fairness.
For too long, the U.S. has accepted unfulfilled Chinese
promises of greater market access even as we open our economy
to Chinese companies. A demand for fairness and reciprocity
should not undermine China's success as market principles would
work toward long-term stabilization and state-directed economic
growth can produce massive over-capacity and mountains of debt.
To put it bluntly, the United States is suffering from a
decades-long promise fatigue with China. We get commitments
from China, they make promises, and then they don't keep them.
In order to move forward, great countries need to keep their
words.
It is my hope that this hearing will inform us on some of
the challenges to U.S. commerce and our current relationship
with China as it relates to China's harmful practices stemming
from industrial policy, intellectual property theft, forced
technology transfer, cyber espionage, and many other practices.
With that, I want to thank all of our witnesses for being
here today, and I now recognize the Ranking Member for any
opening statement that he may have.
Senator Markey.
STATEMENT OF HON. EDWARD MARKEY,
U.S. SENATOR FROM MASSACHUSETTS
Senator Markey. Thank you, Mr. Chairman, very much, and
thank you for your role in helping to create this very
important subcommittee, the Security Subcommittee.
I think that it's time for us to have this special focus
and I thank you for your leadership on this issue and I'm
looking forward to partnering with you----
Senator Sullivan. Me, too.
Senator Markey.--and I, like you, want to thank Senator
Wicker and Senator Cantwell for their conversations in creating
this subcommittee. I think it gives us a focus that is going to
be very important on issues that loom large in the 21st Century
but need this specific attention because for over a century,
America has enjoyed the largest, most dynamic economy in the
world, consistently dominating global markets and leading the
world economic order.
Our unrivaled economic production and innovation economy
has made us the most prosperous nation on earth. The economic
dominance has also enabled the United States to be the world's
lone remaining super power. It helped us build and lead a
rules-based international order that creates a level playing
field for all and broadly encourages countries to aspire to
America's ideals of democracy and individual liberties.
Regrettably, there are unprecedented challenges to our
commercial might and to this rules-based international order,
as Senator Sullivan and I are going to be focusing upon those
issues.
Through a series of coordinated and concerted actions,
China has launched a comprehensive and well-executed plan to
dominate key high-tech industries, like 5G, telecommunications
networks, artificial intelligence, and advanced manufacturing.
China's goal is to dominate these high-tech fields within
the next 30 years so that they may gain a massive economic,
military, and intelligence edge for decades to come, and here
is the Chinese game plan.
One, direct subsidies, hundreds of billions of dollars of
direct subsidies, low-interest loans, and tax breaks to Chinese
industries, two, foreign investments and acquisitions,
investing and acquiring foreign companies to gain access to
advanced technologies, and three, forced transfer agreements
forcing foreign companies wishing to invest or conduct business
in China to share intellectual property and technology secrets
with the Chinese Government.
These efforts pose a threat to our country's economic
welfare and our national security.
In 2018, U.S. intelligence agencies stated that the
Pentagon is facing an unprecedented threat to its technological
and industrial base as a result of Chinese recruitment of
foreign scientists, intellectual property theft, and targeted
acquisitions of American companies.
The Office of U.S. Trade Representative recently issued a
report highlighting China's unfair trade practices, noting not
only the country's opaque regulatory system but also its poor
record of adhering to its transparency obligations as a World
Trade Organization member.
If we are to retain our role as a global leader committed
to international norms, we have to confront this challenge head
on and that's why I am so excited to explore what policy tools
are at our disposal to combat these threats. Tools such as
leveraging the World Trade Organization to challenge unfair
Chinese industrial policies, restricting Chinese firms' ability
to conduct business in the United States if they pose a threat
to commerce and security, applying tailored trade restrictions
to protect domestic industries threatened by unfair Chinese
trade practices.
But to be clear, tariffs and tweets alone are not
sufficient to address these threats to commerce nor is any
bilateral deal that does not address the underlying structural
problems in our economic relationship. We must be willing to
make the domestic investments needed to ensure our workers, our
manufacturers, and our innovators have the tools and resources
they need to compete in this globalized economy.
Closing the trillion dollar backlog in infrastructure
investments, investing in education and human capital
development, building an intellectual bridge that transitions
the workforce to the 21st Century economy and providing robust
funding for science and research and development programs to
help ensure America remains the world's preeminent innovation
incubator.
So I'm excited to learn more from this all-star group of
witnesses which have assembled here today, Mr. Chairman, and I
thank you for holding this hearing. This is an incredible kick-
off to a new era in this committee's history, but I think it's
much needed, and again I congratulate you on this first day.
Senator Sullivan. Great. Thank you, Senator Markey, and as
hopefully you can see, this is going to be a very strong
bipartisan endeavor. I think this is an area on so many of
these issues where there is a lot of bipartisan interest and
bipartisan support. So we're excited about that.
Well, I want to welcome our witnesses and some of whom I've
had the opportunity to work with previously. Let me begin from
left to right.
We have Mr. Daniel Rosen, who is a Partner at the Rhodium
Group; Mr. Jonathan Kallmer, Executive Vice President of Policy
Information Technology of the Information Technology Industry
Council; Ms. Samm Sacks, Cybersecurity Policy Fellow and China
Digital Economy Fellow, New America; and the Honorable Eric
Rosenbach, Co-Director, Belfer Center for Science and
International Affairs, at Harvard Kennedy School or, as Senator
Markey would say, Hahvid Kennedy School.
Mr. Rosen,----
Senator Markey. By the way, that's coming from a Harvard
graduate.
[Laughter.]
Senator Sullivan. That's where I learned this.
Mr. Rosen, you have five minutes to deliver an oral
statement. A longer written statement will be included in the
record. The floor is yours.
STATEMENT OF DANIEL H. ROSEN, PARTNER,
RHODIUM GROUP
Mr. Rosen. Thank you, Chairman Sullivan, Ranking Member
Markey, and Members of the Subcommittee. I appreciate the
opportunity to offer my views.
I approach the question based on 26 years evaluating
China's economy, the prospects for U.S.-China relations, and
the interests of American firms since starting my career after
finishing the MSF Program at Georgetown with somebody else in
the room in 1992.
I'll offer a high-level picture of China's economic
practices leading to the present concerns we're talking about
and I can elaborate all that in the discussion.
After starting reform and opening in 1978, China generally
converged with the liberal economic practices champion by the
United States, not due to pressure but because market economics
simply worked better. This was in the U.S. strategic and
commercial interests.
More recently, this convergence has slowed and in some
cases reversed and given China's size and global footprint,
that is a challenge for U.S. welfare and for other market
economies, regardless of why it's happening.
While the right American policy response to these trends is
not yet clear, there is now a consensus that status quo
approaches must evolve. Not all challenges to the United States
are maligned and the United States should in principle welcome
those that accompany the betterment of one-fifth of humanity.
Our concern arises therefore not from competition per se
but from the implications if a $13 trillion China today uses
non-market solutions to its problems and because China is
around the world now as a trader, investor, and development
financier, the non-market choices it makes at home will affect
conditions globally.
American engagement never rested on China becoming a market
economy overnight but on China endeavoring to liberalize for
its own reasons and Beijing did do that after 1978.
Concern today is not that China never tried to converge
with our way of doing things but that their progress has
stalled. From 2012 to 2018, the Xi era, Beijing attempted to
deleverage its interbank credit markets twice, open the equity
markets, empower independent boards of directors at state
enterprises, achieve currency internationalization, and open
the capital account. All of these economic reform moves led to
many crises and were reversed.
The shadow over U.S.-China economic engagement therefore
comes not because China refused to reform but because it
couldn't manage to do so.
China's non-convergence with market approaches has
consequences for others. We depend for our vitality on things
that China's current policy choices will disrupt. I mentioned
three: the financial system, rules-based pro-competitive
regimes, and the sanctity of private intellectual property
rights protection.
Nations that do not share the same fealty to these elements
simply cannot be as engaged or interoperable with us as nations
that do. This is a simple reality.
First, while Chinese authorities say they can be neutral in
regulating capital access for state and non-state firms alike,
the reality is that separate but equal is inherently unequal in
Chinese capital markets today.
This insulates many Chinese firms from the diligence
demanded of their private foreign competitors, giving them an
advantage. Local government fiscal outlays and national and
sub-national subsidies, as the Ranking Member noted, also
distort conditions profoundly.
Second, for market systems, even-handed Rule of Law is
essential, including competition policy. China today is trying
to mix political guidance with commercial logic in ways that
simply distort markets.
I can point to the Rhodium Group ASPI China Dashboard
showing that foreign firms seeking merger review in China are
six times more likely to get hauled in for review than purely
Chinese parties trying to do a tie-up.
Third, and the rest of the panel is going to deal with this
extensively, innovation drives modern economies, especially
higher-income levels, and China's previous promises in the 2003
era and also more recently to marketize innovation have not
matched up with action.
It's hard to project what the total costs of China choosing
to pursue non-market models are will be for the United States,
let alone to try to predict the costs for things that are hard
to quantify, like our national security and our resilience.
I can talk to you more about the efforts we make as
economists to try to do a better job evaluating that, but I
want to just finish in 10 seconds and maybe 30 more if I can
weigh on the schedule to point to three principles that I'm
going to suggest for how we respond rather than absolutely
specific policies. I think principle at this point is most
important.
First of all, our responses for now should be provisional.
They should be reversible, depending on whether China takes
note of the dangers of its non-market policies right now and
reverts back to a market course.
Second, our responses should be selective. Where there are
national security risks or risks to our system, we must address
them, but, by and large, the United States can still say yes to
most Chinese manufacturing and direct investment in the United
States without having to forego the benefits of that
interaction in the name of our security.
And third, even to the extent we do disengage with China to
some extent, should we reach that conclusion, there's a way in
which we can do that peacefully with peaceful disengagement
being the keyword. That is to say, without malice, with the
hope that China finds its way back to the kinds of liberal
ideas, small ``l,'' that have worked so well in the advanced
economies over the past century.
A final point I'll make, of course, is that openness is the
wellspring of our national security and we must never forget
that. Our dynamism, our exposure to ideas and practices around
the world ultimately make us stronger, and there will be a
large cost to us economically and otherwise to the extent we
need to close doors and so we need to be very mindful about how
we do that.
Thank you very much, and I look forward to the
conversation.
[The prepared statement of Mr. Rosen follows:]
Prepared Statement of Daniel H. Rosen, Partner, Rhodium Group
Chairman Sullivan, Ranking Member Markey and Members of the
Subcommittee, I appreciate the opportunity to offer my views at this
hearing on challenges for U.S. commerce presented by China's
marketplace practices. I approach this question based on 26 years of
professional work evaluating the nature of China's economy, the
prospects for US-China economic relations, and the interests of
American firms pursuing commercial opportunities. Following eight years
in the think tank sector and time in government, I established what is
today Rhodium Group--a private research partnership--to conduct this
analysis, where 16 researchers are presently involved in the effort.
Today I wish to offer a high-level picture of the arc of China's
economic practices and priorities leading up to the present concerns.
Each of the broad characterizations I offer is underpinned by a body of
research which I would be pleased to elaborate in discussion, or in
follow-up with you or your staff.
Background
After the start of its self-described ``reform and opening'' era in
1978, China generally converged--though with fits, starts and
exceptions--with the liberal economic approaches championed by the
United States. It did so not due to foreign pressure, but because
market economics was more productive. Support for this evolution was in
the United States' strategic and commercial interest. In recent years,
however, this convergence has slowed and in some areas reversed. With
its size and global footprint, a China pursuing a non-market oriented
path--regardless of motive--will be a concern for U.S. economic
welfare, and for other market economies. While the right American
policy response to these trends is not yet clear, there is a consensus
that status-quo approaches must evolve.
Structural Divergence
As China recovered from a state of epic impoverishment in 1978 to a
normal level of development, it was bound to present a trial to the
United States and the world. Since Nixon went to China the Nation's
population has risen by 60 percent to 1.4 billion, and per capita
incomes rose 75-fold in nominal terms: accommodating the demand and
supply consequences of that was naturally a challenge. Not all
challenges are malign, and the United States should welcome those that
accompany the betterment of one-fifth of humanity, and the related
commercial competition that was bound to bring. The real concern arises
not from competition per se, but from the implications if a $13
trillion China decides to revert to non-market solutions to managing
its economy. And because China now seeks to project economic presence
around the world as a trader, financial investor, commercial director
investor and development finance purveyor, the non-market incentives
China uses to shape its economy at home will spill over and affect
economic conditions around the world.
The American bet on engagement with China never rested on China
becoming a market economy overnight, but on evidence that China
believed its interests were served by marketization in the long-term,
and, thus, that with patience (and transitional mechanisms) we would
naturally converge. This depended on China endeavoring to liberalize
its economy, not on pressure from American trade negotiators. Two
hundred years of American foreign policy experience had taught that
only China would change China. Twenty years of observation from the
start of rapprochement to Deng Xiaoping's recommitment to market reform
in 1992 made clear that China, and the Communist Party, was serious
about change.
Concern for U.S. economic interests today stems from indications
that China's drive to converge with the liberal international economic
order has stalled. Xi Jinping began his tenure with a broad economic
reform plan--the Sixty Decisions--and he endorsed a series of reform
initiatives in his first term. From 2012 to 2018 Beijing attempted to
deleverage the interbank credit markets (twice), open the equity
markets, empower independent boards of directors at state enterprises,
achieve currency internationalization, and open the capital account.
All of these economic reform moves led to mini-crises and were reversed
(arguably the second credit deleveraging is still underway). The shadow
over US-China economic engagement comes not so much because China
refused to reform but because it couldn't manage it.
Regardless of etiology, China's non-convergence with market
approaches to resource allocation and regulating competition (see
Figure 1) has consequences for others, including the United States. We
depend for our vitality on structural conditions that China's current
policy choices will disrupt. There are myriad pieces of a liberal
market foundation, but three that are paramount are the financial
system, rules-based pro-competitive regimes, and the sanctity of
private intellectual property protection. Nations that do not share the
same fealty to these elements cannot be as engaged or interoperable as
nations that do.
[GRAPHIC(S) NOT AVAILABLE IN TIFF FORMAT]
First, China's financial system serves the interests of borrowing
firms with favored access to credit more than consumers or savers.
While Chinese authorities assert that they can be neutral in regulating
capital market access for state and non-state firms alike, the reality
so far is that this separate but equal approach is inherently unequal.
The mushrooming volume and cost of capital have insulated many Chinese
firms from the same diligence demanded of their private foreign
competitors, giving them an advantage. This is true even when Chinese
rates for credit are higher than foreign rates, as debt service ratios
don't matter if new money to pay off old loans is always made
available. In addition to capital market conditions, local government
fiscal outlays and abundant national and sub-national subsidies also
distort capital allocation conditions.
Second, for a market-oriented system to function, even-handed rule
of law is essential. For commercial interests competition policy is a
crucial aspect of this. China is today mixing political guidance with
commercial considerations in corporate governance, in ways prone to
change market outcomes at home and abroad. The Rhodium Group-Asia
Society China Dashboard shows, for instance, that foreign firms
pursuing a merger in China are about five times as likely to face
Chinese government review than solely Chinese merger are. Asymmetries
in trade and investment market access for foreign firms in China
relative to Chinese firms abroad are an important part of uneven legal
conditions. This distorts market outcomes and generally serves the
interests of firms in China at the expense of Chinese consumers and
foreign producers including those from the United States. China is not
the only nation with border barriers to commerce higher than those
maintained by the United States, and American consumers benefit from
imports regardless of trade barrier differences. But at China's scale
and weight in marginal global growth these distortions, like financial
subsidies, can quickly put firms in other nations out of business, and
thus present predatory outcomes or otherwise harm efficiency. China's
international initiatives including the Belt and Road program are
extending the consequences of the Chinese model worldwide.
Third, innovation drives modern economies, especially at higher
income levels. In their 2013 reform program, China's leaders pledged to
improve the innovation environment in China through greater emphasis on
market forces. They called for ``market-based technology innovation
mechanisms'' and said ``the market is to play a key part in determining
innovation programs and allocation of funds and assessing results, and
administrative dominance is to be abolished.'' But eighteen months
later Made in China 2025 was launched, a 10-year strategic plan for
achieving new levels of innovation in emerging sectors. The plan
emphasized central planning, setting performance targets for domestic
content and domestic control of intellectual property in critical
industries. A related implementation plan set benchmarks for global
market share for Chinese firms. This industrial policy approach to
innovation, infused with hundreds of billions of dollars in support,
will distort conditions in the innovation ecosystems of other nations,
including the United States, and precipitated the aggressive 2018 U.S.
Section 301 Investigation, which concluded that China's technology push
was unreasonable, discriminatory and a burden on U.S. commerce.
Impacts and Options
It is impossible to confidently project the economic cost of China
choosing to pursue a non-market model for the United States or U.S.
manufacturing, let alone for qualitative variables such as national
security or resilience. This is turn impedes cost-benefit assessment of
policy options for our response. Do tariffs work? In some ways, but by
depriving us of cost-efficient intermediate inputs they also diminish
our export competitiveness. What is the price of disengagement? It
depends on how much erosion in the value of American intellectual
property if we do not respond to technology policies abroad, not on a
steady-state projection of U.S. conditions. And meanwhile, if China
continues to put political guidance above efficiency in the economy a
financial crisis is almost inevitable, changing our China concerns from
those associated with a strengthening competitor to those wrapped up in
a flailing one.
The concerning features of the Chinese system described above would
be present and require our attention even if China were staying the
course on reform. If that were the case, the questions would be what
degree of statism would China keep, what would it slough off, and how
long would it take. Most nations, including the United States, employ
some state involvement in the economy, including in the allocation of
finance (Fannie Mae), tipping the competitive playing field in some
industries (electric power--Tennessee Valley Authority) and promoting
innovation (Sematech). The question of degree and ground rules--whether
there is an overarching commitment to the primacy of market and
consumer orientation--is key. And the mix is not eternal, as present
debates over the role of industrial policy in the United States and
other advanced economies shows. But if instead of convergence with
advanced economy norms where the state plays a limited economic role
Beijing claims to have an alternative, state-guided model that requires
other nations to accommodate its non-market preferences, then past
assumptions about the course of engagement with China will be outdated.
China has the sovereign right to choose the system it thinks best for
itself, but to draw on an old saying, its freedom to swing its fist
stops where our nose begins.
What to Do: Provisional, Partial, Peaceful
We are at the beginning of a national conversation--better still,
an international conversation among like-minded liberal colleagues--
about policy responses to new directions in China's evolution, not at
the end. There are not yet refined answers. However principles to guide
policy thinking are emerging.
First, our responses should be provisional. Unless everything we
think we know about the relative efficiency and dynamism of free
markets over state-controlled markets is wrong, the present Chinese
policy turn will be a dead-end, and we will see either a diminishing
threat or a reversion to market orientation in the future. Indeed, one
can argue that China is already showing signs of an economic stall.
Anticipating this, American policy should be built for adaptability.
Any disengagement we pursue should be reversible, and our ability to
reengage should be protected.
Second, our response should be partial and selective, whether in
the short-term or the long-term. Where there are national security
risks from commerce, or interaction threatens to disrupt the healthy
functioning of our market ecosystem, we must be prepared to stand
apart; but in much of our economic exchange these concerns are not
present or can be mitigated. The United States can say yes to Chinese
manufactured goods and direct investment most of the time. Blocking
these flows would be gratuitous and serve no strategic purpose. Rather
than plan only for all or nothing scenarios, we should build a sliding
scale of engagement that fits with the likely mixed-bag that China will
present--a nation somewhere in the middle between advanced economy
norms and statism.
A third normative principle is for our stance on commercial
interaction with China, even if emphasizing disengagement, to be
peaceful, not just on liberal moral grounds, but for realpolitik
reasons. Putting politics above economic efficiency will not work in
China today, just as it failed to work in the past. When a reckoning
occurs, the Chinese people will either blame bad ideas at home or
hostile foreign forces abroad. It is the American interest that they
correctly make the domestic diagnosis, and that when the time comes to
engage in convergence again there is a foundation of goodwill between
us not a sour recollection of bellicosity. If China chooses to pursue a
non-market solution to its problems we can be self-protective and
counsel caution to others, while at the same time avoiding malice.
Concluding Thought: Danger of Overprotection
Openness is a wellspring of American national security. In
responding to concerns about China it is imperative that we preserve
that asset as much as possible. Our welfare will take a hit from
sliding our engagement scale in the direction of caution, at least in
the short-term. Our ability to offset that cost is uncertain. We will
need to enact domestic policies to replace inputs from China, adjust
our trade to embrace replacement imports from other nations, and write-
off many investments made in the past. There are real centers of
innovation leadership in China too, and disengagement will deprive us
of those. The quicker and more extensively we choose to part ways with
China in areas of high-tech concern, the more urgently we need to
return to responsible leadership of the advanced economy caucus.
Economic protectionism has often been disguised as national security
through history, and when firms reduce competition with fear-mongering
our security is diminished. As we consider strategies to mitigate
consequences of China's economy for our interests, we must take care to
do no harm to what makes us strong in the first place.
Senator Sullivan. Thank you, Mr. Rosen.
Mr. Kallmer.
STATEMENT OF JOSH KALLMER,
EXECUTIVE VICE PRESIDENT OF POLICY,
INFORMATION TECHNOLOGY INDUSTRY COUNCIL (ITI)
Mr. Kallmer. Chairman Sullivan, Ranking Member Markey,
Members of the Subcommittee, thank you for inviting me to
discuss this critically important topic.
My name is Josh Kallmer, and I'm the Executive Vice
President for Policy at the Information Technology Industry
Council or ITI.
ITI is a collection of 64 of the world's most innovative
companies, representing the entire spectrum of the technology
sector. Every one of our companies operates globally with the
vast majority doing business in China.
We have a keen interest in this subject and we commend the
Administration in working to close the deal with China that
could address many of the challenges of doing business there.
I also have a personal perspective on this matter. Several
years ago, I served as Deputy Assistant U.S. Trade
Representative for Investment, where I was responsible for
negotiating treaties to secure additional market access for
U.S. companies and for representing USTR on the Committee on
Foreign Investment in the United States or CFIUS and that was
the context in which I had the privilege to work with you, Mr.
Chairman.
As you can imagine, China was a frequent topic of my work.
Let me say at the outset that our organization and the
companies we represent recognize and respect the national
security considerations at play here. The U.S. Government has
no more solemn and important responsibility than to protect the
Nation's security and we're committed to working with Congress,
the executive branch, and the entire stakeholder community to
address these challenges consistent with that imperative.
So I'd like to make three broad points today. The first is
that tech companies face significant challenges doing business
in China. For years, China has abused the privilege of being a
member of the international trading system, pursuing a tapestry
of policies and practices that favor Chinese companies and
support the Chinese state.
China's conduct has been particularly egregious in the
technology sector where it coerces foreign companies into
disclosing proprietary technology, subsidizes the domestic
manufacturing of many products, enacts unique domestic
standards without meaningful participation from foreign
companies, and restricts cross-border data flows.
My second point is that it's nevertheless important that
companies continue to do business in China. Despite the
challenges, U.S. business engagement in China strengthens
America economically and technologically and thereby
contributes to its security and its leadership.
China is an important and growing market for U.S.
technology exports. Being able to sell products and services to
a fifth of the world's population allows U.S. tech companies to
create jobs and expand R&D investment in the U.S., which allows
the United States to retain its technological edge.
Doing business in China also helps U.S. firms avoid ceding
global markets to their Chinese competitors. Customers of
services, such as cloud computing, whether they're Chinese,
German, Brazilian, or otherwise, want services that are
available globally.
If U.S. companies cannot provide cloud services to
multinational customers who do business in China and around the
world, Chinese firms will and furthermore, while China
frequently violates its trade commitments, continued business
engagement helps prevent it from flouting international norms
much more substantially.
By pressing for increased market access, participation in
standard-setting, and fairer treatment overall, U.S. companies
help keep a spotlight on Chinese practices that preclude it
from rewriting the rules of trade.
Finally, to address these challenges, we need to have a
strong multidimensional partnership between companies and
policymakers. Government and industry must work together to
address China's conduct. Neither alone can address the
challenges.
Companies understand how data moves and therefore how to
mitigate risks to networks and operations. Policymakers
understand how to assess security risks and how to seek changes
in other countries' behavior, and we see three specific ways of
doing so that I suspect we'll discuss today.
First, the tech industry welcomes the Administration's
efforts to redefine the bilateral economic relationship with
China and we're eager to see an agreement that meaningfully
addresses its policies and practices and in that regard, Mr.
Chairman, Mr. Ranking Member, I couldn't agree more with the
idea that the agreement has to address the structural problems
in China's market.
We look forward to supporting the Administration in working
to ensure that once an agreement is reached, China abides by
every single commitment that it makes.
Second, we need to ensure that the U.S. Government has the
tools to address security risks effectively without impeding
the innovation that supports U.S. technological leadership.
We strongly supported the development of last year's FIRRMA
legislation to improve the CFIUS process and we're working
actively with the Administration to modernize the export
control system under the Export Control Reform Act.
We also work closely with the U.S. Government through our
leadership position in the Department of Homeland Security's
ICT Supply Chain Risk Management Task Force.
Finally, we need to invest in America's future to ensure
that its companies and workers are as competitive as possible.
That means investing in research and development in areas such
as AI, 5G, enhancing STEM education, improving physical and
digital infrastructure, and pursuing economic policies that
allow the United States' world-class companies, entrepreneurs,
and workers to compete with anyone in the world.
So I'll wrap up my opening remarks there, but let me thank
you again for having me, and I'd be happy to take your
questions.
[The prepared statement of Mr. Kallmer follows:]
Prepared Statement of Josh Kallmer, Executive Vice President of Policy,
Information Technology Industry Council (ITI)
Introduction
Members of the Committee, thank you for inviting me to testify
today.
The Information Technology Industry Council (ITI) represents 64 of
the world's leading information and communications technology (ICT)
companies. We are the global voice of the tech sector and the premier
advocate and thought leader in the United States and around the world
for the ICT industry. ITI's member companies are comprised of leading
technology and innovation companies from all corners of the ICT sector,
including hardware, software, digital services, semiconductor, network
equipment, Internet companies, and companies using technology to
fundamentally evolve their businesses. Trade issues are critical to our
members, and China is always a subject of much concern and interest.
Today's hearing is particularly timely, as China, trade, and
security issues garner significant attention from the administration
and Congress. Media attention and the potential for conflating these
issues make it even more important to clarify and address these complex
subjects. China's blatant disregard for international norms governing
free trade and market access has been well-established and must be
addressed. China's role and impact on the global economy is as complex
as it is important, however, and its relationship with the United
States is by nature both competitive and cooperative.
China has a well-established record of shifting the playing field
in its favor--whether it is creating conditions for technology transfer
through forced partnerships with Chinese companies; establishing
ambiguous and intrusive security review regimes; or circumventing U.S.
export controls laws, these unfair practices not only create an unfair
economic advantage but may also, in some cases, pose a national
security risk. Numerous policymakers have voiced concern regarding the
security implications of China's practices. ITI members take security
very seriously, including taking measures to ensure protection of their
networks, customer data, IP, and threats to national security. ITI has
demonstrated this commitment through our active engagement with
policymakers on a number of issues, including the Committee on Foreign
Investment in the U.S. (CFIUS) and export controls reform, and we
welcome the opportunity to work with policymakers on the issues before
us today.
While we must address China's problematic policies and practices,
that is only half of the equation. The U.S. Government must also
rebalance its approach to strengthening the U.S. economy and the
capacity for innovation in the United States. To that end, we encourage
the U.S. Government to invest in education and skills training and
basic research and development, and to foster the growth of emerging
technologies in the United States.
Regardless of whether China plays by the rules or not, it will
continue to improve in technological development, innovation, and
growth. We are no longer in a situation in which China makes
technological gains simply by virtue of stealing U.S. technology.
Therefore, efforts to wall the U.S. off from competition with China
will not solve the problem. The United States must be prepared to
compete.
In my testimony, I will outline some of the challenges that our
companies face as well as what we can do about it, why the Chinese
market is so important, and how we can ensure that the United States
continues to foster an environment that gives the best and brightest
individuals the necessary tools to develop tomorrow's most innovative
technology.
Key Problems Foreign Tech Companies Face from China
Our companies face real and persistent challenges in the Chinese
market, including data localization requirements, cloud services
restrictions, and intrusive and undefined security review regimes that
may lead to exposure of source code and other intellectual property.
Over the last decade, China has made a concerted effort not only to
address legitimate cybersecurity and privacy concerns of Chinese
citizens and companies but also to foster a protected space for
domestic companies to gain an unfair market advantage. As the Office of
the United States Trade Representative (USTR) laid out in its
comprehensive Section 301 investigation findings report, China has
created a tapestry of laws, regulations, standards, and practices that
collectively advantage Chinese companies and create conditions for
direct and indirect tech transfer.
Despite this clearly strategic approach to boost Chinese innovation
and indigenous technology, the Chinese government is not a monolith.
Infighting, discord, and pressure from Chinese leadership for agencies
to issue regulations and demonstrate enforcement has added another
layer of uncertainty and unpredictability to the Chinese market.
Following passage of China's 2016 Cybersecurity Law, the tech sector
has seen an unprecedented onslaught of implementing regulations,
notices, measures, and standards drafted by numerous agencies within
the Chinese bureaucracy, often contradicting one another. For example,
the information technology standards body known as TC 260 released 110
standards for comment between November 2016 and December 2017 alone,
followed by another 53 standards in 2018--accounting for two-thirds of
all standards that TC 260 has released for public comment. While these
standards are often classified as voluntary, they may become de facto
mandatory standards, making the short comment windows even more
critical. These hastily enacted regulations also allow enforcement
agencies to both interpret obligations unevenly and, potentially,
target foreign companies.
Broad and Ambiguous Security Review Regimes
While the Chinese government has for the most part been careful not
to explicitly outline requirements for transfers of technology, source
code, or other IP, the ambiguity and uncertainty surrounding China's
numerous ``security review regimes'' create conditions ripe for
coercion of companies to expose valuable intellectual property. For
example, the Cybersecurity Law requires that companies subject
themselves to intrusive security reviews for products and
infrastructure to qualify as ``secure and controllable.'' While the
meaning of this term is ambiguous, the provision favors domestic
companies and products as inherently more secure and is, in effect, a
thinly-veiled attempt to encourage consumers to ``buy domestic.''
Specifically, the Cross-Border Data Transfer Measures outline highly
intrusive procedures, including background investigations of network
suppliers and inspections of corporate offices.
Implicit and Explicit Technology Transfer Requirements
Chinese requirements outlined in various laws and regulations--
including those that require firms to locate production or facilities
in China and establish a joint venture (JV) with a Chinese partner in
order to operate in China--can put their valuable technology and other
intellectual property at risk. Disclosure of sensitive information can
be forced through a contract (e.g., JV, partnership), direct pressure
from local or central governments, or governmental review or
certification mechanisms. While there is nothing inherently wrong with
voluntary JVs and partnerships, they become problematic when they are
forced on foreign parties and when regulations stipulate either that
the Chinese partner must maintain majority control of the JV or that
only a Chinese company may obtain required product licenses.\1\
---------------------------------------------------------------------------
\1\ See Law of the People's Republic of China on Chinese-Foreign
Joint Ventures; Provisions on Administration of Foreign-Invested
Telecommunications Enterprises; The People's Republic of China Foreign
Investment Catalogue 2017
---------------------------------------------------------------------------
China has made its technology transfer objectives clear through its
national strategy to promote indigenous innovation, Made in China 2025.
The strategy explicitly promotes the transfer of technology as a means
of advancing technological capability, competitiveness, and strategic
emerging industries. Further, it outlines a wide-ranging effort to
employ funding and the investment of significant government resources
in support of key industries. While the Chinese government intended
Made in China 2025 as a means of setting aspirational goals for a
domestic audience, it has nonetheless fostered an environment that
makes forced technology transfer more likely and may yield overcapacity
in targeted sectors. These factors create real competitiveness risks
for companies and can significantly distort market supply and demand.
Restrictions on Foreign Cloud Service Providers
China's restrictions on U.S. cloud services providers (CSPs)
exemplify the lack of fairness in the U.S.-China trade relationship.
Foreign companies face written and unwritten requirements that do not
allow foreign companies to obtain licenses to operate without a Chinese
partner; force U.S. CSPs to surrender use of their brand names; and
require companies to hand over operation and control of their
businesses to Chinese companies in order to do business in the Chinese
market. Chinese cloud services providers operating in the United States
are subject to none of these restrictions.
Data Localization Requirements
Cross-border data flows are essential to digital trade. In 2016,
over 53 percent of total U.S. service exports relied on cross-border
data flows.\2\ Data flows are also important for purposes of network
protection, as companies rely on real-time exchanges of information
across borders to identify and ``patch'' vulnerabilities and receive
timely system and software updates. Despite numerous efforts by the
U.S. tech sector to explain that data localization does not enhance--
and may diminish--data security, China continues to publish new and
troubling laws, regulations, and standards that require the storage of
data in China. For example, China's Cybersecurity Law and other
regulations seriously harm many U.S. exporters by restricting cross-
border data flows and requiring firms to store and process data in
China. Draft regulations--including the Cross-Border Data Transfer
Measures and the Critical Information Infrastructure Protection
Regulation (both implementing regulations of the Cybersecurity Law)
contain numerous provisions that would force companies to localize
certain data in China and create undue and expensive impediments to
transferring business information out of China in a timely manner.
---------------------------------------------------------------------------
\2\ ``Cross-Border Data Flows, the Internet and What is Means for
U.S. and EU Trade and Investment'' (Brookings, https://
www.brookings.edu/blog/up-front/2014/10/21/cross-border-data
-flows-the-internet-and-what-it-means-for-u-s-and-eu-trade-and-
investment/).
---------------------------------------------------------------------------
China's Standards Development
Chinese standards work and implementation of the 2017 revision of
the Standardization Law presents a unique set of challenges, as China
aims to codify the standards-development process in China.
The Law includes problematic elements such as unclear public
disclosure requirements that may reveal business-sensitive information.
Implementing policies of the Law, such as the Pioneer Standards
Program, incentivize public disclosure of standards that companies use
in their products. Disclosure is not mandatory, yet companies that do
not disclose standards will not be recognized as standards
``pioneers,'' which may influence consumer purchasing preferences and
also renders the product ineligible to compete for government
procurement contracts.
ITI supports industry-led, consensus-based international standards
development, which fosters an environment in which standards are
market-driven and only adopted if they benefit current technology and
consumers. However, China and other nations have utilized ``country-
unique'' standards as a policy tool to establish market access barriers
and give domestic companies a competitive advantage. Given the size and
influence of China's market, these national standards may influence
regional trends and product development. China's exclusion or strict
limitations on the participation of foreign companies in standards
development bodies means that Chinese standards are developed in way
that weakens interoperability and the global standards system. ITI
urges Congress and the Administration to promote and strengthen the
standards development process worldwide to ensure that development is
fully consistent with international norms and the World Trade
Organization (WTO).
China's reliance on a top-down model to promote its standards does
not mean that the U.S. Government should take a similar approach. While
China may propose many more standards in international standards
organizations, the market should ultimately choose the most appropriate
standard for consumers and the current technology. Regardless of
quantity, a robust industry-led international standards development
process leads to adoption of the most appropriate standard. In this
regard, there is no ``first mover advantage'' that would give China an
advantage in the development of 5G or technologies related to AI. The
best way to counter China's growing influence in international
standards bodies is to work within and support the international
standards system. The U.S. Government can assist by promoting reliance
on international standards and by investing in research and
development, which will allow U.S.-based companies to continue to
innovate and lead in the market.
Why Do Companies Stay in the Chinese Market?
While the Chinese market presents clear risks and impediments for
foreign companies, its size and impact on the global supply chain
cannot be ignored. In 2018 alone, the U.S. exported nearly $21 billion
worth of ICT goods to China.\3\ China is the third largest market for
U.S. services exports in Asia and accounts for nearly a quarter of the
global consumer market. These customers operate not only in China but
also globally--and they demand products and services that operate
globally. If U.S. companies leave the Chinese market, they effectively
forfeit much more than the Chinese market to Chinese companies.
Customers--particularly those that depend on enterprise services such
as cloud computing--will seek companies that provide services in all
markets in which they operate.
---------------------------------------------------------------------------
\3\ ``U.S. GDP was $20.89 trillion in the fourth quarter of 2018''
(Bureau of Economic Analysis, https://www.bea.gov/news/2019/initial-
gross-domestic-product-4th-quarter-and-annual-2018).
---------------------------------------------------------------------------
From both an economic and technological advantage perspective, it
is not in the interest of U.S. companies, consumers, or the government
to cede market share to Chinese companies. Put simply, if companies
want to compete for global consumers and continue to be at the
forefront of emerging technology development they must compete with
Chinese companies in China and abroad.
What the U.S. Government Can Do
ITI appreciates that the U.S. Government recognizes China has
instituted problematic tech policies and practices and that the
administration has taken steps to address it, including USTR's Section
301 investigation and subsequent report. We routinely hear from
policymakers regarding both economic and security concerns related to
China, including current and future American economic competitiveness.
The tools that the U.S. Government uses to address these issues,
however, must be tailored and strategic to avoid causing unnecessary
harm to U.S. competitiveness and innovation--which are key to the
Uniteds States' economic and national security. I'd like to outline a
few basic tenets below.
Assess Potential Security Problems from Both a Private and Public
Sector Perspective
ITI respects and acknowledges national security concerns. We
advocate for and work with policymakers to develop thoughtful and
tailored policy approaches that consider: the problem or threat from
both a public sector and private sector perspective; whether and to
what extent a threat can be mitigated; and how to limit adverse or
unintended effects on companies' ability to operate, compete, and
innovate. It is important to recognize that the public sector often has
information and political insights that the private sector does not and
vice versa. While the U.S. Government has visibility into many security
threats, it relies on the private sector to tell it what is happening
on its networks and the steps that should be taken to mitigate risks.
While policymakers are rightly concerned about safeguarding
American companies' innovations in emerging technology fields such as
artificial intelligence (AI) and 5G, it is important to ensure that
such safeguards do not hamstring companies' ability to develop the very
technologies that the U.S. Government values for purposes of economic
growth and national security. The tech sector can help in this
assessment of future impacts.
The consequences of security policy to tech companies will have
significant ripple effects. ITI encourages Congress and the
administration to engage with the private sector on these important
issues and work together to develop a strategic and coordinated
approach to the potential threats and challenges posed by China and
others.
Compete with China and Invest in America's Future
Preventing China from stealing technology alone will not help us
achieve our goals. The U.S. Government must invest in America's future.
This means investing in research and development, education, science
and technology, artificial intelligence (AI), and digital
infrastructure. Strengthening the business environment, the Nation's
human resources, and incentivizing innovation are all key to generating
sustainable economic prosperity.
If the U.S. is to preserve its technological edge, it must be
prepared to step up and compete with China. Regardless of whether China
plays by the rules or not, Chinese inventors, entrepreneurs, and
businesses will continue innovating and will close the technological
gap between the U.S. and China. While a level playing field is of
course important, it is vital that the U.S. Government continue to
commit to serious investments in technology to ensure American
competitiveness and economic growth. China is making a concerted,
strategic effort to invest and plan for its economic and technological
future. The clock is running out for the U.S. Government to take
action. Where the private sector in the U.S. is making significant
progress in advancing the next generation of technologies and investing
heavily in cutting-edge research, the U.S. Government can and should do
more to support innovation.
With the world's largest and increasingly educated population,
China had 4.7 million STEM graduates in 2016. To put that in
perspective, that means half of China's nearly 8 million graduates are
focusing on STEM, while in the U.S. less than a third--roughly 568,000
of America's 2 million graduates--major in STEM. The U.S. has invested
less and less in R&D spending, where in 2016 R&D constituted about 2.7
percent of GDP.\4\ China is catching up quickly with an expenditure of
2 percent of its GDP going to R&D.\5\ In 2017, China accounted for 48
percent of the total global investment in artificial intelligence
startup funding, while the U.S. accounted for 38 percent. In monetary
terms, China invested $7.3 billion in artificial intelligence while the
U.S. invested $5.77 billion.
---------------------------------------------------------------------------
\4\ ``How much does your country invest in R&D'' (UNESCO Institute
for Statistics, http://uis.unesco.org/apps/visualisations/research-and-
development-spending/).
\5\ Ibid.
---------------------------------------------------------------------------
China is also on track to outpace the United States in other areas.
For example, according to a 2018 International Data Corporation report,
the U.S. will spend $22 billion on smart city development this year.
China is close behind with projected spending at $21 billion. As of
2015, there were 1,000 smart city pilot plans in the works worldwide,
500 of which were located in China. While 66 percent of U.S. cities are
adopting smart city technologies, China's test bed for smart cities is
the largest in the world.
These are just a few examples. The bottom line is that the United
States is failing itself by not seriously investing in our country's
technological and economic future.
Conclusion
China poses serious challenges to the tech sector. We must address
these challenges aggressively yet strategically and with an eye to
future ramifications for the economy and technological competitiveness.
We also can neither ignore nor deny the significant role China plays in
the global economy as a key piece of the global supply chain, supplier
of products and components, an innovative competitor, and a vital
market for U.S. goods and services, and it would be a disservice to
downplay the need to invest in U.S. companies' ability to compete with
an increasingly innovative and technologically advanced China. With the
right approach, we can address these serious challenges in a way that
benefits the United States' economic and national security.
On behalf of all ITI members, I thank you for having me before the
Committee today and commend you for your interest in examining the
various challenges that China poses to the tech sector. We stand ready
to work with you to address these challenges. I look forward to
answering your questions.
Senator Sullivan. Thank you, Mr. Kallmer.
Ms. Sacks, the floor is yours.
STATEMENT OF SAMM SACKS, CYBERSECURITY POLICY AND CHINA DIGITAL
ECONOMY FELLOW, NEW AMERICA
Ms. Sacks. Chairman Sullivan, Ranking Member Markey, and
Members of the Subcommittee, thank you for the opportunity to
testify today, and I, too, am very excited to talk about the
tools we have at our disposal.
My research focuses on information and communication
technology policies in China. I have worked on Chinese tech
policy issues for over a decade, both with the national
security community as well as the private sector and now in a
research capacity.
The United States and China are now locked in a growing
conflict with technology and cybersecurity at the center. The
decisions made by U.S. policymakers now will have consequences
for years to come.
While much attention is paid to the role played by joint
ventures and China's industrial policy in tech transfer and IP
theft, I will focus on three related issues but issues that
have gotten less attention where I think there is an
opportunity right now for action.
I will discuss the challenges posed by standards, data
transfer, and emerging technology norms. First, standards.
Since 2015, China has issued over 300 cybersecurity standards.
I've translated and analyzed these standards in a report from
last year and will be happy to discuss that in more detail in
follow-on questions.
These standards pose three main issues to U.S. commerce.
First, the Chinese Government can use standards to pressure
companies to undergo invasive product reviews where sensitive
information and source code may be exposed as part of
verification and testing.
Second, they may create a competitive advantage for Chinese
companies if regulators deem Chinese companies to be superior,
and third, to comply with some standards, foreign firms may
need to redesign products for the China market in ways that are
fundamentally incompatible with the global standard system.
Another major issue for U.S. companies in China, as my
colleague, Mr. Kallmer, has mentioned, is cross-border data
transfers. Depending on how China's cybersecurity law is
implemented, the government could require certain kinds of data
to be stored within Mainland China and require security
approvals for cross-border data transfer.
A third challenge is the Chinese Government's efforts to
shape the norms for the use of emerging technologies. The
Chinese leadership was not at the table in shaping the rules
for the global Internet and now they want to ensure that that
does not happen in transformative technologies.
When it comes to issues, like AI ethics, safety, and
privacy, the rules do not yet exist in China or in the rest of
the world. There are some troubling indications when it comes
to the Community Party's vision for the use of technology.
For example, reports say that in Xinjian, the government is
detaining large numbers, upwards of hundreds of thousands to
one million Muslims, and using a range of technologies in that
process.
So on all of these fronts, right now, the U.S. has a window
for achieving meaningful change that should not be squandered.
I have five recommendations. First, adopt a small yard/high
fence approach. This is a phrase used by the former Secretary
of Defense Robert Gates and it essentially means be selective
about what technologies are vital to national security but be
aggressive in protecting them. Overreach in the form of blanket
bans, unwinding global supply chains, and discrimination
against individuals is not the answer.
Second, make targeted demands of China in trade talks. As
China's standards regime is still taking shape, the Chinese
Government should commit to revise those standards that
pressure U.S. companies to disclose source code, encryption
keys, and sensitive information. On data, Beijing should commit
to allow more commercial data to exit the country.
Third, work with China on setting norms for emerging
technologies. The U.S. benefits from exchange and cooperation
with Chinese practitioners and scholars. There are grave risks
to losing visibility and insight into China's approach on these
matters.
In parallel, the U.S. should coordinate with allies and
partners to create international pressure on Beijing.
Multilateral pressure has been effective in the past.
Last, we cannot just play defense. We must play offense.
The United States must invest in its own R&D, its
infrastructure, its STEM education, because China will not
abandon its technological aspirations. We must be able to
compete in our own right.
Thank you very much, and I look forward to your questions.
[The prepared statement of Ms. Sacks follows:]
Prepared Statement of Samm Sacks, Cybersecurity Policy and China
Digital Economy Fellow, New America
Chairman Sullivan, Ranking Member Markey, and Members of the
Subcommittee, I appreciate the opportunity to testify on the challenges
China presents to U.S. commerce.
I am a Cybersecurity Policy and China Digital Economy Fellow at New
America. New America is a nonpartisan think tank dedicated to the
mission of realizing our Nation's highest ideals through confronting
challenges caused by rapid technological and social change.
My research focuses on information and communication technology
(ICT) policies in China and the U.S.-China technology relationship. I
have worked on Chinese technology and cyber issues for over a decade,
not only with the U.S. government, where I focused on the national
security implications of technology transfer and dual-use technology,
but also with the private sector, looking at China's complex and
rapidly evolving regulatory environment.
This hearing could not come at a more critical moment. The United
States and China are locked in a deepening conflict with technology and
cybersecurity at the center. It is arguably the most significant period
in the bilateral trade and investment relationship in the last four
decades. The decisions made by U.S. policymakers during this window
will have consequences for U.S. national security, competitiveness,
innovation, technological leadership, and norms for years to come.
China's Technology Challenge
In his testimony last week before the House Ways and Means
Committee, Ambassador Lighthizer testified that technology transfer,
failure to protect intellectual property (IP), large subsidies, and
cyber theft of commercial secrets present major problems for the U.S.
economy.\1\ While much attention is paid to the role played by joint
ventures (JVs) and China's industrial policy, I will focus here on
three related issues that get less attention than they deserve and
where there is an opportunity right now for action: standards, data
flows, and emerging technology norms and governance.
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\1\ Robert Lighthizer, ``Opening Statement of USTR Robert
Lighthizer to the House Ways and Means Committee,'' February 27, 2019,
https://ustr.gov/about-us/policy-offices/press-office/press-releases/
2019/february/opening-statement-ustr-robert.
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While I will focus my comments on the ICT space, these challenges
are not limited to companies in the technology industry. They also
matter for all sectors that rely on ICT infrastructure, data, and
digital platforms--including manufacturing, finance, energy, retail,
healthcare, etc.
1. Market Access, IP, and Technology Transfer
The administration of President Xi Jinping is doubling down on
plans to reduce reliance on foreign suppliers in what are deemed ``core
technologies.'' \2\ These efforts coincide with Beijing's rapid build-
out of the most comprehensive cybersecurity legal and regulatory regime
of any government in the world. An interlocking system of laws,
regulations, and standards create a maze of rules spanning data, online
content, and critical infrastructure. While the Cybersecurity Law is
the centerpiece of this system, far less understood are the hundreds of
cybersecurity standards accompanying it, which in practice are vital
for actually doing business on the ground.
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\2\ Paul Triolo, Graham Webster, Lorand Laskai, and Katharin Tai,
``Xi Jinping Puts `Indigenous Innovation' and `Core Technologies' at
the Center of Development Priorities,'' DigiChina, New America, May 2,
2018, https://www.newamerica.org/cybersecurity-initiative/digichina/
blog/xi-jinping-puts-indigenous-innovation-and-core-technologies-
center-development-priorities/.
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These standards contribute to making China an increasingly
difficult market for foreign firms to operate in. There are three main
challenges posed by the standards regime:\3\
---------------------------------------------------------------------------
\3\ Samm Sacks and Manyi Kathy Li, ``How Chinese Cybersecurity
Standards Impact Doing Business in China,'' CSIS Briefs, Center for
Strategic & International Studies, August 2 2018, https://www.csis.org/
analysis/how-chinese-cybersecurity-standards-impact-doing-business-
china.
First, the Chinese government can use standards to pressure
companies to undergo invasive product reviews where sensitive
information and source code (even if not explicitly required)
may be exposed as part of verification and testing. This
includes, for example, the security assessment process for
products such as central processing units, operating systems,
and office software suites. As part of the assessment,
suppliers need to submit verification materials including
product IP, source code, and design and development documents.
China's Standardization Law (which took effect in January 2018)
may require public disclosure of what are called ``enterprise
standards,'' referring to a company's proprietary product and
service specifications, according to BSA's Special 301
Submission.\4\
---------------------------------------------------------------------------
\4\ BSA / The Software Alliance, ``Special 301 Submission,''
February 8, 2018, https://www.bsa.org/ /media/Files/Policy/Trade/
BSA2018Special301.pdf.
Second, Chinese standards also create a competitive
advantage for Chinese companies. Chinese companies may not have
the same concerns foreign companies do about providing
sensitive information to the government as a condition of
meeting the standards. Chinese regulators may also deem Chinese
companies as being more secure under the vague criteria
contained in the standards simply because they are local and
therefore perceived to be more ``secure and controllable'' and
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without influence from foreign governments.
Third, to comply with some standards, foreign firms may need
to redesign products for the China market where they are not
compatible with international standards. This is not only
costly, but also creates interoperability issues with global
markets.
Beijing uses vague language in standards, like in many Chinese laws
and regulations, to avoid issues, such as World Trade Organization
(WTO) challenges, while allowing the government maximum flexibility and
discretion to apply onerous provisions when it sees fit.
Internationally Beijing must disclose required standards to the WTO.
However, in 2017 the government downgraded over 1,000 Chinese standards
submitted to the WTO from required national standards to
recommendations.\5\
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\5\ ``396-xiang Qiangzhixing Guojia Biaozhun Feizhi 1077-xiang
Qiangzhixing Guojia Biaozhun Zhuanhua'' [396 Mandatory National
Standards Abolished, 1077 National Standards Transformed], Ministry of
Commerce of the People's Republic of China, April 1, 2017, http://
chinawto.mofcom.gov.cn/article/i/ac/201704/20170402545384.shtml.
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Although officially most standards are deemed ``recommended,'' in
practice many may often be required to do business in China. This is
the case when standards are listed as procurement requirements for
government or state-owned enterprises. Beyond government customers,
some Chinese customers may not buy from vendors who lack a
certification associated with certain standards. There have been cases
in which customer deals do not go through because a product lacks a
certain certification.
Many more standards are likely to come, as Beijing is still only in
the early stages of a national effort to build out its cybersecurity
standards regime. Many existing standards are still only in draft form.
For more details on China's cybersecurity standards regime, please
see the report I wrote in my previous position at the Center for
Strategic & International Studies.\6\ The report includes our
translation and analysis of more than 300 standards dating back to
2015, when the Cybersecurity Law drafting process began.
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\6\ Sacks and Li, ``How Chinese Cybersecurity Standards Impact
Doing Business in China.''
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2. Data Localization
Restrictions on cross-border data flows represent one of the top
problems for U.S. companies in China. According to Article 37 of
China's Cybersecurity Law: ``Critical information infrastructure
operators that gather or produce personal information or important data
during operations within the mainland territory of the People's
Republic of China, shall store it within mainland China.'' \7\
Depending on how it is implemented, this provision could require
certain kinds of data to be stored within mainland China and require
security approvals for cross-border data transfer.
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\7\ A translation of China's Cybersecurity Law is available at:
https://www.newamerica.org/cybersecurity-initiative/digichina/blog/
translation-cybersecurity-law-peoples-republic-china/.
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The Chinese government is still defining ``personal information''
and ``important data,'' as well as what sectors fall under ``critical
information infrastructure'' (CII), under separate measures still in
draft form,\8\ but there are concerns that the scope could be vast and
ambiguous.\9\
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\8\ ``Measures on Security Assessment of Cross-border Transfer of
Personal Information & Important Data (Draft for comment)'' and
separate standard Information Security Technology--Guidelines for Data
Cross-Border Transfer Security Assessment (draft for comment) together
are meant to flesh out technical guidelines assessing cross-border data
transfers. LINK See also Samm Sacks, Paul Triolo, and Graham Webster,
``Beyond the Worst-Case Assumptions on China's Cybersecurity Law,''
DigiChina, New America, October 13, 2017, https://www.newame
rica.org/cybersecurity-initiative/blog/beyond-worst-case-assumptions-
chinas-cybersecurity-law/
\9\ According to the latest publicly available draft, all ``network
operators'' will be subject to assessments before exporting data out of
China. In practice, this could mean anyone who owns and operates an IT
network. Industry sources report the government may have walked this
back recently to focus just on CII operators, but there is still
tremendous regulatory uncertainty given that the definition of CII
itself is up in the air. The May 27, 2017, version gives a sweeping
definition of ``important data,'' spanning that which can ``influence
or harm the government, state, military, economy, culture, society,
technology, information . . . and other national security matters.''
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As the government finalizes these draft requirements amid much
internal debate, it is important to keep in mind that there are also
competing voices in China advocating for more alignment with
international practices. Key players in China's private sector have
argued that cutting off cross-border data flows will hurt the country's
global economic goals; in fact, one of the main reasons why Beijing has
yet to finalize the cross-border data flow measures is that there has
been so much pushback from Chinese industry seeking global markets.
3. Leadership in Technology Norms and Governance
Artificial intelligence (AI), the Internet of Things (IoT), and the
collection and use of the data involved present new challenges when it
comes to technology norms and governance. The rules do not yet exist
when it comes to complex questions related to ethics, safety, privacy,
and discrimination.
Chinese scholars, practitioners, and the government are beginning
to grapple with these challenges in often positive ways. There is a
growing field of public conversations and legal scholarship in China
devoted to topics ranging from the right to contest algorithmic
decisions to bias and discrimination in AI--similar questions under
discussion among leading AI thinkers in the United States.\10\
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\10\ I recently participated in a Track 2 dialogue on privacy with
Berkeley Law and Peking University Law. The link to the public portion
of the conference is available here: https://www.law.berkeley.edu/
research/bclt/bcltevents/2019-privacy-and-cybersecurity-law-
developments/agenda/.
---------------------------------------------------------------------------
Last year, China took a major step in asserting leadership in AI
governance by hosting a major international AI standards meeting in
Beijing and publishing an AI standards white paper that underlined the
need for rules of the road when it comes to AI ethics, privacy, and
safety.\11\ Chinese authorities see this as a way to take a leading
role in international governance, reflecting long-standing concerns
that Chinese representatives were not at the table to help set the
rules of the game for the global Internet. The Chinese government wants
to make sure that this does not happen with the next generation of
transformative technology, now that China has become a technology power
with a sizeable market and leading technology companies.
---------------------------------------------------------------------------
\11\ Jeff Ding, Paul Triolo, and Samm Sacks, ``Chinese Interests
Take a Big Seat at the AI Governance Table,'' DigiChina, New America,
June 20, 2018, https://www.newamerica.org/cybersecurity-initiative/
digichina/blog/chinese-interests-take-big-seat-ai-governance-table/.
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With AI governance still in its early stages, it is too early to
know what approach China will take; however, in some areas there are
very troubling indications when it comes to the Communist Party's
vision for the use of technology.
Reputable reports say that in Xinjiang, the government is detaining
large numbers of Muslims and using a range of technologies in the
process. Biometric scans, facial recognition, devices that scan
smartphones for encrypted chats, and high-tech big data monitoring
systems are enabling the mass surveillance and incarceration of Uighurs
and other citizens, with estimates ranging from hundreds of thousands
to as many as one million people affected.\12\
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\12\ Josh Chin and Clemente Burge, ``Twelve Days in Xinjiang: How
China's Surveillance State Overwhelms Daily Life,'' The Wall Street
Journal, December 19, 2018, https://www.wsj.com/articles/twelve-days-
in-xinjiang-how-chinas-surveillance-state-overwhelms-daily-life-
1513700355.
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It is not clear whether the Chinese government plans to expand the
model for how technology is being used by security services in Xinjiang
to other parts of China, but we cannot ignore that possibility that it
could in the future.
There is tremendous uncertainty in China and the rest of the world
about how to shape rules and norms around new technologies in ways that
will bring benefits to humanity. China aspires to play a leading role
in this conversation in ways that will have ramifications for U.S.
companies doing business in China, and, more broadly, for the formation
of global governance frameworks for the use of technology.
Recommendations for U.S. Policy Toward China
As Ambassador Lighthizer testified last week, the U.S. government
is engaged in ``very intense, extremely serious, and very specific
negotiation with China on crucial structural issues.'' \13\ This
presents a window for achieving meaningful change that should not be
squandered.
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\13\ Lighthizer, ``Opening Statement of USTR Robert Lighthizer to
the House Ways and Means Committee.''
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I have five recommendations:
1. Adopt a ``small yard, high fence'' approach. The question is how
to address the challenges posed by China in a way that does not
undermine ourselves in the process. In a recent article for
Foreign Affairs, my colleague Lorand Laskai and I argue for an
approach based on what the former Secretary of Defense Robert
Gates called ``small yard, high fence.'' This means being
selective about what technologies are vital to U.S. national
security, but being aggressive in protecting them.\14\
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\14\ Lorand Laskai and Samm Sacks, ``The Right Way to Protect
America's Innovation Advantage,'' Foreign Affairs, October 23, 2018,
https://www.foreignaffairs.com/articles/2018-10-23/right-way-protect-
americas-innovation-advantage.
Overreach in the form of blanket bans, unwinding global supply
chains, and discrimination based on national origin is not the
answer. Tools like the Committee on Foreign Investment in the
United States (CFIUS), export controls, and law enforcement are
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designed to be used as scalpels, not blunt instruments.
Overreach has costs for U.S. security, competitiveness, and
innovation. As my New America colleague Graham Webster writes
for MIT Technology Review, there may be greater harm to U.S.
interests in viewing China's technological ambitions as an
existential struggle between two competing blocs.\15\ That is
because the United States and China belong to an interconnected
system when it comes to research, development, and
manufacturing. Innovation by American companies is fueled by
access to the Chinese market. The leading semiconductor
manufacturers make substantial profits in China. They then plow
a major portion of those profits back into R&D in order to stay
competitive in emerging technologies like 5G.
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\15\ Graham Webster, ``The U.S. and China Aren't in a Cold War, So
Stop Calling it That,'' MIT Technology Review, December 19, 2018,
https://www.technologyreview.com/s/612602/the-us-and-china-arent-in-a-
cold-war-so-stop-calling-it-that/.
Unlike the Cold War space race with the Soviet Union, the line
between U.S. and Chinese technological development is not as
clear as the political border between the two countries. Today,
government scientists have been replaced by international
corporations and diffuse global networks of entrepreneurs,
researchers, and venture capitalists.\16\
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\16\ Laskai and Sacks, ``The Right Way to Protect America's
Innovation Advantage.''
Innovation flows both ways across the Pacific. China is emerging
as an AI powerhouse, with Chinese start-ups excelling in
several areas, including computer vision, speech recognition,
and machine translation. If U.S. companies are to have any
chance of keeping up, they will need access to Chinese
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research, talent, and expertise.
2. Targeted demands in China trade talks. As U.S. and Chinese
negotiators work to complete a trade deal, the U.S. side should
structure its demands of Beijing to focus on the following
issues which will have significant effect on the ability of
U.S. companies to do business in China. By prioritizing the
following three issues, the U.S. side may have a shot at
achieving more than just a cosmetic deal with Beijing. These do
not require that Beijing dismantle state capitalism or abandon
its technological ambitions, but they could result in
meaningful changes for doing business in China:
a. Standards: Since China's standards regime is still taking
shape, this is an area upon which the United States should
press Beijing. The Chinese government should commit to
revise regulations and standards that pressure U.S.
companies to disclose source code, encryption keys, and
other sensitive information such as proprietary product
specifications in exchange for market access. Any
government reviews should be conducted in a non-arbitrary
and transparent manner, and include international third-
party accredited bodies.\17\
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\17\ BSA / The Software Alliance, ``Special 301 Submission.''
b. Data Flows: Beijing has yet to finalize the scope of what kind
of data must be stored locally under the pending definition
of critical information infrastructure. Beijing should
commit to allow more commercial data to exit the country
without undergoing opaque and arbitrary security audits.
The final version of the relevant regulations on the issue
should spell this scope out in clear terms. Beijing should
also sign onto the Asia-Pacific Economic Cooperation's
(APEC's) Cross Border Privacy Rules System (CBPRs)\18\ to
facilitate cross-border data transfers with the United
States. Since Beijing is concerned with new U.S.
restrictions on U.S. citizen data under the expanded CFIUS
regime, the U.S. side should agree to its own security
reviews involving access to U.S. citizen data in a narrow
fashion.
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\18\ See: http://cbprs.org/.
c. IP Theft: On IP theft, Beijing should commit to impose criminal
penalties, including jail time (not just fines) against
individuals as a deterrent against IP theft. It also should
agree to put in place measures that protect confidential
business information during government review processes,
including a dispute channel to address conflicts of
interest and the types of information requested, according
to the U.S. China Business Council.\19\
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\19\ US-China Business Council, ``US-China Business Council
Statement on Section 301 Report,'' March 22, 2018, https://
www.uschina.org/media/press/us-china-business-council-statement-
section-301-report.
Robust verification measures should be put in place to backstop
commitments made by Beijing. China did not live up to its
commitments not to conduct cyber industrial espionage under
the 2015 Xi-Obama cyber agreement. A compliance monitoring
system focused specifically on IP and tech transfer should
be used to scrutinize practices, procedures, and systems of
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violators.
3. Work with China on setting norms for emerging technologies. As
governments around the world grapple with how to set norms and
shape governance for emerging technologies, the United States
benefits from cooperation and exchange with Chinese officials,
companies, and policy thinkers. There are risks to losing
visibility and insight into what China is doing on this front.
It is in the U.S. interest to work with China to set rules on
AI ethics and safety. Joint research and other partnerships
provide this lens and channel.
4. Coordinate with allies and partners to create international
pressure on Beijing. Multilateral pressure has proven
successful in the past. For example, in 2009 a coalition
including the United States, Japan, and Europe combined efforts
to pressure the Chinese government to suspend a requirement
that screening software (``Green Dam Youth Escort'') with
surveillance capabilities be installed on computers sold in
China. The United States should build upon the alliance
structures that have been successful since the end of World War
II. Unilateral action will not only compel China to retaliate
against U.S. companies; it will make Beijing double down on the
very structural problems we want to address, feeding Beijing's
own narrative about cybersecurity governance.
5. The United States must play offense by investing in its own R&D,
infrastructure, STEM education, and a capital market that
rewards investment. China will continue to invest in closing
the technology gap with the United States regardless of our
actions, so the United States must be able to compete through
its own technological and economic leadership.
Senator Sullivan. Thank you, Ms. Sacks.
And next we have the Honorable Eric Rosenbach.
STATEMENT OF HON. ERIC ROSENBACH, CO-DIRECTOR,
BELFER CENTER FOR SCIENCE AND INTERNATIONAL
AFFAIRS, HARVARD KENNEDY SCHOOL, FORMER DOD
CHIEF OF STAFF; FORMER ASSISTANT SECRETARY OF DEFENSE FOR
HOMELAND DEFENSE AND GLOBAL SECURITY
Mr. Rosenbach. Thank you, Mr. Chairman, Ranking Member. A
pleasure to see you, Mr. Chairman, after working with you to
get the brigade in Alaska, and Ranking Member, Senator Markey,
thank you for everything you do for Massachusetts and your
recent visit to the Kennedy School.
This is the Information Age and information is now the
world's most consequential and contested geopolitical resource.
The world's most profitable businesses have understood for
years that data is the new oil.
Political operatives and, unfortunately, foreign
intelligence operatives, as well, have shown that data-driven
social media is the key to influencing public opinion.
Leading researchers in the area of artificial intelligence
know that good data, not just algorithms, will allow companies
and nations to gain a competitive edge.
In the 1990s, America's supremacy in information
technologies and the Internet seemed unassailable.
Unfortunately, as the importance of information as a
geopolitical resource has waxed, U.S. dominance has waned.
That's why this hearing is so important.
China is moving very quickly into the Information Age with
a strategic approach that bolsters their national interests.
The United States, on the other hand, seems to be standing by,
beholden by large tech companies focused primarily on
connecting more people to generate more data to ensure more
clicks on advertising links.
In the absence of a national strategy to protect Americans'
data, promote competitiveness of American firms, and secure our
information and technology infrastructure, the U.S. risks
ceding its leadership role in the Information Age.
As you heard over the past decade, China's pursued a
national strategy to challenge U.S. global leadership in the
Information Age. There are two things in particular that I'd
like to hit on.
First, one of the best-known Chinese national champions is
Huawei, now the largest telecom producer in the world. The
significant resources that Huawei derives from the backing of
the Chinese Government puts American and European telecom firms
at a clear disadvantage and this comes in particular when it
comes to developing and deploying some of the technology
necessary for the next generation of broadband networks.
Clearly, allowing Huawei equipment into the U.S. 5G backbone
would be a grave national security concern.
The Chinese Government has also devoted significant
military intelligence capabilities to stealing the data and
intellectual property needed to fulfill the ambitious goals
established by President Xi's Made in China 2025 Plan.
The PLA was responsible for the hacks and theft of hundreds
of millions of Americans' data from the Office of Personnel
Management, Marriott, Anthem Health, and Equifax. Although the
PLA undoubtedly used this information for intelligence
purposes, it's also highly likely that this high-quality data
has been used to help the government-sponsored development of
Chinese AI capabilities.
The Committee's well versed in this issue, but I'd be happy
to discuss more about my experience based in the Pentagon
negotiating with the Chinese on issues of intellectual property
theft.
So that leads us to what should we do. Clearly, many of
China's actions are unfair in a modern global economy, but the
United States and Congress in particular also need to
internalize an important point. This is not about China. This
is about America. This is not a partisan issue. We control our
own destiny and we can outcompete any nation in the world if we
unite and focus on a few key areas of policy and law.
Here are some that I recommend. First, we need to promote
the competitiveness of American firms and the most important
place to start is by passing a national data security and
privacy law.
As you heard, information is and will be the Nation's most
important strategic resource in the next century, yet American
companies are left to deal with competing and often
contradictory requirements. In particular this impacts early
young innovative firms trying to figure out how to navigate the
Information Age.
We should ensure regulation supports the competitiveness of
American firms and critical sectors and Broadband 5G in
particular. The U.S. Government and the FTC in particular
should be sure that regulations designed to protect consumers
and competition don't inadvertently undermine the
competitiveness of American firms and promote the success of
national champions, like Huawei.
The U.S. needs to win the race for talent. The U.S. has
excelled by prizing and nurturing openness, creativity, and
innovation. Simply put, we will not out-compete the Chinese
unless we ensure that more highly skilled workers are able to
obtain H1B visas.
We need to continue to limit foreign ownership of key
information sectors and provide CFIASs with additional human
resources. Congress should be encouraging action of reforming
CFIAS now and needs to ensure that CFIAS has the human
resources to make this law implementable.
Finally, I believe very strongly the U.S. needs to deter
actions to steal our national resources by defending America's
interests in cyberspace. This starts with publicly attributing
attacks that raise the cost to adversaries. This has proven
effective in the past. We should continue to do this regularly.
Furthermore, we need to develop precise and legal offensive
cyber operations that change the current dynamic of America
simply sitting back and absorbing the blows of China's actions.
Good defenses are important but defense alone will not mitigate
the threat of these attacks.
At this time, I would like to submit the rest of my
statement for the record and look forward to your questions.
Senator Sullivan. Without objection.
[The prepared statement of Mr. Rosenbach follows:]
Prepared Statement of Hon. Eric Rosenbach, Co-Director, Belfer Center
for Science and International Affairs, Harvard Kennedy School, Former
DoD Chief of Staff; former Assistant Secretary of Defense for Homeland
Defense and Global Security
Chairman Sullivan, Ranking Member Markey, other distinguished
members of the Subcommittee on security, thank you for calling this
important hearing on ``China's Challenges to U.S. Commerce'' and for
the invitation to testify today.
This hearing is important: China is moving very quickly into the
Information Age with a strategic approach that bolsters their national
interests. The United States, on the other hand, seems to be standing
by, beholden to large technology companies focused primarily on
connecting more people to generate more data to further bolster their
profits. In the absence of a national strategy to protect Americans'
data, promote the competitiveness of American firms, and secure our
information and technology infrastructure assets, the U.S. risks ceding
its leadership role in the future economic, military, and political
landscapes.
The Information Age
This is the Information Age. And information is now the world's
most consequential and contested geopolitical resource. The world's
most profitable businesses have understood for years that data is the
``new oil.'' Political operatives--and, unfortunately, foreign
intelligence operatives as well--have shown over the past two
presidential elections that data-driven social media is the key to
influencing public opinion. Leading researchers in the area of
artificial intelligence know that good data, not just algorithms, will
allow companies, and nations, to gain a competitive edge.
Data-driven innovation is not only disrupting economies and
societies; it is reshaping relations between nations, and there is no
better example than the US-China relationship. The pursuit of
information power--involving states' ability to acquire, refine,
protect, and use information to advance their interests--is changing
strategic priorities. In the current US-China trade negotiations, for
example, IP theft and state-support for tech companies is on the table
next to soybean and automobile tariffs. American policymakers are
questioning a long-standing tenet of the U.S. economic system: openness
to foreign investment. In short, the pursuit of information power is
altering strategic and economic relations between nations.
In the 1990s, America's supremacy in information technologies and
the Internet seemed unassailable. Unfortunately, as the importance of
information as a geopolitical resource has waxed, U.S. dominance has
waned. States with authoritarian forms of government--and China in
particular--first recognized the strategic importance of information,
and have adapted their national laws and policies accordingly.
America's economic competitors believe they are locked in a zero-sum
competition to create, collect, buy or steal data, and to develop the
talent and technology to convert it into strategic advantage.
Data held by both corporate and government entities has more
strategic value than ever before because of its importance in
developing artificial intelligence. A technical wunderkind is no longer
as critical to writing a good AI learning algorithm; instead, what
developers most require are troves of high-quality data to train and
optimize algorithms over time. As a result, states have a strong
interest in developing, accessing or stealing commercial, private and
government data necessary to train and optimize AI algorithms.
Indian Prime Minister Narendra Modi, for example, believes that
``whoever acquires and controls'' data will attain ``hegemony.'' In his
recent book AI Superpowers, venture capitalist Kai-Fu Lee predicts that
China's widening lead in artificial intelligence will not only ensure
the ``economic balance of power tilts in China's favor,'' but will tilt
``political influence and `soft power,' towards China,'' and cement its
``cultural and ideological footprint around the globe.'' Most developed
economies now have national ``artificial intelligence''strategies. None
are more mercantilist than China's ``Development Plan for a New
Generation of Artificial Intelligence,'' which aims through a
combination of government subsidies and incentives to push China into
leading the world in AI by 2030.
The Competitive Threat from China
Over the past decade, China has pursued a national strategy to
challenge the United States' global leadership in the Information Age
through a conscious strategy of state-backed investment, loose consumer
data privacy protections, a centralized AI and technology deployment
strategy, and intelligence operations to steal crucial data and
intellectual property.
The Chinese government has invested heavily in the research and
development of technology that underpins supercomputing, artificial
intelligence, broadband networks and big data. Those investments have
resulted in genuine achievements. In 2016, for example, China unveiled
the world's fastest supercomputer--and announced that it owned more of
the top 500 supercomputers than any other nation in the world. Chinese
firms and research institutions, nearly always supported with state
funds, have made advances in artificial intelligence that some
corporate leaders believe will make China the world leader in hardware-
based AI.
President Xi has also advanced his nation's strategic plans by
developing and supporting firms in key areas of economic power with
state-sponsored loans, contracts and research and development. One of
the best known of these Chinese ``national champions'' is Huawei, now
the largest telecommunications equipment maker in the world. The
significant resources Huawei derives from the backing of the Chinese
government puts American and European telecommunications equipment
providers at a clear disadvantage, particularly when it comes to
developing and deploying some of the technology necessary for next
generation broadband networks.
The Chinese government has also devoted significant military
intelligence capabilities to steal the data and intellectual property
needed to fulfill the ambitious goals established for President Xi's
``Made in China 2025 Plan.'' Over the past decade, Chinese intelligence
officers from the People's Liberation Army (PLA) have conducted
thousands of cyberattacks against both private sector and government
targets. The Chinese, for example, were almost certainly responsible
for the hacks and the theft of hundreds of millions of Americans' data
from the Office of Personnel Management, Marriot, Anthem Health and
Equifax. Although the PLA undoubtedly used this for intelligence
purposes, it's highly likely that this high-quality data was also used
to help the government-sponsored development of AI capabilities.
Over the past decade, Chinese intelligence operatives have been
equally aggressive in systematically stealing intellectual property and
trade secrets from American organizations essential to national
competitiveness. ``More than 90 percent of the department's cases
alleging economic espionage over the past seven years involve China,''
deputy attorney general Rod Rosenstein said after an indictment
unsealed in December 2018.
The Obama Administration's response to these attacks was slow and
initially weak, but by 2015 the Administration finally recognized the
need to confront Chinese leadership with explicit attribution,
sanctions and improved cyber defenses. These actions resulted in a
short-term drop in Chinese cyberattacks against the US. Over the past
18 months, however, Chinese cyber operations have resumed. In the most
recent annual national threat assessment, for example, Director of
National Intelligence Daniel Coats said that, ``China will continue to
use cyber-espionage and bolster cyberattack capabilities to support
[its] national security priorities.'' This past December, the FBI's top
counterintelligence official asserted that, ``Our prosperity and place
in the world are at risk.''
What Congress Must Do
As the Information Age advances, the United States needs to
recognize that data collection and technology deployment are critical
both from the perspective of economic competitiveness and national
security. Looking over the horizon, adversaries will greatly increase
operations to steal sensitive and valuable information in order to
advance their strategic and economic advantage over the United States.
Given the richness of data held by the largest companies and research
centers in the tech, financial and healthcare sectors, it is highly
likely that adversary intelligence services will expand their
traditional targets to include corporate datasets that could be used to
train AI systems and to hone information operations.
U.S. policy responses to these threats should be centered around a
few guiding principles:
1. The Information Age demands a data-centric security and economic
strategy: America needs to develop a data-focused strategy for
competitiveness. From a security perspective, a network-centric
approach to national security is failing. Focus on the threat
of a low probability catastrophic attack on critical
infrastructure networks, for example, has distracted leaders
from the reality that we are not defending the Nation's most
precious resource: information. Likewise, the government has
done very little to prioritize the centers of gravity for an
economy powered for the Information Age.
2. The privacy of personal information is a national security and
economic priority. Policies aimed at bolstering U.S. national
security and promoting U.S. economic competitiveness must go
hand-in-hand with consumer protection. Authoritarian
governments may ignore consumer rights in pursuit of acquiring
information power, but democracies cannot. Bolstering the
global competitiveness of American companies should remain a
top priority, but not at the expense of allowing these
companies to collect, use, and sell information without user
consent or under-invest in cybersecurity measures.
3. America needs a whole-of-government strategy to improve national
competitiveness in the Information Age. Information geopolitics
cuts across all aspects of the economy, society and state
security apparatus. Authoritarian governments have adopted a
highly centralized, mercantilist approach to protecting,
acquiring and using information. Centralization will not be the
answer for democracies, but coordination must be. Unprecedented
cooperation is required, across economic, social, defense,
intelligence, state department and homeland security
portfolios. For example, the American government can no silo
regulatory decisions about information-related companies
separate from foreign policy decisions on cyberspace.
4. Even further, America needs a whole-of-nation strategy that
includes coordination with the private sector. The U.S.
intelligence community needs to share threat information about
foreign intelligence organizations with the social media
platforms that so directly influence Americans' economic and
political decision. Policymakers must be willing to work with
private actors to ensure regulatory red tape does not stand in
the way of innovation, and that public-private partnerships
continue to create incentives to accelerate technology
development. At the same time, American technology firms need
to understand, and be held accountable for, their role in
protecting national security interests.
These principles should be combined with forward-leaning policy
action. Specifically:
Pass national data security and privacy legislation.
Information is and will be the Nation's most import strategic
resource for the next century. Yet, even in the face of
inadequate data protection practices and damaging data
breaches, the U.S. continues to muddle along with a complex web
of state-based and industry-specific requirements. American
consumers are worse off because their data is unprotected and,
in the event of a personally costly data breach, their rights
and access to legal recourse are unclear. American companies
are left to deal with competing and possibly contradictory
requirements, in particular impacting early innovators and
small businesses without the resources to navigate this complex
environment.
U.S. policymakers urgently need to pass a national law that will
protect user data, reduce regulatory complexity, and spur
innovation by reconciling differences in state and Federal
requirements. While Europe's General Data Protection Regulation
(GDPR) is by no means a perfect model and in some respects is
inconsistent with other U.S. values, it has been effective at
driving corporate investment in data protection. Data
protection legislation passed in California in June 2018 will
need fine-tuning before taking effect in 2020, but it
establishes important principles that could serve as the
foundation for national legislation.
Promote competitiveness of American firms: China undeniably
has an advantage in data collection, by virtue of its large
population and weak data privacy protection policies. While
data is an important input, it is not the only determinant of
competitiveness in the information age. China's authoritarian
system also gives it a deployment advantage, but the U.S. can
do a lot more to reduce regulatory red tape, attract top
talent, and create other incentives to spur innovation.
Ensure regulation supports competitiveness of American
firms in critical sectors. A key driver of the information
age has been the exponential growth of high-speed wireless
broadband infrastructure around the world. American firms
are currently locked in a tight competition with Chinese
powerhouses to determine who will dominate this important
area. The U.S. government--and the FTC in particular--
should make sure that regulations designed to protect
consumers and competition don't inadvertently undermine the
competitiveness of American firms relative to Chinese
national champions like Huawei.
Reduce regulatory red tape to expedite deployment of
next-generation broadband infrastructure. Nationwide 5G
deployment is a massive effort requiring equipment
installation and associated permits and approval processes
across thousands of localities. Yet without this
foundation, the U.S. risks falling behind in the next
generation of wireless-enabled technologies. Policymakers
must drive toward regulation that standardizes and fast-
tracks local approvals, while giving local authorities the
opportunity to provide implementation guidance.
Continue public-private partnerships that support
advanced technology development. Within the framework of
robust national data privacy and security laws, the U.S.
government should promote more partnerships with civilian
companies and academic institutions to make progress on
high-priority AI initiatives. For example, the Defense
Innovation Unit--Experimental (DIUx), established by DoD
for this purpose, provides a model for incentivizing the
private sector to develop technologies with direct national
security applications.
Win the race for talent. The U.S. has a history of
prizing and nurturing openness, creativity, and innovation.
Our university system is a springboard for raw talent; our
legal and government institutions allow new businesses to
thrive; and our sophisticated financial system enable the
best ideas to be successful. To maintain a competitive
edge, the U.S. needs a foundation of policies and practices
that continue to attract top talent, like the heads of AI
at Apple, Facebook, Microsoft, and Google's cloud computing
division, who were all born outside the US. The visa
program is a good place to start--at minimum, Congress
should ensure that more highly skilled workers are able to
obtain H-1B visas. Policymakers should further consider
special programs for students and experts in the AI and
broader set of STEM fields.
Protect American information and infrastructure assets: Good
offense that promotes U.S. economic competitiveness must be
coupled with good defense that bolsters the U.S. system against
foreign attacks and takeovers.
Incentivize use of strong encryption. Making America
the world leader in encryption technology could advance
both economic and national security interests. Protecting
the Nation's most important resource will require a
significant expansion in the use of encryption. The
nation's defense and security agencies have relied on
encryption to protect its most precious secrets for many
decades--DoD, in fact, is the largest user of encryption in
the world. The U.S. must both clarify the legal questions
around encryption and develop real incentives to promote
the use and growth of encryption products and platforms
that allow individuals and organizations to protect their
data.
Limit foreign ownership and provide resources to
support firms in key information sectors. Over the past
decade China has systematically targeted investment in and
ownership of firms developing technology, such as AI, that
will drive strategic advantage in the Information Age.
Congress took encouraging action by reforming and passing
legislation that increased limitations and oversight of
foreign ownership and involvement in data-rich sectors.
This was important, but should be supplemented with new
sources of incentives to sustain American tech firms whose
technology does not have an immediate commercial
application.
Deter Chinese actions to steal our national resources by
defending America's interests in cyberspace: Our response to
Chinese cyber-attacks that steal personal data and intellectual
property has been weak, resulting in the perception by China
that an attack on the American economy will not incur costs.
The U.S. needs a strong national response to demonstrate that
interference with American information and infrastructure
assets in any manner is unacceptable. We have to raise the cost
of attacks and decrease the benefits that our adversaries seek.
Publicly attribute attacks to raise costs to
adversaries. The increased willingness of the Intelligence
Community, DHS, and FBI publically to attribute Chinese
cyber attacks through indictments is crucial and positive
first step.
Develop precise and legal offensive cyber operations
that change the current dynamic of America simply sitting
back and absorbing the blows of adversarial actions. Good
defenses are important, but defense will not alone mitigate
the threat of foreign attacks. To complement defensive
measures, the U.S. government, led by the Department of
Defense, needs to bolster its capabilities to disrupt and
degrade Chinese cyber operations before they succeed.
Improve intelligence sharing with the private sector.
The Intelligence Community should also strive to share as
much intelligence information as possible about Chinese
cyber operations. In the past, the government has too often
watched important intellectual property or data flow out of
the country without warning impacted organizations.
Senator Sullivan. Well, thank you. Outstanding opening
statements by each of our witnesses, and we have the Chairman
of the Full Committee here and I'm just wondering if he wants
to make an opening statement before we start making questions.
STATEMENT OF HON. ROGER WICKER,
U.S. SENATOR FROM MISSISSIPPI
Senator Wicker. Thank you very much, Mr. Chairman, and I
will not take anywhere near five minutes to make an opening
statement, but I do want to say that this is the very type of
hearing that I envisioned when we came up with the Subcommittee
on Security.
I want to commend Chairman Sullivan and my long-time friend
and colleague from the House and Senate, Senator Markey, for
their leadership in this regard.
The economic relationship that the United States has had
with China has been remarkable in the past few decades, but
it's been a learning experience as American consumers have
benefited from this and certainly as the Chinese people have
benefited from it.
It has become obvious that the leadership in China has no
intention of playing by international rules, that they have no
concept of respecting such international principles as
intellectual property rights or data privacy and so while the
relationship that we have and that we're going to necessarily
have with China over time presents us with great opportunities,
it does present us, as the title of this subcommittee hearing
indicates, with immense challenges.
So I think this is a very thing that we need to be looking
at in a very good way early on in this Congress for this
subcommittee to spend its time and I congratulate both of my
friends for their leadership in this regard and wish you well.
Senator Sullivan. Well, thank you, Mr. Chairman, and I'll
begin the questioning here by, you know, one of the big things
we're trying to do in the Congress is really hot to work with
the Administration to craft a bipartisan strategy on how to
deal with these issues which are very complex.
One of the issues, and I highlighted it in my opening
statement, is this issue of reciprocity. I think reciprocity is
important because people certainly in our country understand it
and I think in most countries they understand it. It just goes
to basic fairness.
I've asked a number of keen observers of China, including
Dr. Henry Kissinger, in an Armed Services hearing a couple
years ago about should this be a defining feature between the
United States and China. He essentially answered yes in so many
words.
So I want to talk about this issue, particularly as it
relates to the economic relationship. You know, I had my first
trip to China as a U.S. Senator and I raised this question of
reciprocity last spring on numerous fronts. Here's just an
example. We all know that Chinese companies, usually backed by
government subsidies or government investment funds, come to
the United States and they buy, for example, you name it, movie
studios, biotech companies, robotics companies, Internet
companies, OK, and then the answer--and I'm not going to even
ask you because we all know what the answer is.
If a U.S. company wants to go to China and buy the same
kind of companies, a movie studio, a biotech company, a high-
tech company, an Internet company, the answer is no. So there's
no reciprocity, particularly on the investment side of the
ledger.
So my question and maybe I'll start with you, Mr. Kallmer,
would you be supportive of a very simple bill, maybe called the
U.S.-China Reciprocity Act of 2019, that essentially says if a
U.S. firm can't go over in a sector of China and buy a company,
then they can't do it here? What would be wrong with that?
The American people would understand it and this is a
really important point. We meet with many foreign leaders. I am
very convinced that if we did something like this, the EU
would, the Japanese would, the Koreans would, and all of a
sudden you could have two-thirds of the global GDP of the world
saying the same thing. If you don't play by the rules that we
all play by, you can't invest. Pure reciprocity. It's fair.
People understand it.
Would you support something like that? What would be the
pros and cons of that approach?
Mr. Kallmer. Thanks for the question, Mr. Chairman. I think
we would----
Senator Sullivan. And then comment on our allies doing it,
as well, which I think they would be willing to do with U.S.
leadership leading the way on this.
Mr. Kallmer. And I would actually--I wanted to comment on
that in a little bit of a broader context.
I think we would certainly want to see the text of such a
bill, but I think in general terms we'd be very supportive of
the concept.
Senator Sullivan. This would be broader than the CFIAS
reform we just did.
Mr. Kallmer. Absolutely, absolutely. I mean, this is a
systemic issue in doing business with the Chinese. The example
I used in my opening remarks about the cloud services companies
is a perfect example.
We have the best cloud services companies in the world.
When they go to China, they are prevented from owning Chinese
companies. They're, you know, forced to enter joint ventures.
They're prevented from using their intellectual property.
They're prevented from representing themselves in----
Senator Sullivan. But the Chinese don't have similar
restrictions here.
Mr. Kallmer. Not at all, not at all.
Senator Sullivan. Not at all. So it's unfair. It's
basically unfair.
Mr. Kallmer. It is completely unfair.
Senator Sullivan. Not a level playing field.
Mr. Kallmer. It is not. It is not, and you can replicate
that fact pattern across different sectors of the economy and
so I think we would look forward to the opportunity to work on
something like that with you.
Your point about the support of allies is critical not
just----
Senator Sullivan. Critical.
Mr. Kallmer.--in the context of something like this but in
everything we do to try to influence China. The United State is
still the biggest economy in the world, but we can't do it
alone. This is fundamentally a global problem. Chinese
practices harm German companies, Japanese companies. They
impede innovation in those countries.
Senator Sullivan. Let me just interrupt you here.
Mr. Kallmer. Yes.
Senator Sullivan. Sorry. I want to ask one follow-up.
Ambassador Lighthizer's doing this a lot with the EU and
Japan. They even have a group, the U.S.-Japan-EU group that's
pretty much focused on these issues working together as it
relates to the China challenge.
Mr. Rosen, what do you think of that idea of pure, just a
pure straight-up reciprocity bill that says if you can't do it
here--if we can't do it there, you can't do it here? Pretty
simple, pretty easy to go home and explain to our constituents
about it, and very, very fair. Why would we not want to do
something like that?
Mr. Rosen. Thank you very much, Mr. Chairman. I think first
thing that can be helpful to the deliberation is that Rhodium's
put together a fairly perfect database on two-way flows and it
is actually still the case that the value of U.S., FDI, and
China is much greater than the value of Chinese direct
investment in the United States, although at the margin in
recent years, the trend has been that there's been more annual
Chinese flow into our economy than is possible in the other
direction.
Second, some non-trivial amount of this Chinese investment
coming into, say, Silicon Valley is actually Chinese companies
that were started by U.S. private equity and venture capital
companies. So there is some American chromosomes, if you will,
in some of the money that's flowing in this direction.
That is the kind of granular stuff that's important to
unpack and have staff kind of work through as you design and
put together what might be a very important and useful
framework and regime on reciprocity.
Moving to the question of fairness, though, for just a
second, you know, it has since the 1790s, in fact, been the
position of the U.S. that if other people want to bring their
treasure here, that's a good thing for us, regardless of
whether they accept our treasure flowing in their direction.
That is to say, you know, Cuban capital flight out of that
economy because of the realities there, we should accept
regardless of whether they have the ability to absorb our
capital outflows.
Senator Sullivan. Not if they're stealing the investment
and then using it to buildup their own industrial base.
Mr. Rosen. Right. So we need to take the analysis to the
next level. What is the nature of the lack of reciprocity, the
nature of the asymmetry and investment opportunity, and is
there in fact a specific risk in a given area of technology
that confers a benefit, especially in an emerging foundational
technology area?
So there are many cases where I am acutely concerned about
the lack of reciprocity. There are many other sectors, like
real estate, where I don't really care very much and I say let
the money leave China and come up on our shores.
Senator Sullivan. OK. Senator Markey.
Senator Markey. Thank you, Mr. Chairman.
This is the proper committee because this is the Committee
in the 1990s that created this whole digital revolution with
the laws that were passed out of this Committee. So we are the
right committee. We are the Committee of expertise to now be
examining the consequences. So I thank you again for bringing
this focus to it.
Mr. Rosenbach, Tick Tock is a Chinese-owned app which
allows users to share and view short video clips with music and
it's no secret that kids and teens flock to this platform every
day.
Last month, the Federal Trade Commission levied a record
fine against Tick Tock for violating the Children's Online
Privacy Protection Act and its Chinese company that's doing it.
It's illegal, whether it's Chinese or American, but it's an
indication of how the Chinese can get inside of our system.
What steps should the United States take to protect
Americans from invasion of privacy that Chinese companies, like
Tick Tock, are engaging in every single day?
Mr. Rosenbach. Thank you, Senator. To start with, you know,
theft of intellectual property is one thing that is horrible
but doing something that would harm kids, you know, is kind of
over the top, as the father of a pre-teen who would be involved
in that, and so I think you need to uphold the rules and if
this firm is not going to follow U.S. law and the privacy
protections that are there in place to protect children, they
should not be allowed to operate in the U.S. and we should find
ways for them to be blocked so that kids can't access that and
the app is not legal here.
Senator Markey. Thank you, sir. I'd like to give you--yes,
Ms. Sacks.
Ms. Sacks. Under the expanded CFIAS system, access to U.S.
citizens-sensitive personal data is now a consideration and I
welcome that for specifically this issue.
Senator Markey. Thank you.
Ms. Sacks. However, I think that it needs to be narrowly
tailored. Right now, it's very broad and so from the Chinese
perspective, they see this as justification for their own
efforts to localize data.
So as we think about access to U.S. citizen data under
CFIUS, let's see if we can set a model for the Chinese in more
narrowly scoping what that means.
Senator Markey. OK. But still we have to deal with it. It's
going to happen and intensify as the years go by.
I want to follow up on the Chairman's question, just go to
the Huawei issue, and our need to deal with their desire to
bring their technologies and to build them into the
communications networks of our country and yet just going to
the reciprocity question, clearly that would never be allowable
in their country in terms of allowing our companies to do the
same thing.
So if you could, just expand upon that duality and what you
would recommend that we establish as policies, following up on
what the Chairman said, to ensure that we have some parity of
treatment between the two countries, sir.
Mr. Rosenbach. Yes, sir. I've been working in national
security and telecom intelligence for almost 20 years, have
followed the Huawei trajectory for the last 10. There's no way
I would allow Huawei gear in the U.S. 5G backbone. It's a
threat to national security and clearly they don't even play
fair.
More importantly, the Chinese used Snowden as an excuse to
exclude a lot of American firms from the market to raise some
of these data protection boundaries that are not based on real
fact or technology and are very protectionist and if they're
going to do that, then I think the reciprocity principle is
something that is very important to recognize.
We want our firms to be able to compete on a level playing
field and U.S. tech firms will win if they can do that.
Senator Markey. Anyone else want to comment upon that and
the Chairman's, you know, insight in terms of the lack of
reciprocity? The Chinese would never allow us to have an
American company go inside their networks and build these kinds
of technologies into information-gathering operations. Yes, Mr.
Kallmer.
Mr. Kallmer. Thanks, Ranking Member Markey. I would just
add that I think there are multiple ways to view this kind of
an issue.
Reciprocity and whether and how to do it is an incredibly
important one, but it sort of speaks more to the economic
commercial trade issues. There could be wholly separate
national security considerations, such as the ones that Mr.
Rosenbach identified for which the U.S. Government also needs
to have tools and that is a theme that we talk about a lot.
We'll probably talk about it more today, which is that from a
security perspective, it's important also for the U.S.
Government to clearly identify the authorities that it has or
that it needs or that it has but needs to build up, to address
all of these risks.
Senator Markey. Yes. And a lot of this hearing is really
just to deal with the sinister side of cyberspace. We talk
about all the benefits but there is a definite sinister side
and you, Mr. Rosenbach, were talking about all of the attempts
by the PLA, People's Liberation Army, to penetrate key American
interests.
So could you expand upon that and whether or not you think
this is a pathology? What's the smartest way to deal with that
underlying pathology so that we're paradoxing them correctly?
Mr. Rosenbach. Yes, sir. So this is something that was
directed from the senior most levels of the Chinese leadership
to use national intelligence agencies to steal intellectual
property and pass them to state-owned industries. That's
something that not only doesn't happen in the U.S., is illegal.
The idea that NSA would pass secrets to Intel or Google or
Microsoft, you know, is absurd. That's not fair.
Not only that, they're using that data, from my assessment,
to build a new platform for AI. Data matters a lot and that's
the reason you would steal these large troves of data that's
clean and organized and help you further develop the algorithms
of machine learning.
So it's not only a cost in the way people expect an IP,
down the road I believe it's even more important and will have
a bigger impact----
Senator Markey. And when Huawei says, oh, and we're not
connected to the government at all, we're just a private
sector, do you have a brief comment on that?
Mr. Rosenbach. I don't believe it, and in some ways there
will always be a nexus between telecom companies and the U.S.
and the government but it's not the same. There's not the same
type of relationship and if you look at the trajectory of some
countries that made the mistake of putting Huawei gear in their
backbone, like the U.K. and Australia, they're now in the very
difficult situation of ripping it out.
I don't think the U.S. wants that. We're already a little
behind on 5G. Doing something like that would put us even
further behind.
Senator Markey. Thank you. Thank you, Mr. Chairman.
Senator Sullivan. Senator Fischer.
STATEMENT OF HON. DEB FISCHER,
U.S. SENATOR FROM NEBRASKA
Senator Fischer. Thank you, Mr. Chairman.
Mr. Rosenbach, you've mentioned a couple times now about
the hacking and the theft that we have seen of Americans'
information. You talked about the collection of that data and
it's going to feed the Chinese AI system.
I would like to ask you specific examples that you can give
us about the risk that this poses to consumers and to
businesses from an economic espionage perspective, please.
Mr. Rosenbach. Some of the examples of IP theft, which
might be different than just the large data theft, would be the
theft of aerospace secrets, both in the commercial and the
private sector. There are some pretty well-documented cases of
in the chemical sector.
One that you can say is a known fact relates to Huawei
itself which in a court case admitted and paid a fine for
stealing the source code from Cisco that they then used to
build the core routers that have made them successful down the
road. That's the type of behavior that is directly harmful to
U.S. firms.
The other thing is there's a cost here to the economy for
these large data thefts, which means every consumer that has to
deal with getting new credit cards. It seems like a small thing
but anyone who was involved in Equifax knows you spent time,
it's a drag on the economy, and we need to protect our data
better because of that.
Senator Fischer. You've also highlighted the need to limit
foreign ownership to protect American information and
infrastructure assets that we have.
I know you're aware of the efforts of the Chinese to
penetrate the U.S. railcar industry. The CRRC has recently
signed contracts to provide inexpensive Chinese Government-
subsidized railcars to meet the several Metro Centers across
the U.S. and that's a concern. That's a worry that they could
install some kind of technology there that's going to provide
them with surveillance of our rail and our transit interests.
Do you share those concerns, and do you believe Congress
should implement some kind of additional oversight so that we
do have safeguards to protect our critical infrastructure in
those circumstances?
Mr. Rosenbach. Yes, ma'am, I do. First, it just seems odd
that a firm that's getting help from the Chinese Government
would be able to do that and we wouldn't produce them in the
U.S. if we could.
Second, your point on critical infrastructure is really
important. What if there is a special sauce baked into the
software that controls the networks that run these
transportation modes in any transportation sector, and at a
time of their choosing, the Chinese use that to hold the U.S.
hostage or, in the worse case, unlikely but very critical, to
conduct a cyber attack? Those are two bad things for certain.
Senator Fischer. Thank you.
Ms. Sacks, in your testimony, you cited and you also warned
against the U.S. interests viewing China's tech ambitions as a
struggle between two compelling blocks.
Given the Chinese Government's trend toward country-unique
policies that hinder market access, how can the United States
and its allies approach imbalances that are created by China's
core interests in favoring those domestic companies and can we
realistically try to shape China's approach in many respects?
Ms. Sacks. Thank you. I think the key in addressing these
issues is to understand the cost-benefit that comes with
looking at this as a competition in which this is a zero sum
game, right.
So when we talk about AI and 5G and all sorts of
technologies, they don't necessarily conform neatly to national
borders. Code flows between borders when we talk about the
research being done with diffuse networks of sciences across
countries, the open source information that is sort of the
backbone of AI cutting edge research right now.
So right now under consideration is new export controls
around emerging and foundational technologies and I welcome
industry and others to weigh in on how do we more narrowly
tailor the scope of this to take into consideration ways that
we can erect barriers without undermining our own
competitiveness and innovation in the process.
In some ways, distinguish----
Senator Fischer. Do you think that's realistic? Can we----
Ms. Sacks. When it comes to AI,----
Senator Fischer.--have those barriers and not have that
bilateral competitiveness?
Ms. Sacks. I think with AI, it's going to be very
difficult. In some ways, it may be impossible to distinguish
between the military and civilian use for some of these
applications, and I agree with the assessment of ITI and my
colleague, Mr. Kallmer, in that when we think about where these
technologies are being used, what is essential from a military
advantage? It's not just about being used or could be used by
the military and there needs to be a process to understand
that.
Senator Fischer. Thank you very much. Thank you, Mr.
Chairman.
Senator Sullivan. Senator Blackburn.
STATEMENT OF HON. MARSHA BLACKBURN,
U.S. SENATOR FROM TENNESSEE
Senator Blackburn. Thank you, Mr. Chairman. I am so pleased
that Chairman Wicker established this subcommittee. I think
it's so needed as we work on these issues and Mr. Markey and
I've worked on these issues for a long time, as Senator Blunt
was also with us over at Energy and Commerce in the House.
I think as we talk about AI, as we talk about 5G, not only
are we concerned with China and how you never know where their
commercial sector and their industrial complex end and begin.
They really are pretty much one and the same.
And in addition to the things that you all have discussed
this morning, I think we also have to look at, and, Ms. Sacks,
this goes to your point to Ms. Fischer, looking at who is going
to set the standards when it comes to AI, when it comes to 5G,
and knowing that we're going to have to deal with the China
scale and weight and intensity on this issue and Huawei
specifically as we look at a lot of this and how they embed the
malware and the spyware into their technology.
We don't want our allies to use it. We do not want American
companies to be using this technology because of their tendency
to do that. So in that context of looking at communications and
the information equipment, to what extent can Chinese firms put
a downward pressure on us and on our allies as we talk about
what we're doing in that Armed Services sphere?
I served on Armed Services Committee and, Mr. Kallmer, I
see you shaking your head, nodding your head. I'd like for you
to answer and, Mr. Rosenbach, I'd like to come to you.
Mr. Kallmer. Sure. Thanks, Senator Blackburn, and the
reason I'm nodding my head is because it's a terrific question
that I think illustrates the importance of being really
deliberate and analytical about identifying risk.
One of the points that we made throughout the FIRRMA
process last year is that, in addition to nothing being more
important than U.S. national security, it's critical that we
observe with humility working with our government partners who
have best access to information and breakdown the various
risks.
Is the risk one of a foreign company with bad intentions
buying something in the United States? Is there a risk of
technology outflow from the United States to some other
country? Is the risk the one you identified, which is another
country, such as China, having a disproportionate role in
writing the rules and setting the standards?
And in that regard, it is critical that we get our arms
around this whole risk set and have tools to address each of
them.
Senator Blackburn. Well, and I would add to that, as we
look at the risk set, I think the intentionality----
Mr. Kallmer. Right.
Senator Blackburn.--needs to be a consideration.
Mr. Kallmer. Exactly. And so the example of standards is a
perfect one. It goes maybe not so much anymore, but
traditionally a little bit below the radar because it's quite
technical, but in a way, there's nothing more pernicious than
China's approach to seeking to dominate the writing of
standards, pushing that approach in----
Senator Blackburn. Well, they set the rules of the road if
they set the standards.
Mr. Rosenbach.
Mr. Rosenbach. I think it is important to talk about risk
and the one thing to keep in mind is you need to think about
risk on a decade-long at least perspective and so sometimes
firms, American, European, otherwise, will make risk decisions
based on a year or two or three out and that?s when they're
more likely to invest in Huawei gear because they have a better
deal because it's subsidized by Chinese Government and they
don't think, first of all, at the national level what that can
mean for a national security perspective or that 10 years down
the line, they're going to be locked into something that they
can't get out of and that's where it's more of the government's
role to think about risk at the strategic perspective for the
country and over the run of the Information Age.
Senator Blackburn. OK. My time is expiring. Ms. Sacks, I
have a question for you. I'll submit it for the record, but I
liked your analogy that you used of a small yard/high fence.
I've got a question on that for you.
Mr. Rosenbach, I'm going to come back to you with something
as Commerce being a market-facing agency, a couple of questions
there as that relates to the integration for some of our
stakeholders as we look at our military side and our commercial
side.
Yield back.
Senator Sullivan. Senator Klobuchar.
STATEMENT OF HON. AMY KLOBUCHAR,
U.S. SENATOR FROM MINNESOTA
Senator Klobuchar. Thank you very much. I don't have much
of a voice. So that means I won't filibuster. Very good for
you.
Mr. Kallmer, I recently led 18 Senators in a letter urging
the National Security Advisor to reconsider the decision to
eliminate the role of Cybersecurity Coordinator at the NSC and
I'm concerned that, given the Chinese Government's commitment
to cyber programs and investment in cyber capabilities, we
aren't keeping pace. Could you respond to that?
Mr. Kallmer. Yes, thank you, Senator Klobuchar, and I hope
you recover your voice soon.
Senator Klobuchar. So do I.
Mr. Kallmer. That is a theme that has been very important
to us. Our companies across the board care deeply about
cybersecurity and historically have found that there's nothing
more important than the U.S. Government not only having a lot
of smart people thinking about it, but in having a truly
coordinated approach and so whether it is having a senior role
at the White House, whether it is having a senior person at the
State Department, and the extent to which they are all
coordinating a whole of government approach, it's critical.
In fact, the RSA conference is occurring right now in San
Francisco, which I think is the world's largest cybersecurity
conference. Finding ways for industry to support the U.S.
Government in having that top-notch whole of government
approach is a top priority.
Senator Klobuchar. Right. Senator Thune and I actually have
a bill that I'm leading to try to get more expertise into the
government from the private sector with tours of duty. Have you
thought through that?
Mr. Kallmer. We have. In fact, part of our organization
focuses not just on public procurement of ICT products but also
IT modernization within the government and this is a theme that
we have been pushing for some time, which is to find some way
to second or create opportunities for really talented cutting-
edge people in the private sector to do tours of duty in the
government.
Senator Klobuchar. Good. Then there's kind of that non-
traditional espionage with 500 million guests for Marriott and
some of the other hacks that we've seen.
Maybe someone else wants to answer this. What kind of
outreach, Mr. Rosenbach, do you think should be going on with
the private sector?
Mr. Rosenbach. The idea of bringing outside private sector
expertise into the government is really important. During the
time I was in the Pentagon as chief of staff, we started
something called the Defense Digital Service in which we found
ways to bring hard-core techies in for a tour of 3 years, small
team, did some really phenomenal things that really improved
the overall level of cybersecurity at DoD.
Anything that you could do to make that more widespread
across government I think would be very helpful.
Senator Klobuchar. OK. Another area, election
infrastructure. A report by the Hoover Institute and the Asia
Society concluded that China did not directly interfere in our
2018 elections, although we know Russia was working on it
pretty hard in terms of hacking in and then, of course, Russia
did a lot of other things that were very bad.
Can any of you explain the cyber capabilities of China to
interfere in our elections?
Mr. Rosenbach. Yes, ma'am. I 'm running a project at the
Kennedy School called Defending Digital Democracy that's
working with state and local election officials to help them
protect their infrastructure. We had an after-action review
from the 2018 elections, had 25 states come and talk about what
they saw.
We shouldn't be relieved that we didn't see anything in
2018 and very clearly if the Chinese wanted to influence the
U.S. in a strategic way, they have the capability to do it,
either through directly attacking the election and undermining
trust or through disinformation campaigns that would be done
via social media.
So it's something we need to keep working on and, quite
frankly, the Government needs to play a stronger role. DHS has
gotten much better, but it's not fair to let the states take
blows from nation state intelligence services when it's about
our elections.
Senator Klobuchar. Very good. Last, you stressed the
importance of privacy legislation and, of course, it's
something we're working on here. Senator Kennedy and I have a
bill.
Could you talk about how security and economic threats
Americans face could get worse if we do nothing when it comes
to privacy?
Mr. Rosenbach. Yes, ma'am. Just real quickly, when
information is the most precious commodity in the Information
Age, it seems crazy that the U.S. would not have a national
bill to regulate this.
Now if we don't do it, California will be the standard or
GDPR from Europe will be the standard. So it seems almost----
Senator Klobuchar. That was meant to scare you, Senator
Sullivan.
Ms. Sacks. Or China. China actually is further ahead in
their legislative process in having a national privacy law. So
that may be a bit under the radar.
Senator Klobuchar. OK. That's good to know.
Senator Markey. We don't want China to get ahead of us.
Senator Klobuchar. That was a bit of a sarcastic joke by
the Ranking Member.
Anyone else want to comment on this?
[No response.]
Senator Klobuchar. All right. Thank you very much.
Senator Sullivan. Senator Blunt.
STATEMENT OF HON. ROY BLUNT,
U.S. SENATOR FROM MISSOURI
Senator Blunt. I thought you were getting to me. I was just
guessing it was going to my turn.
But I want to join my colleagues who got here earlier,
asked questions earlier, with their praise of both of you and
the Chairman in creating this committee. I think it's a really
important issue that we've been trying to deal with in a number
of diverse ways but never quite this focused before.
So I chair the appropriating committee on NIH, Labor, and
Health and Human Services, Education, but particularly at NIH,
in the last year, and I know you've been paying attention to
this, the idea of researchers that are either being wooed by
the Thousand Talents Program or are students who are here,
particularly from China, and, you know, we've had a problem for
a long time of feeling like that the things that we had
developed were almost being forced to be given away but now we
see maybe dual research, maybe there's enough information going
back and forth to another country that they've set up their own
research lab based on our money and our efforts to move
research in that direction.
So I guess for whoever wants to take it and maybe more than
one of you, what do you think the impact of programs like this
are going to be on U.S. research, things like the Thousand
Talents Program, and also how do we address that without unduly
damaging scientists who are actually there to do scientific
research and to do it under all the guidelines that we would
hope they would have?
Ms. Sacks, your hand is up, so we'll let you start.
Ms. Sacks. Thank you, Senator. This is the right question
to ask because universities are in many ways the bedrock of
U.S. power in the world, attracting the best and the brightest.
So we have to get this right.
I think there are three distinct issues that often get
blurred and I'd like to untangle them. The first one is the
Chinese Community Party has a concerted effort to control and
monitor its students here. There's a great example from a case
of the University of Maryland from a few years ago.
This is distinct from the issue of access to U.S.
technology and research and here I think the tools of the
national security community and law enforcement are designed to
handle that. They are designed to handle when there are real
threats and they should continue to be used in that way.
I am deeply concerned that Chinese researchers, scientists,
and students are being discriminated against on U.S. campuses.
This is highly problematic not just from a moral perspective.
It gets at the heart of the openness and the values that define
our country.
We need to compete for the best talent in the world and if
those students don't feel welcome on our campuses, they will go
elsewhere. So we have to get this balance right.
Mr. Rosen. Senator, we were just part of a production of a
study on the relationship between Chinese and American
biotechnology industries over the past 20 years that we did for
the China Security Commission here on the Hill which you'll be
familiar with.
That study does, I think, an excellent job of bringing all
available evidence to bear on what the interaction between our
two economies has been in that industry. Bottom line is that
China's biotech industry today wouldn't exist if it weren't for
China's ability to participate in, benefit from the open
dynamic of American biotech industry, nor today is our
sustainable without the inclusion of tens and tens of thousands
of Chinese graduate level researchers which are a big part of
the human resources that make us dynamic in that industry, as
well.
So this is a tricky one because if we really try to sort of
disentangle from things that are benefiting China's capability
in this space, we're going to pull a lot of the timber out
holding up the roof of our sector here, as well, and so this
one really needs care.
There's some good research available in that space to try
to make sense of it. I will say that transparency and
understanding who are the investors looking to make
acquisitions in the United States is an absolute key to getting
this right.
Senator Blunt. Mr. Kallmer, did you have something on this?
Mr. Kallmer. Yes, Senator Blunt, I think I would say at a
high level that I associate myself with Ms. Sacks and Mr.
Rosen.
Senator Blunt. Let's go to Mr. Rosenbach then.
Mr. Rosenbach. So I have to say this doesn't represent
Harvard University, just Eric Rosenbach.
I think one thing that's counterintuitive and you hear a
lot in Silicon Valley and in Cambridge, which are tech hubs, is
that if you could, quote, staple a green card to the diploma of
every computer science graduate who's a Chinese or not, they
would stay here and they wouldn't go back to China and they
would fuel the American economy and that will seem
counterintuitive but a strong openness that immigration from
the smartest people in the world will be good for the U.S.
Senator Blunt. OK.
Senator Sullivan. Thank you, Senator Blunt.
We're going to go a second round of questions here and
we've had a good attendance, so I'm sure there will likely be
some other Senators returning.
I want to go back to this idea of reciprocity and a couple
issues. You know, one challenge that I see with the idea that
we've been discussing, this kind of pure reciprocity, is you
could potentially hurt kind of the innovators in America.
Let me just give you an example. Let's say there's somebody
in Silicon Valley. He or she, she, I have three daughters, so I
always like to say she, she builds an AI company, builds it
over 20 years. It's really good, going to sell it, puts it on
the market, and the biggest bidder by far is a Chinese-backed/
government-backed investment fund. OK. So there you have this
issue. We could never buy an AI company from China, but at the
same time, you don't want this young American woman who is an
entrepreneur, who's going to get a big payday, to be told by
the government, well, you can't take the highest bid, even
though the highest bid is from a Chinese Communist-backed
investment fund. So it creates a dilemma.
But let me also mention, and, Mr. Rosen, you touched on it,
I've been looking into this reciprocity issue for a long time,
but there's kind of what I call negative reciprocity, so the
idea of a bill that we're talking about here.
If we can't do it there, you can't do it here, negative,
but there's also what I would consider positive reciprocity,
and one of the things the U.S. has done over the decades is
we've gone over and done green field investments, right, you
know, Google, Microsoft, GM, Ford. We build factories from the
ground up. Green field, and by the way, when there was tensions
between the United States and Japan in the 1970s and 1980s, one
of the things the Japanese did, which was to help reduce those
tensions, they came over here and built green field
investments. I mean auto factories in the South and Ohio. I
mean, Japanese auto manufacturers employ as many or more
Americans in that sector than a lot of the Big 3 does.
The Chinese always seem very reluctant to do that. I've
spent a lot of time in China in my career and I've always gone
to them and said why don't you come to--don't come and buy our
companies, right, don't come and try and buy the AI company,
but come over and build something from the ground with your
capital and your expertise and employ Americans. They're very
reluctant to do that.
You talked about this, Mr. Rosen. Are you seeing a change
in that? I think it would help reduce tensions. It would be
similar to what happened in the 1970s and 1980s with Japan. Are
you seeing that? Again, just give me a little bit more of your
sense quickly on reciprocity, just pure reciprocity on
investment.
Mr. Rosen. Thank you very much, Senator. Indeed, beyond the
numbers I referenced before, just the absolute volumes of
direct investment, traditionally defined, the breakdown between
M&A versus green field is radically different.
Senator Sullivan. So they don't do a lot of green field in
America?
Mr. Rosen. Well, they don't, but----
Senator Sullivan. Why don't they?
Mr. Rosen.--it's partly because, you know,----
Senator Sullivan. Why don't they?
Mr. Rosen.--companies from less-developed markets and
economies, their first turn around the block in a highly
regulated advanced economy like the U.S., not so easy to build
it from scratch, much easier to buy it, especially if you have
pretty attractive capital terms available to you. So we can
kind of understand that.
Senator Sullivan. Do you think they're changing, though,
because it would be in their strategic interests and I think
ours and could help lower tensions?
Mr. Rosen. It is changing, not just in the United States,
but we're looking at this for comparison very closely in the
European Union. There's a tendency for China to start trying to
move to green field investments, but I would suggest we need to
be a little bit careful here.
Indeed, there are 800,000 Americans working for Japanese-
invested firms here, most of them green field, pretty big deal
for employment.
Senator Sullivan. And working out well for both countries.
Mr. Rosen. Yes, has been.
Senator Sullivan. Pretty much.
Mr. Rosen. Has been a stabilizing and sort of moderating
factor in our relationship over many decades.
However, there are also green field R&D investments taking
place. For example, up around Route 128 in Silicon Valley,
which overnight are putting out the word anybody who wants to
double their salary who's an engineer doing autonomous driving
come talk to us and they're absorbing a huge amount of the
available best talent in some ecosystem catchment areas for
talent and those are green fields, green field R&D operations.
So those can be concerning, as well.
So just the green field kind of stream doesn't fully solve
the problem but it's something that we need to think about.
Senator Sullivan. Let me ask one other quick question
before I turn it over to some of my colleagues again.
You know, on the other hand, investments sometimes gives
countries leverage and we're starting to hear about--you know,
we talk about universities where these Confucius institutions,
Senator Portman and his Investigation Subcommittee did some
good work on this recently, put out a report, and I don't know.
These are just anecdotal, but you're also starting to hear
anecdotes about even the Hollywood movie studios where there's
significant Chinese investment, which there is, and when's the
last time we saw a movie from a United States movie studio with
Chinese investment that was anything remotely critical about
China?
Are we starting to see investment in U.S. firms leading to
censorship on China-related issues, and, if so, shame on the
Hollywood movie studio execs if that's the case, but isn't that
something else we should be concerned about? Any comments on
that or am I just reading an article that might not be factual?
Mr. Rosen. If I may, Senator, I've been teaching a class at
Columbia for 18 years and in my classroom, my Chinese students,
graduate school, are much less willing to engage in an open
discussion than they used to be.
Senator Sullivan. Why?
Mr. Rosen. They're concerned about who else is in the room,
who their fellow students are, and whether there might be some,
you know, consequence to them from speaking frankly.
So this is a very broad concern. It shows up in cultural
areas, such as movies, although I have to say that is being
sold back off by the Chinese side. They ran into financing
troubles. So we'll probably get it back, like we did from the
Japanese with Rockefeller Center.
But in any case, it is a broad concern not just to the
United States but to virtually everyone in the advanced
democratic world.
Senator Sullivan. Ms. Simms.
Ms. Sacks. Chairman, you asked about----
Senator Sullivan. Sacks, I'm sorry.
Ms. Sacks. Chairman, you asked about how this impacts firms
and there's an example from the past year involving U.S.
airlines and their not being able to refer to Taiwan as Taiwan
but as associated with China. So censorship about the way that
Taiwan is talked about and the political system there expanding
to airlines and the terminology they use. So I think there's
something to be looked into in that.
Senator Sullivan. Yes, Mr. Kallmer.
Mr. Kallmer. And I would just add, this is, you know, why
it's important to have the tools. I don't know a lot personally
about the movie example, but as Ms. Sacks pointed out earlier,
under the revised CFIUS framework, use of data could be a
relevant national security criterion and so it seems important
to be able to say we've got a new thing that doesn't feel right
and it almost kind of rings, if it is true, in national
security terms, important to look at what the risk is, whether
it can be mitigated, which is a critical question, and to be
able to address it.
Senator Sullivan. Great. Thank you.
Senator Rosen.
STATEMENT OF HON. JACKY ROSEN,
U.S. SENATOR FROM NEVADA
Senator Rosen. Thank you so much for holding this hearing
and I appreciate that two of the panelists also have Rosen in
their names. So it makes me feel very welcome here today. I
appreciate that. Just had to mention that. Thank you so much.
[Laughter.]
Senator Rosen. But, you know, this is a really important
topic as we talk about China's threats today, and I want to
talk really about some of the cyber military threats that we
have.
You know, I'm really concerned about the emerging
cybersecurity threats from China, including our intellectual
property, technology transfer specifically, and cybersecurity.
I just came from another hearing. This is what is on
everybody's mind, privacy and security. It's what we all worry
about as individuals, regardless of what our businesses are,
and, of course, in Nevada, we have a lot of defense in Nevada.
Nellis Air Force Base, Fallon Naval Air Station, Nevada
National Test and Training Range, Creech Air Force Base, lots
of things going on there, and military's very important.
So what I want to ask a little bit and maybe, Mr. Rosenbach
or anyone can take this question, what's your assessment of
China's use of hybrid warfare methods, mixing conventional
attacks with cyber attacks, and how does China use this
strategy to influence our other Asian partners and even our
allies? Anyone who would like to.
Mr. Rosenbach. Thank you, Senator, very much, and, you
know, you might want to check out some time the Cyber Flag
Exercise at Nellis Air Force Base. You can go watch them fight
cyber wars.
Senator Rosen. Yes.
Mr. Rosenbach. It's very interesting. On your question,
which is really smart, the Chinese, just like the Russians,
have started to use cyber as part of hybrid warfare, primarily
in Southeast Asia and there near abroad.
So when they're trying to advance their interests in the
South China Sea, they'll use cyber information ops, diplomacy,
and other means of coercion to have the Vietnamese back down,
the Philippines, even trying on the Australians.
I have a colleague who wrote a great report on this. If you
want, I'd be happy to----
Senator Rosen. I'd love to have that. Thank you.
Mr. Rosenbach. Yes, ma'am.
Senator Rosen. Yes, and anyone else want to respond to
this?
[No response.]
Senator Rosen. And so what do you think in your estimation,
knowing that they're doing this, how can we, I guess, give the
counterpunch or maybe not the counter--not be reactive. How are
we being--how do you think we can best be proactive in this
cyber warfare?
Mr. Rosenbach. Yes, ma'am. In my experience, which is based
primarily on all of the interactions I had with the Chinese and
the PLA when we were negotiating these things, the Department
of State and Defense, it was very clear that unless you give
forceful action to the Chinese and you demonstrate that, that
they'll continue to take as much space as they can to advance
their interests.
That means you need to attribute things publicly when they
do nefarious activities. You need to push back. In the Obama
Administration, quite frankly, we were very often too passive
up until the end and that sent the message to the Chinese that
they could do aggressive things, both in cyber----
Senator Rosen. So we need to take more aggressive approach?
Mr. Rosenbach. Yes, ma'am, we do.
Senator Rosen. I want to keep on this a little bit and move
it out to commercial investments. Of course, they have ports
across South Asia, Africa, the Middle East. What do you think
the advantage that these ports provide China in a conflict with
us and to what extent do you think the projects that China
provides they have leverage over these countries?
Mr. Rosenbach. I guess that's for me again. In a time of
conflict and the Chinese buying key ports in Africa, even in
the case of Australia, that's very significant for the U.S.
military because the logistics chain is so important to the way
in which you would fight a war and, you know, we hope that
would never ever happen with China, but if it did, that would
be a very logistics transportation heavy-type conflict and if
the Chinese controlled ports where we need to have access and
move things, that would be a big problem for the Department of
Defense.
Senator Rosen. They can control them not physically but
cyber, cyberly, if cyberly is a word.
Mr. Rosenbach. Cyber or could be through investment.
They're doing both, I think.
Senator Rosen. As well. Thank you. I yield back.
Senator Sullivan. Senator Markey.
Senator Markey. Thank you. This committee is going to be
the Committee in drafting a new privacy policy for the country
and there are intensive bipartisan discussions that are taking
place right now amongst the members.
My question to you is, should we do cybersecurity
simultaneously with privacy? Are they inextricably linked? If
we're going to have a comprehensive policy, should we do both
at the same time so that there is a new predictable environment
not just here but internationally as people are looking at our
country? Ms. Sacks.
Ms. Sacks. I mentioned earlier that China is further ahead
than we are on this effort and we laughed about it, but the
reality is they actually have a personal information protection
law in advance stages in the legislative process and under
their framework, under the cybersecurity law, cybersecurity and
privacy are actually in the same bill and in many ways that's
contradictory.
On the one hand, there are actually provisions for consent
in the cybersecurity law, but they also have provisions that
would allow the state security services to go in and collect
more personal information and it creates a contradiction.
But I do urge this committee to think about, to understand
that if that is not accelerated here in the U.S., China is
moving forward in advancing their own model of what data
protection means. So at the moment, we have the European model
and we have the China model, and the U.S. is in a reactive
position. So I commend you on this work.
Senator Markey. Thank you. Mr. Rosenbach.
Mr. Rosenbach. Yes, sir. Senator Markey, I know the
Committee has had several hearings on this and I think it's
outstanding because it's probably the most important piece of
legislation you could pass when it comes to cybersecurity and,
dare I say, competitiveness in the Information Age.
If it's about information and right now the U.S. has a
patchwork of laws, mostly driven by the states for this, that
introduces a lot of litigation risk to firms trying to figure
out what they should do, and it inhibits innovation.
So both from a national security perspective and, my
opinion, an economic perspective, having a national law that's
both about data protection and privacy and cybersecurity would
be good for both of those areas.
Senator Markey. Yes, and I agree with you. I mean, I just
think that they go hand in glove and ultimately it's the
discussion that we put off. We should have had it in the 1990s
as we were unleashing the revolution. We did not, but now we
can see what the consequences are in terms of the vulnerability
of the system and the vulnerability of private citizens' data,
corporate data in our country.
Any others who wish to comment on that? Yes, Mr. Kallmer.
Mr. Kallmer. Thank you, Senator Markey. I would just add
that this is an issue that's critically important to our
members, as well, and we've been putting together actually a
framework for how we would suggest the Congress think about
consumer privacy legislation for the last several months with
the objectives of not only having higher substantive standards
for personal data protection, but also making sure that we have
something that is globally interoperable and again, as with all
these issues, contributes to American leadership.
On the question of how and whether to marry it up with
cybersecurity topics, I think that's an intriguing idea and one
we'd be interested to talk more about. There is a lot--
recognizing Senator Klobuchar's good question about
cybersecurity leadership, there is a lot of activity that the
U.S. Government and industry work in partnership on when it
comes to cybersecurity.
So I think mechanically we just want to make sure we're
doing the right things in the right way, but no doubt the
concepts are linked and we need to think about them together.
Senator Markey. Yes, and, you know, up in Greater Boston,
we are now the cybersecurity capital. We're like a mini-Israel
in terms of cybersecurity companies that are being developed,
but it's all in reaction to the vulnerability of the system and
I think it's critical for us and a lot of members are talking
about that, as well, on this committee, that we develop those
cybersecurity standards.
What are the expectations that we have, you know, for our
corporate side but also from our governmental side in terms of
the safeguards that they are going to build in because this is
a daily attempt to break through the more limited safeguards
which were put on the books thus far and it's only going to
intensify as the years go by.
Mr. Rosenbach.
Mr. Rosenbach. Yes, sir. I was just going to say you
brought up the example of Israel and the model there is you use
cybersecurity encryption, data protection as a center of
gravity to build new areas of the economy that could drive the
U.S. forward. So both would be great for the country from a
national security perspective but great from an economic
perspective in the Information Age.
Senator Markey. Thank you. Any others?
[No response.]
Senator Markey. Thank you, Mr. Chairman.
Senator Sullivan. A couple other follow-up questions. I
want to change the subject slightly.
Mr. Rosenbach, you had mentioned this issue, which I think
is a really important one, where the Chinese Government, kind
of coordinated with companies, is engaging in activities that
not only our government doesn't do, that people do it in
government or in the private sector, they would violate laws.
So the biggest one there is the Foreign Corrupt Practices
Act, right. We don't go and bribe foreign government officials
to get deals and if American companies go bribe foreign
officials to get deals, they can go to jail. That's just the
way Congress thought that should be addressed.
I'm going to submit for the record here a Wall Street
Journal investigation. It's called ``Wall Street Journal
Investigation: China Offered to Bail Out Troubled Malaysian
Fund in Return for Deals.'' Without objection for the record.
[The Wall Street Journal investigation follows:]
[GRAPHIC(S) NOT AVAILABLE IN TIFF FORMAT]
Senator Sullivan. This is a really extensive Wall Street
Journal report that shows the extent to which at the most
senior levels in the Chinese Government official corruption was
pushed as part of the policy to get Chinese predatory
infrastructure financing through the bribery of foreign
officials around the world.
Now, of course, this puts American companies at a
comparative disadvantage if they're trying to do infrastructure
developments in other parts of the world and Chinese senior
government officials are bribing officials in those countries.
Can any of you speak to this issue of corruption, official
Chinese corruption with regard to global deals and how you
think we should be trying to address that, as well? You want to
start, Mr. Rosenbach?
Mr. Rosenbach. Honestly, Senator, I don't have any factual
data on that. I only know what we would hear often or see in
intelligence about Chinese officials offering things on the
side for deals, in particular connected to telecom deals in
Africa.
Senator Sullivan. But do you think that that's something
again us as a country and our allies should be working on
together so we essentially say to the Chinese this is
unacceptable,----
Mr. Rosenbach. Yes, of course.
Senator Sullivan.--not acceptable?
Mr. Rosenbach. Right. It's unfair for an American firm to
have to do all the due diligence that goes into upholding the
Foreign Corrupt Practices Act, which is expensive just from a
legal perspective, and to know that people aren't playing by
those same rules and could be sliding money across the table to
win a deal when they don't even have the best technology or the
best services.
Senator Sullivan. Mr. Rosen, you had a comment?
Mr. Rosen. Senator, if I can broaden the concern you're
expressing a little bit to not just to corrupt factor in the
equation, if you will, but all sorts of politicization of the
investment process, right. That ultimately creates a risk of
financial instability which is a concern, a national security
concern to us and our allies, as well.
We've worked, you know, post World War II, kind of half
that period. We, unfortunately, were part of building up debt
loads in a lot of developing countries and then the second half
of that period, we've tried to remedy that and improve the
development outlook for, you know, the same 75 or hundred
countries that China is now trying to design the belt and road
program for.
I just have a tremendous concern that China's attempt to
cut corners on diligent investment at home has created the
biggest trap of all for China itself, right. We talk about the
risk to China's growth outlook now because it's been so over-
reliant at home on debt. Well, as it now goes abroad with the
development program, it's essentially exporting the same risks
that are woven into its economic structure and model into a lot
of other very fragile nations around the world.
We know, unfortunately, from experience that when fragile,
politically fragile places, like Venezuela, avail themselves of
easy credit card options, just like college students, they tend
to wind up in trouble and we're seeing that in too many places
today. So that's not corruption alone, but it is something
which I think deserves our attention. The spillovers of China's
model, how that can be deleterious to our national security
interests.
Senator Sullivan. Let me ask a final question of all of you
from my perspective and again I appreciate it. This has been a
really good discussion and unless there's additional followup,
OK, and, well, maybe I'll have Senator Rosen ask her question
and then I'll end with mine.
Senator Rosen.
Senator Rosen. Thank you. I appreciate it. You know, in
order to respond to security threats and, of course, prepare
for new challenges across the spectrum frankly, we have to
ensure that we have enough trained cybersecurity and just IT
professionals in general. So here in Congress, we set great
legislation, apprenticeships, opportunity grants, tax credits,
whatever tools we have available to us.
So what Federal investments do you think we can best make
right now so we can be proactive against these threats? Anyone?
No? No one has an idea of investments that we can make into
our----
Mr. Rosen. I love the expanded----
Senator Rosen.--economy, into our work force?
Mr. Rosen.--provisioning for human resources around the
CFIUS process and now the FIRRMA expanded CFIUS process to make
sure there's an adequate team of people who can quickly go over
many more transactions, not tying up American commerce with
long lengthy review time tables, but instead turn back clarity,
as all the panelists have said.
Most important is that we can quickly narrow down to the
transactions that are concerning to us and let the ones that
are not concerning go through quick so people can create jobs.
Senator Rosen. So maybe I'm not exactly clear. I'm talking
about what investments can we make in human capital or even
hardware capital, computing capital, if you will, quantum
computing, artificial intelligence that's going to help with
this, so we need both? Please.
Mr. Kallmer. So a lot of things that we can do and we have
worked with the Congress and the Administration and are eager
to continue doing it.
Some of it has to do with developing capacity on emerging
technologies, AI, 5G, quantum computing. We recently made a
recommendation to the Administration to work with the Congress
to promote that because the growth and leadership potential is
significant. STEM education so that we can continue to build a
U.S. workforce of people that are prepared for these jobs,
continued partnerships with universities, continued R&D
investment in pre-competitive basic research, the kind of
things that we've had legendary cooperation on.
Senator Rosen. Right. Not just first stage research but
research going all the way through.
Mr. Kallmer. So it's a great question and something we
think about a lot.
Senator Rosen. Thank you.
Ms. Sacks. I have two recommendations. In my previous life,
I worked with Siemens in their Industrial Cybersecurity
Business and I think that the next frontier and risk is what we
call operating technology or where the IT meets the physical
infrastructure and this is an idea where I think we absolutely
should focus more resources in training expertise.
The second is on diversity and inclusion issues, focusing
more on how can we get sort of multiple voices. Gender is a
particular one in the cybersecurity space. When we think about
issues like algorithmic bias, that's going to be very
important.
Senator Rosen. I had a Code like a Girl Bill. I'm a former
computer programmer. That was the first bill I put when I was
in Congress. I'm going to be reintroducing that again. So we'll
be addressing that one.
Thank you.
Mr. Rosenbach. I was just going to say one thing real
quick. You know, I teach and students are always looking for a
way to get into government and serve and so something that
would be like an ROTC program for undergrads or maybe grads
where they then go into government, serve in cyber-security.
Senator Rosen. Like a reserve program.
Mr. Rosenbach. They could go into the private sector.
Senator Rosen. Like a cyber reserve, like the Army.
Mr. Rosenbach. We have a long tradition in the military
doing that in the U.S. and Israel. Something like that I think
could be effective.
Senator Rosen. I think that's a great idea. Thank you so
much.
Senator Sullivan. Senator Blumenthal.
STATEMENT OF HON. RICHARD BLUMENTHAL,
U.S. SENATOR FROM CONNECTICUT
Senator Blumenthal. Thank you, Mr. Chairman. I understand
and I apologize that I've been at various other hearings, as
all of us have been, that Mr. Rosenbach notes that
authoritarian regimes have stolen large amounts of sensitive
personal data from consumers.
There are a list of them, a litany. This information
directly provides China with strategic intelligence and
economic advantage but it also feeds into a surplus of raw
material that can be developed, used to develop new
technologies.
Do members of the panel agree that privacy rights with
respect to China or any other of these countries are also a
matter of national security and that in pursuing privacy, as we
are doing in this committee, for consumers in general, we are
helping to protect national security? Mr. Rosen.
Mr. Rosen. I think my colleagues have offered more
considered perspectives on the integration of the privacy
agenda with cyber and security agendas. So I would defer to
them to elaborate.
Mr. Kallmer. Happy to do so, Senator Blumenthal. It's a
great point, and I think what we've observed is that there
absolutely can be alignment. In fact, one of the topics we've
discussed a little bit today is the revised CFIUS bill, which,
of course, is a process designed round national security and
inward investments and other economic activity.
The fact that it is now expanded to include a reference to
the use of data, the use of personal data as a potential
national security criterion is positive. The U.S. Government
has to be flexible to address new kinds of threats that come
around and also explore whether those threats can be mitigated
so as not to interfere with business and innovation, but it's a
good question.
Senator Blumenthal. Do you agree?
Ms. Sacks. (Nods.)
Senator Blumenthal. Let me shift to Huawei. Should the U.S.
Government and our allies be satisfied by the show and tell
that this company has offered us? What are the tactics that
Huawei could use in terms of back door use of its equipment and
is it preventable?
Mr. Rosen. I will offer that that's principally a technical
question and so again I would defer to my colleagues that are
from the technology backgrounds.
However, I will say that from a sort of high-level
perspective, the basic problem of China in our time is that in
previous years, China explicitly identified its own need to
separate commercial and government intentions and combination
in the marketplace.
In just the past few years, that objective on China's part
and the need for it has become very murky and that is prima
facie concerning to any other market economy concerned that if
you don't have a nice crisp boundary around what's official and
what's commercial, it's very hard for other nations to embrace
especially critical infrastructure-related offerings from those
vendors.
Senator Blumenthal. Let me explain the reason for my
question and maybe I asked it in too shorthand a way.
This company, as you know, has continued to court our
allies in Europe principally. One of its tactics there has been
to allow governments to inspect the source code of their
devices. In other words, to kind of peek under the hood and
assume that everything else is fine, everything else is safe,
but experts warn that the result is a false sense of security.
Huawei doesn't simply hand over the equipment. It provides
software updates and often directly manages the network. All of
these services create ongoing potential vulnerabilities and
they're not just vulnerabilities that serve the company but
they serve a potential adversary in terms of national security,
as you have correctly characterized them.
So I welcome any other views on this topic.
Ms. Sacks. When we talk about the risk of Huawei, I think
it's important first to identify three distinct risks so we can
mitigate around that. These often get blurred. So one is does
Huawei have a back door that would allow access? The other is
shoddy engineering and, quite frankly, that's what our partners
in the U.K. have found, which is different, and the third is
what would a company like Huawei be prevailed upon to do in a
warlike situation?
So what cybersecurity practitioners will say is an outright
blanket ban is not the most effective way to deal with that
risk. Instead, you identify specific quantifiable risks
associated with certain technologies and you design a
management system around that.
Mr. Rosenbach. I know we're overtime, so you all tell me if
I need to be quiet, but I would say, Senator, this is really
important to look at.
The example you had of looking at the source code is an
example in which just that day you would be able to say this
looks clean because they'll do a software upgrade. They will
have remote access. The gear with Huawei core routers is
configured so that you can have remote access.
In the case of the U.K., this is about 5 years ago, they
set up a center that reviewed all the gear, looked at it, put
it into their network. Today, because of both shoddy
engineering and concerns about security, they're ripping it all
out of their network.
So you just need to keep in mind a glimpse and a snapshot
on 1 day does not mean that there's not special sauce baked in
there and down the road.
Senator Blumenthal. Well, I think that point is extremely
important and you put it better than I did, but let me just say
in conclusion because I'm out of time, we are in a warlike
setting.
Ms. Sacks. Are we?
Senator Blumenthal. I don't think too many people would
doubt having read, heard, seen the conflicts that are ongoing
in the cyber domain that we are in a warlike setting and I
think that's the reason that justifiably I and many of my
colleagues have called for much greater advocacy to protect our
national security.
Senator Sullivan. Senator Markey.
Senator Markey. Thank you so much. According to reports,
China and the United States have agreed on a pact that would
require Beijing to purchase American agriculture and energy
goods while also lowering some trade barriers inhibiting U.S.
companies from accessing Chinese markets.
But those reports suggest that the deal would not ensure
that China curtails intellectual property theft, cyber attacks
or subsidies that create uneven playing fields for American
companies.
Should those concessions also be a part of any deal given
that we know these have long-term implications for our country
if we don't deal with them right now and China does want to
deal? Yes, Mr. Kallmer.
Mr. Kallmer. I don't know the state of the pact right now,
but if it were an agreement that only dealt with purchases and
didn't make serious inroads on the structural systemic issues,
it would be a colossal missed opportunity. The Administration
has done great work in getting to this point with the Chinese
taking it seriously, but it needs to address those issues. It
needs to have meaningful enforcement and verification
mechanisms and ultimately it needs to be a multinational effort
to make sure China abides by it.
Senator Markey. OK. Great. And I'm concerned about
Beijing's efforts to hack U.S. defense contractors and research
institutions to steal sensitive military information.
Earlier this week, the Wall Street Journal reported that a
known Chinese hacking group is behind a series of cyber attacks
on universities in the United States in an elaborate scheme to
steal research about maritime technology.
Ms. Sacks, what should we be doing at the Federal level in
order to protect our military secrets from Chinese hackers?
Ms. Sacks. The Chinese Government under Xi Jinping has
invested tremendously in elevating cyber policy. They created a
very powerful entity within the Chinese bureaucracy to funnel
much more resources and focus to this issue.
So I think it's imperative that on our side we also invest
in making sure that cyber is a high-priority element within the
U.S. Government bureaucracy because they certainly are doing
so.
Senator Markey. Yes. And any other comments on that?
Mr. Rosenbach. Sir, I would just say we have worked on this
problem for almost a decade. The Chinese continue to take
aggressive action like this, very strategically targeting an
area in which they need to leap ahead the United States Navy in
submersible technology autonomous underwater vehicles and so
they do it very consciously.
It's just not fair to expect a university doing research on
this to be protecting itself and spending money at the level
that you're trying to thwart the PLA and so you need to think
about ways that maybe even the government or another defense
contractor is bringing cybersecurity solutions because
otherwise that investment is flowing out the door. The Chinese
and the PLA are reaping the benefits of that.
Senator Markey. Yes, so I thank you. So, you know, from my
perspective, Mr. Chairman, just an incredibly successful first
hearing----
Senator Sullivan. Yes.
Senator Markey.--on this subject, and we're just scratching
the surface of all of the issues that we're going to have to
deal with.
When I think of the Chinese and I think of their Belt and
Road Initiative and trying to move into countries very
friendly, like want to help you there in Sri Lanka, want to
help you there in Malaysia, we'll give you all this discount
access to what it is that you might need for your
infrastructure and then buyer's remorse on the part of these
countries. What have we done in allowing them in without asking
the questions upfront in terms of what the strings are that are
attached, this Trojan horse strategy which they have in
technology after technology in country after country.
So when we talk about Huawei, we talk about any of the rest
of these issues that are in this whole complex, that it's
critical for us to start asking questions and then proposing
answers because we're already deep in and it's pretty obvious
that we haven't had the national conversation that will create
the policies that can give us a strategy that matches the
magnitude of the strategy which the Chinese already have in
effect.
So I thank you, Mr. Chairman, and I thank the witnesses for
this very good hearing.
Senator Sullivan. Thank you. I'll just wrap it with a
comment and then a final opportunity for comments from our
witnesses, but thank you. You guys have done a great job for
our first hearing.
You know, I think what we're seeing here is a strong
bipartisan sense of a challenge that we need to address and in
some ways that's good that we're working together on this, and
I also do want to compliment the President and his
Administration.
If you've looked at, for example, the National Security
Strategy of the Trump Administration, the National Defense
Strategy, these are very serious documents. I think they have a
lot of bipartisan support.
Our friends in the media don't write about that a lot, but
they've also recognized the challenge, right. The big National
Security Strategy's a shift from, you know, rightfully we've
been looking at the challenge of violent extremist
organizations since 9/11 as the primary challenge to our
Nation's security. That's still, of course, an ongoing
challenge, will be for a long time.
But the Trump Administration's National Security Strategy
and National Defense Strategy recognizes that the return of
great power rivalry with China as the pacing threat is the
biggest geostrategic challenge for the next 50 to a hundred
years. I happen to believe that. That's why we had this hearing
as our first hearing.
I also think they're doing a good job on these trade
issues. The tariffs are controversial to some, but I think the
President and his team have put this front and center. So
they're in these negotiations now. A number of us have been
working with the Administration on things like structural
reforms, enforcement mechanisms, starting to address this
corruption issue.
There are some, you know, in the United States who are
saying cut this deal now, get it done. The stock market will
probably go up if you do it.
Any final thoughts for the Administration as they are
engaged in a tough negotiation and again to their credit,
they've put this front and center in ways that I think previous
Administrations, Democrats and Republicans, for a number of
reasons have kind of swept it under the rug. So kudos to them.
But any final thoughts to the Administration on this near-
term challenge of what they should be trying to achieve? Mr.
Kallmer, you already mentioned it. Anyone else, just thoughts
for Ambassador Lighthizer and Secretary Mnuchin and others?
Yes, Ms. Sacks.
Ms. Sacks. Last week, Ambassador Lighthizer testified
before the House Ways and Means Committee and he said the
negotiations ongoing are really dealing with the structural
issues, IP, tech transfer, cyber espionage, and so I would
really encourage this Administration to use this moment of
potential leverage to really tackle these issues and to not
settle for a cosmetic deal.
We heard that China has announced they're going to make
technology transfer illegal, but let's get----
Senator Sullivan. Haven't they been saying that for 30
years?
Ms. Sacks. Right. And so that's why I bring up the issue of
standards. Look at where are these vulnerabilities actually
occurring and come up with a targeted way to get at them,
right. Don't just look at this Made in China 2025 being as
being a rollback.
Senator Sullivan. Great. Anyone else for final--Mr. Rosen.
Mr. Rosen. Any deal that does not include an extraordinary
amount of structural work that China commits to doing, an
extraordinary amount of acknowledgement by China that its
freedom to swing its fist stops where other people's noses
begin, and that its non-market choices right now are having
deleterious consequences for others, any deal that doesn't have
those elements and others is not going to be a deal that lasts
more than about 45 minutes.
So there's really two deals we need to prepare for. One in
which China gets back to believing that marketization is in its
own interests and is the only path forward, which Deng
Xiaoping, Zhu Rongji and many of the other leaders we've seen
in the past 40 years believed, and another deal that we have to
be prepared for in which China continues to think that there's
an alternative model that it can pursue.
In the latter case, there's only so much engagement that's
going to be possible between us and it's going to be very
painful to us to have to live with that.
Senator Sullivan. But we need to work with our allies on
this, too. Does everybody agree with that?
Mr. Rosen. Right. There's no way we can absorb the cost of
that if it's 20 different advanced economies all trying to cut
their own deals.
Senator Sullivan. Well, listen, thanks again. I think this
has been a great hearing.
The hearing record will remain open for two weeks. During
this time, Senators may submit additional questions for the
record. Upon receipt, the witnesses are respectfully requested
to submit their written answers to the Committee as soon as
they can.
I thank again the witnesses for appearing here today.
This hearing is now adjourned.
[Whereupon, at 11:59 a.m., the hearing was adjourned.]
A P P E N D I X
Rail Security Alliance
March 6, 2019
Hon. Dan Sullivan,
Chairman,
Subcommittee on Security,
U.S. Senate Committee on Commerce, Science, and Transportation,
Washington, DC.
Dear Chairman Sullivan:
The Rail Security Alliance congratulates you in convening the
inaugural hearing of the Senate Committee on Commerce, Science, and
Transportation's Subcommittee on Security. The topic of the hearing
``China Challenges for U.S. Commerce'' is a timely topic that is vital
to both the economic and national security interests of the United
States. We appreciate the opportunity to communicate to you the work of
the Rail Security Alliance and the importance of protecting U.S.
commerce from the unfair practices from the People's Republic of China.
The Rail Security Alliance is a coalition of North American freight
rail manufacturers, suppliers, unions, and steel interests that is
committed to ensuring the economic and national security of passenger
and freight rail systems. This alliance was formed in response to the
merging of China's two rail manufacturers into one massive state-owned
enterprise, the China Railroad Rolling Stock Corporation (CRRC). CRRC,
by their own calculation, controls roughly 83 percent of the global
rail market. As a state-owned enterprise, CRRC has access to unlimited
state funding that allows them to win contracts around the world by
underbidding every other competitor, jeopardizing the future of this
industry.
Over the past three years, the Chinese state-owned enterprise China
Railway Rolling Stock Corporation (CRRC) has aggressively targeted the
U.S. market as a means of advancing China's ``Made in China 2025''
initiative, which aims to overtake the United States and other nations
in critical industries like passenger and freight railcar
manufacturing. Using state-backed financing and other anti-competitive
tactics, CRRC has now secured $2.6 billion in contracts to build metro
transit cars for Boston, Chicago, Philadelphia, and Los Angeles,
sometimes underbidding its competitors by as much as several hundred
million dollars.
This threat is now knocking on the doors of Washington. WMATA,
Washington's metro system, is seeking to procure new metro cars this
year and it is becoming increasingly clear that CRRC could win this
contract. With no Buy America or Disadvantaged Business Enterprise
(DBE) requirements for this contract, CRRC is well positioned to make a
compelling bid. Needless to say, the prospect of metro cars
manufactured by the Government of China running under or near the
Pentagon, the Capitol, the White House, and other sensitive
installations should raise every alarm across this city.
The freight system is not immune to CRRC either. CRRC has also
attempted to enter the North American freight rail manufacturing
sector--first with a joint venture in North Carolina that fortunately
did not come to full-fruition, and now with a separate facility in
Moncton, New Brunswick. We have seen this pattern before. CRRC entered
the Australian market in 2008 and decimated its domestic manufacturers
in just nine years. We would be naive to think that cannot and will not
happen here.
We have attached for the Committee record a report from Oxford
Economics illustrating how a similar pattern in the United States could
result in the loss of roughly 65,000 American jobs in the freight
sector alone, along with a $6.5 billion reduction in U.S. GDP.
Furthermore, we have also included a report from Brig. Gen. John Adams
(USA, Ret.) on the national security risks inherent in allowing a
Chinese state-owned enterprise access to our freight and transit rail
systems.
Allowing Chinese state-owned enterprises to continue expanding and
operating in the United States without appropriate oversight presents
major risks to the economic and national security of our country. The
United States can no longer risk an unchecked China doing business on
our shores.
Again, congratulations on chairing the inaugural hearing for the
Subcommittee on Security. We appreciate that you chose to highlight the
threat of China to American commerce and we look forward to our
continued work together.
Respectfully submitted,
Erik Robert Olson,
Vice President,
Rail Security Alliance.
______
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______
National Security Vulnerabilities of the U.S. Freight Rail
Infrastructure and Manufacturing Sector--Threats and Mitigation
Brigadier General John Adams, U.S. Army (Retired)--October 22, 2018
Our country depends upon the privately owned and operated North
American freight railroad system to provide safe, reliable, and
effective transportation for our Nation's industries, our defense
industrial base and to ensure the security of our homeland. Our
nation's future depends upon the reliability and security of freight
rail as the primary mode of transportation not only for every
imaginable type of industrial cargo, but also for military equipment,
fuels, chemicals, and hazardous waste. 140,000 miles of main-line U.S.
freight rail infrastructure connect ports to rural and urban inland
hubs, tie military bases to key logistical nodes throughout the nation,
and link the U.S. to key allies and trading partners.
In short, U.S. freight rail is crucial to our Nation's global
economic competitiveness and a strategic asset that our armed forces
depend upon to maintain readiness and preserve our defense capacity.
Yet, while we have recognized certain threats to the security of
our freight rail system, we have begun to allow foreign interests to
make incursions into the rail industry in ways that could threaten our
national interests for decades to come. The Government of China has
made it a priority to target the U.S. freight rail system, building
inroads into freight rail supply chains and taking aim at rolling stock
asset ownership. Beijing's ``Made in China 2025'' plan aims for
comparative advantage in the global advanced rail sector, along with
nine other industrial sectors. Now is the time for our Nation to push
back on China's strategy to overtake U.S. freight rail, because a
failure to do so means tremendous security risk at home. As a retired
Brigadier General and 30-year veteran of the U.S. Army, I know that
Chinese dominance of U.S. rail would turn the system from a bedrock
industrial and strategic asset into a potentially crippling
vulnerability.
In the pages that follow, I review the many reasons that we should
be concerned about the advancing efforts by the Government of China to
take control of U.S. freight rail; reflect on the state of those
efforts thus far; and make specific recommendations for policy action
that should be taken to keep our rail, and our nation, safe.
ohn Adams,
Brigadier General,
U.S. Army (Retired),
President,
Guardian Six Consulting LLC.
______
Executive Summary
The privately owned and operated U.S. freight rail system is the
most sophisticated, productive, and capital-intensive in the world.
Freight rail is vital to our economy, our commercial transportation
system, and our homeland security infrastructure. Today, on more than
140,000 miles of track, freight rail carries 40 percent of all American
intercity freight and 13 percent of the Nation's goods.
The sustainability of this extensive and sophisticated network is
now under threat as the Government of China seeks to make inroads into
increasingly large and vital portions of the freight rail manufacturing
sector and its supply chain. Unlike other transportation sectors,
freight rail products do not have Buy America protections. Therefore,
Chinese state-owned enterprises (SOEs) could undercut U.S. suppliers.
If we allow Chinese SOEs to continue their efforts to target and
undermine U.S. freight rail interests, we risk not only tens of
thousands of U.S. jobs, but also larger potential damage to the
industrial base, our critical infrastructure, and the security of this
Nation.
The threat of Chinese dominance of our freight rail sector is more
than just a market concern. The national security implications of U.S.
industry and military interests being forced to rely on Chinese
government-manufactured railcars are jarringly self-evident: Chinese
penetration of the rail system's cyber-structure would provide early
and reliable warning of U.S. military mobilization and logistical
preparations for conflict. Were the Chinese to gain access to advanced
U.S. freight car technology (notably specific rolling stock asset
health, waybill commodity information on loaded freight cars, or
precise GPS train location) the potential exists for the generation of
a false negative (or positive) sensor activation--something
particularly worrisome given that freight rail carries most nuclear
waste and hazardous material that we transport in this Nation. A false
sensor reading (e.g., tank car outlet dome cover is secure) could lead
to a false level of confidence that tank car service valves are secure.
If service valves are disturbed and undetected a release of toxic
chemicals could result in catastrophic consequences to life and the
environment. Moreover, Chinese intelligence about U.S. rail freight
logistical movements could provide China with a destabilizing economic
competitive edge. Chinese access to or control of U.S. freight rail
would also mean that risk of other actors'--including terrorists'--
malicious intrusion would become more difficult for U.S operators to
detect or counter.
We depend on technology, machinery, and a robust system of
intellectual property protections to support our national security;
when we allow foreign states to interfere--especially our strategic
competitors--we risk that security. While Congress has recognized and
taken steps to address similar threats to products such as computer
chips and cellular technology, policymakers may not fully understand
China's ongoing incursion into an increasingly digitized rail network.
Indeed, there are few places where this risk is more acute than with
the U.S. freight rail system, and few actors who threaten the security
of the freight rail system more than the Chinese government.
Yet in recent years, we have witnessed an unabated and aggressive
entry into the U.S. rail market by China's national rail company, China
Railway Rolling Stock Corporation (CRRC). This show of force, intended
to serve the long-term strategic and technological aims of the Chinese
government, as well as that nation's desire to ensure a massive
external market for the oversupply of its railcars, components, and raw
materials, threatens the survival of U.S. freight rail manufacturing.
This, in turn, raises one of the most serious security risks we have
faced in the postwar era.
CRRC's history of using underhanded tactics to overtake rail
manufacturing in other countries is well known. Over a span of just
nine years, CRRC decimated the Australian freight manufacturing
marketplace. Now, without immediate action, the U.S. freight rail
manufacturing risks a similar fate. If this pattern continues in the
U.S., Chinese state-directed efforts will eventually force U.S.
companies out of business, endangering as many as 65,000 U.S.
manufacturing jobs \1\ and putting our national security at risk.
Chinese intrusion into the U.S. rail system's supply chain
threatens the health and sustainability of this vital economic pillar,
especially in a national emergency. Were China to gain inroads into
those operations, management, and supply chains, the ability of U.S. to
effectively utilize and leverage the freight rail network in a crisis
could be crippled. Moreover, the extensive telematics and digitization
of the American rail network, while integrating the most modern
technology, also exposes the system and those who use it to a wide
array of cyber risks. While there is no single solution that will
mitigate these concerns, we must modernize our national policies to
reflect these security risks. Three key reforms are needed from
Congress and the administration:
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I. The Impact and Importance of Rail in America
The U.S. freight rail network, in comparison with freight moved by
water, pipeline, truck, and air, accounts for approximately 40 percent
of U.S. freight moved by ton-miles and 16 percent of freight moved as
measured by tons.\2\ In 2014, the operations and capital expense of the
major U.S. freight railroads supported approximately 1.5 million jobs
(1.1 percent of all U.S. workers), nearly $274 billion in U.S. economic
output (1.6 percent of the total), and $88 billion in wages (1.3
percent of the total).\3\ The thoroughly integrated rail systems of the
United States, Canada and Mexico are a cornerstone of the North
American market as well as the foundation for the safe, reliable, and
efficient transportation of goods from rural communities to urban areas
to seaports and government and military installations.
Railroads not only serve as the primary mode of transport for an
array of key products and commodities, but they also regularly
transport U.S. military equipment, hazardous waste, potentially toxic
and hazard commodities (i.e., chlorine, anhydrous ammonia, ethylene
oxide) and flammable liquids (i.e., petroleum products, ethanol). The
North American railcar fleet includes more than 1.6 million cars. With
seven Class I railroads,\4\ 21 regional railroads, and 525 local
railroads,\5\ more than 140,000 miles of active railroad, more than
1.65 million freight cars in North America, and 39,521 locomotives, an
estimated 12,000 trains operate daily.\6\
The U.S freight rail industry moves more freight than any other
rail system worldwide. These figures include the $6.5 billion U.S.
freight rail manufacturing sector which directly supports 65,000
jobs.\7\ The rail industry provides numerous public benefits including
reductions in road congestion, highway fatalities, fuel consumption,
logistics costs, and public infrastructure maintenance costs. As
private organizations responsible to their shareholders, U.S. freight
railroads depend upon profits for reinvestment and capital improvement.
The average U.S. manufacturer spends about 3 percent of revenue on
capital expense. The comparable figure for freight railroads is nearly
19 percent, more than 6 times higher than other industries.\8\ The
majority of this goes to maintenance and repair, and up to 20 percent
gets reinvested to enhance capacity.\9\
Most commercial freight (i.e., container freight) ships
intermodally. Rail's ability to transfer cargo intermodally--train
transport of goods before or after transfers from other modes of
traffic (aircraft, vessels, or trucks)--is vital to the economic
viability of U.S. ports and urban hubs, and for the past four decades,
constitutes the fastest growing segment of the freight rail
industry.\10\ Though the viability of American ports also depends upon
the ability to deliver to and receive inland cargo by all
transportation modes, freight rail connectivity at ports is
increasingly and uniquely important to attract containerized cargo when
the origin-destination pairs are more than 500 miles apart.\11\ Indeed,
U.S. railroads moved over 1 million intermodal loads in July 2018, a
5.5 percent increase over July 2017.
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U.S. military vehicles are transported by freight rail near
Greenville, SC in July 2018.
Half of all freight traffic is interchanged. This means that,
except for captive unit train movements on a single railroad from
origin to destination, using only that railroad's own cars (i.e., coal
or grain hoppers), most of the cars in any given freight train will be
owned by someone other than the handling carrier. Approximately 70
percent of all freight cars in North America are owned by non-railroad
entities (e.g., private car owners, leasing companies, banks, shippers,
and utilities). Interchanged traffic is vital to smooth international
commerce for Canada, Mexico, and the United States.
The U.S. freight rail system is also one of the most
technologically advanced in the world, with a rapidly expanding scope
of digitization, thoroughly incorporating the network into the Internet
of Things (IoT). Onboard freight telematics incorporate a vast network
of wireless sensors that monitor asset health and location, sending the
information to communication management units as well as to displays in
locomotive cabs. U.S. railroads depend upon the continual upgrade and
development of advanced technology to reduce risks, improve safety, and
improve the network's efficiency. As Federal Railroad Administration
(FRA) Administrator Ronald Batory stated at his swearing in on February
28, 2018: ``We must aggressively embrace the Internet of Things and
artificial intelligence, along with seeking autonomous functions that
can foster an environment towards minimal to non-existent risk.'' \12\
II. China's Government Aims to Dominate U.S. Rail
Rail manufacturing is one of the 10 industries included in the
Chinese government's ``Made in China 2025'' initiative,\13\ a plan
targeting global dominance in sectors that the Government of China
considers most strategic to its global aims. As the White House Office
of Trade and Manufacturing Policy noted in a recent report, ``[T]he
Chinese government has institutionalized the industrial policy of
inducing investment in `encouraged' high technology sectors using the
financial resources and regulatory instruments of the State.'' \14\
Toward these ends, China's government has brought to bear a range of
state subsidies, state financing, and other resources to support the
market entry and market ascension objectives of its wholly government-
owned, $33 billion conglomerate, China Railway and Rolling Stock
Corporation (CRRC), an enterprise that--with more than 183,000
workers--is now the largest rolling stock producer in the world.\15\
While it is owned by the Chinese government, CRRC is controlled by the
Communist Party of China, and it has set about to build a foothold in
the U.S. market, with a near-term goal of overtaking our rail sector.
Indeed, CRRC's own bylaws state that the company will seek guidance
from the Communist Party of China on significant matters affecting the
company's operations.\16\ Three of CRRC's current board members
previously held high-level positions at state-owned defense companies,
Aviation Industry Corporation of China (AVIC), which produces fighter
and bomber aircraft, helicopters, and unmanned aerial vehicles for the
Chinese Army, and China Shipbuilding Industry Corporation (CSIC), which
produces submarines, warships, and other naval equipment for the
Chinese Navy. Furthermore, two former CRRC board members held positions
at AVIC and China North Industries Group Corporation Limited (NORINCO),
a state-owned defense company that supplies tanks, aircraft, missiles,
firearms, and related products for the Chinese military.
The latter two of these entities, CSIC and NORINCO, have been
subject to allegations of espionage and sanctions evasion by the U.S.
government, raising serious questions about the connections of CRRC
board members to these activities. In 2007, AVIC was reputed to have
stolen data on the F-35 fighter jet from Lockheed Martin and used it to
build the Chinese J-31 fighter.\17\ Similarly, CSIC was indicted in
2016 by the U.S. Department of Justice for entering into contracts with
another Chinese company for the purchase of industrial materials that
were created using stolen trade secrets from an American firm.\18\
NORINCO has also been sanctioned by the U.S. State Department on six
occasions for contributing to Iranian nuclear weapons development.\19\
Two of CRRC's board members were respectively employed in high-level
positions at CSIC and NORINCO at the time these offenses occurred,
suggesting that they were likely aware of, if not complicit in, this
illicit activity.
These actions are a compelling example of how the Communist Party
places pressure on SOEs to fulfill directives such as Made in China
2025. To advance these plans, CRRC has first set its sights on the U.S.
municipal transit sector, seeking to get major new contracts to sell
transit cars to transit agencies in Boston, Chicago, New York, Los
Angeles and Philadelphia, among others. The Chinese government is
banking on the fact that once CRRC secures sufficient U.S. municipal
transit contracts, it can pivot quickly and inexpensively toward the
more strategically important freight rail sector. There, China can
unload much of its current freight car manufacturing capacity
oversupply--offsetting its own, slowing domestic market while
continuing its strategy of using exports to sustain the Nation's
employment base.
Given China's manufacturing capacity oversupply and long-term goals
for global dominance, CRRC hardly needs to profit on short-term sales.
As such, the Government of China is able to sweeten CRRC's bids for new
U.S. transit car contracts; not only by subsidizing CRRC's operating
costs but also, in many instances, providing below-market financing
terms to municipal buyers, making CRRC's prices enticingly low compared
to other bids. In fact, CRRC's own 2016 annual report shows that it has
leveraged China's state-owned banks to the tune of almost $27 billion
to finance its expansion plans.\20\ CRRC has used those resources to
make its bids for major U.S. project opportunities more attractive,
underbidding other competitors by as much as 50 percent, and--since
2015--winning $2.6 billion in transit rail contracts to supply ``Made
in China'' railcars for the Boston, Los Angeles, Philadelphia, and
Chicago metro systems, among others.\21\ Soon, CRRC will have the
chance to apply the same tactics to metro transit rail contracts in
Atlanta, Washington, D.C., New Jersey and New York City.
With these massive successes under its belt, CRRC has built two
U.S. transit assembly plants in Springfield, Massachusetts and Chicago.
These are not where railcar manufacturing occurs, since China has
little interest in shifting its manufacturing to the United States.
Instead, these facilities are where Chinese components and
subcomponents are shipped and assembled into cars that are then sold to
U.S. buyers. Most of the transit cars must have more than 65 percent of
their content sourced from American components if transit authorities
want to qualify for Federal funding. In the case of the Boston transit
contract, however, CRRC met the desire of Massachusetts for an in-state
assembly facility and bid the lowest price by more than $150 million
under the next competitor.\22\ With no Federal funding supporting this
procurement by the state transit authority MBTA, CRRC avoided all
otherwise applicable Federal Transit Administration ``Buy America''
requirements. In November of last year, CRRC shipped the first fully-
built, shrink-wrapped transit rail cars that had been made completely
in China into the Port of Boston.
And while U.S. transit rail is typically subject to such domestic
content requirements, no similar requirements apply to freight railcar
manufacturing. This means that CRRC can effectively import complete or
nearly complete freight rail cars to the United States or complete
minor assembly at CRRC U.S. facilities at an even lower discount than
transit cars have received. Having already established major operations
in the U.S., CRRC's current assembly facilities in the United States
can easily be modified to accommodate freight assembly as well, which
are in fact a downgrade for facilities to produce compared to transit.
CRRC's entry into the freight rail manufacturing poses a direct
threat to a major strategic and economic asset of the United States.
Indeed, a 2017 Oxford Economics study found Chinese competition in
freight rail threatens U.S. economic competitiveness.\23\ That same
study projected that up to 65,000 U.S. jobs could be eliminated if we
allow China to displace U.S. freight rail manufacturing, a sector that
has many U.S.-headquartered players today, as well as a long U.S.
supply chain since the industry is a major consumer of U.S.-made steel.
Even so, signs of Chinese targeting of North American freight rail are
already evident, with CRRC having recently opened freight car assembly
facilities in Wilmington, North Carolina and Moncton, New
Brunswick.\24\,\25\
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Source: Oxford Economics
If the prospect of losing domestic freight rail capabilities seems
far-fetched, we need only remind ourselves of recent CRRC activities in
Australia to understand how far China is willing to go to dominate in
rail. Within a decade after entering Australia's once-thriving domestic
rail manufacturing industry, CRRC used underpricing and other anti-
competitive tactics as described above to wipe out Australia's domestic
rail manufacturing base entirely.\26\ Today, Australia's railcar
manufacturing is wholly controlled by CRRC. As a clear reminder of
China's intentions of continuing--this trend, CRRC itself Tweeted
recently about its plans for market dominance, announcing, ``So far, 83
percent of all rail products in the world are operated by #CRRC or are
CRRC ones. How long will it take for us conquering the remaining 17
percent?'' \27\
The European Union and Israel recognize this threat and are
exploring and enacting policies to better protect their domestic rail
manufacturing and production sectors.\28\ \29\ As of this writing, even
though freight rail is considered by the Department of Homeland
Security to be a key element of our Nation's critical infrastructure,
similar U.S. measures have not been enacted at the Federal level to
directly protect American freight rail manufacturing from the
Government of China and its designs for global dominance.
III. China's Rail Agenda Threatens U.S. Cybersecurity
``The possibility of causing mayhem remotely could make train hacking
an attractive priority for terrorists.'' \30\
In 2010, the world witnessed the first case of weaponized malware
when the nuclear industry fell prey to Stuxnet, prompting the
possibility of attacks on industrial controls in cyber-systems. The
possibility has since become far more real as we have witnessed growing
numbers of cyberattacks that threaten and at times undermine key
segments of the world's economies, power, financial systems, and other
assets.
Predatory Chinese efforts to penetrate our freight rail market
create the potential for disruption to the most advanced technologies
upon which our rail system depends for safety and efficiency.
Commercial railroads are, of course, aware of the risks they face from
potential cyber-security incursions and are investing in cybersecurity
capabilities. Even so, we significantly increase the risk of Chinese
cyber-espionage or even cyber-terrorism by allowing CRRC to displace
U.S. rail interests and shift our freight rail supply reliance to the
Government of China. If allowed to penetrate the U.S. freight rail
system, Chinese government-backed entities could simply vacuum data
from individuals and firms connected to the rail network. China's
history of cyberattacks on U.S. interests, combined with the Chinese
Government's known efforts to use facial recognition and artificial
intelligence for tracking its own citizens through ``a vast and
unprecedented national surveillance system'' make this security risk
all the more acute.\31\
In other U.S. economic sectors where Chinese SOEs have engaged
aggressively, the U.S. Government has responded with targeted
restrictions to mitigate clear security risks. Such measures have
included a reported U.S. government ban on contracting with the Chinese
computer firm Lenovo,\32\ a ban on the purchase of Chinese drones,\33\
and the removal of Chinese-made security cameras from U.S. military
bases.\34\ In April 2018, DoD banned Huawei and ZTE cell phones from
sale in U.S. military exchanges world-wide.\35\ We have yet to do the
same to protect Chinese incursions into the U.S. freight rail
manufacturing base.
According to the National Institute of Standards and Technology,
the following are cyber-threats to industrial control systems, all of
which must be taken into account when we consider control of U.S.
freight rail assets:
Blocked or delayed flow of information through ICS networks,
which could disrupt ICS operation.
Unauthorized changes to instructions, commands, or alarm
thresholds, which could damage, disable, or shut down
equipment, create environmental impacts, and/or endanger human
life.
Inaccurate information sent to system operators, either to
disguise unauthorized changes, or to cause the operators to
initiate inappropriate actions, which could have various
negative effects.
ICS software or configuration settings modified, or ICS
software infected with malware, which could have various
negative effects.
Interference with the operation of equipment protection
systems, which could endanger costly and difficult-to-replace
equipment.
Interference with the operation of safety systems, which
could endanger human life.\36\
Furthermore, as freight trains become increasingly sophisticated,
incorporating more technology and systems integration, these types of
cyber-security concerns become more palpable. In U.S. freight rail,
industrial controls have replaced the mainframes and protocols that
have historically undergirded the industry, and these controls present
vulnerabilities not only relative to the freight rail systems
themselves, but also through outside data connections that could
threaten both public safety and operating continuity.\37\ Significant
technology and rapidly expanding IoT capabilities in the U.S. freight
rail network create potential security challenges that include:
A digitized railroad network/the Internet of Things: Like
other high-tech industries, the freight railroad industry has
embraced digitization and the IoT. Integrated teams of data
scientists, software developers, and engineers develop and
apply technology across every aspect of the nationwide freight
rail network. Indeed, such technology has generated significant
improvements in operational safety and network efficiency.
These benefits also have increased the vulnerability of onboard
systems, individual train operations, and perhaps even the
industry's metadata warehousing centers to cyber threats.
Rail Signaling: In California in 2008, a Metrolink passenger
train collided with a Union Pacific train, causing 25
fatalities and 135 passenger injuries. Congress responded
mandating the installation of positive train control (PTC)
systems on much of the Nation's rail system including the Class
I network by 2015. The statutory deadline was later extended by
Congress to December 31, 2018, subject to certain alternative
schedule criteria. PTC is designed to prevent four specific
accident scenarios: train-to-train collisions, over-speed
derailments, unauthorized train incursions into right-of-way
work zones, and misaligned track switches. A malicious cyber
breach of PTC or underlying existing rail signaling systems
could wreak havoc and cause accidents on the highly
interdependent freight railway network.
Locomotives: Latest generation diesel locomotives have
hundreds of sensors which generate thousands of asset health
and performance indicators per minute.
Onboard Freight Car Location & Asset Health Monitoring:
There are 25,000 freight cars equipped with telematics or
remote monitoring equipment. Over 85 percent of the
installations are on tank cars and the vast majority of those
are materials: chlorine, anhydrous ammonia, ethylene oxide, and
flammable liquids. Thetracking technology includes a wireless
communication management unit to track precise near-real time
lat-long location via GPS, direction of travel, speed, and
dwell time within the 45 Transportation Security Administration
(TSA) designated high-threat urban areas (HTUAs) \1\ and
thousands of chemical shipper/consignee defined geo-fences.
Wireless sensor nodes measure and/or alert:
---------------------------------------------------------------------------
\1\ The Transportation Security Administration defines an HTUA as
an area comprising one or more cities and the surrounding areas,
including a 10-mile buffer zone.
---------------------------------------------------------------------------
loaded or empty car condition
accelerations and peak impacts in yards & on line-of-road
roller bearing temperature
lading temperature in tank cars
tank car hatch covers open (based upon degree of tilt)
handbrake on or off (unattended train securement issue)
End-of-Train Telemetry (EOT): The FRA requires all freight
trains operating on excess of 30 mph to be equipped with a 2-
way EOT device. EOTs include a flashing blue light indicating
the last car in a train as well as the rear brake pipe pressure
which is transmitted to the lead locomotive in the train. EOTs
also include GPS location. The 2-way feature means that the
locomotive engineer can initiate an emergency brake application
from the rear of the train as well as the front. This is
critical safety technology (a pool of 12,000 devices on the
Class I railroads) since Class I railroads are stretching some
trains from 10,000-12,000 feet long as opposed to a typical
5,000-6,000-foot train.
A. Industrial Cybersecurity Considerations
``Chinese industrial espionage is not new . . . but it is practiced
more openly these days,'' writes former Navy Secretary J.
William Middendorf and the State Department's Dan Negrea.\38\
''
Every company shipping goods on U.S. freight rail--which transports
nearly 13 percent of products across our country, for industries
ranging from agriculture to chemicals to mining--should be concerned by
the prospect of China controlling key aspects of the U.S. freight rail
system. In 2016, U.S. railroads originated over 1.5 trillion tons of
freight in 27 million carloads. 40 percent of all intercity freight
goes by rail, including 67 percent of the coal used by electric
utilities for power generation.\39\ Similarly, the chemicals we use to
keep our water supply pure and much of the food products we consume are
shipped by private freight rail. Therefore, ensuring that these
products arrive at their destinations and are free from tampering is of
paramount concern.
The Transportation Security Administration, in the Preamble to its
November 26, 2008 Rail Transportation Security Final Rule, noted that
``Due to the open infrastructure of the rail transportation system,
freight trains can be particularly vulnerable to attack'' and
``[f]reight trains, transporting hazardous materials are of even more
concern, because an attack on those trains. . .could result in the
release of hazardous materials'' and that ``the release of PIH
materials in a densely populated urban area would have catastrophic
consequences.'' Rail also carries some of the most hazardous materials
(HAZMAT) between industries and military installations in America,
often through densely populated areas and cities. Typically railroads
move 1.7-1.8 million carloads of HAZMAT every year--items that are
essential to our economy and our society--and about 105,000 carloads
are so-called ``poisonous by inhalation hazard'' (TIH) materials such
as chlorine or anhydrous ammonia. Freight rail is also a principal mode
of transport for nuclear waste. Indeed, the majority of TIH materials
in this country are transported via rail, which underscores the
paramount emphasis on freight rail safety, free from tampering and
malicious intrusion. The safety consequences of any HAZMAT incident,
especially those involving the most dangerous worst commodities (e.g.,
poisonous by inhalation hazard) are substantial: In January 2005, for
example, a rail tank car ruptured in Graniteville, SC as the result of
a derailment, releasing chlorine that forced the evacuation of 5,400
people within a mile radius of the site. Ultimately 9 people died, and
75 others required treatment for chlorine exposure.\40\
B. Transportation Operations Cybersecurity Considerations
Given the crucial role of rail in our economy and our defense
industrial base, U.S. Presidential Policy Directive 21 classifies
freight rail as part of our Nation's critical infrastructure.\41\ And
yet, no Federal law specifically restricts foreign government ownership
of our freight rail supply sector. At the same time, many of the same
critical infrastructure features designed to boost the quality of and
operation of our freight rail system also raise serious vulnerability
concerns in the hands of a foreign government.
Policymakers should recall that the ubiquitous freight rail network
traverses nearly every major city in the nation, particularly the 45
TSA designated continental HTUAs. Many rail yards and storage locations
are close to densely populated areas, which at any time could contain
large numbers of loaded HAZMAT tank cars.\42\ Additionally, freight and
passenger rail are highly interdependent; they use many of the same
bridges, tunnels, control centers, tracks, signals, and switches.
Amtrak--the principal U.S. provider of inter-city passenger rail--
operates on more than 22,000 miles of track owned by freight railroads,
and many commuter and light rail systems also operate on freight rail
tracks.\43\ A freight rail or railyard incident could be triggered to
cause tremendous direct and collateral damage on large population
centers as well as vital transportation networks.
Finally, railroads have information-based operating systems that
also pose vulnerabilities. The Railway Alert Network (RAN), for
instance, distributes intelligence between and among the Federal Rail
Administration, commercial railroads and U.S. law enforcement; RAN,
which is now operated by the American Association of Railroads (AAR),
allows for analysis and dissemination of threat communications from DOT
and DHS to AAR's members.\44\ Tapping into the RAN system would give an
unfriendly outside government access to secure information, including
network data analytics and traffic analysis, that should not be shared.
The AAR developed its AskRail mobile app in 2014. First responders are
able to instantaneously access the specific hazardous materials
commodity in a tank car as well as the hazards posed. AskRail employs
GIS mapping to identify vulnerable areas like hospitals and schools and
rivers. Obviously, unauthorized access to AskRail by those with
malicious intent poses a security threat.
C. Military Cybersecurity Considerations
The Department of Defense (DoD) has a longstanding reliance on
freight rail in the United States. Most of the military's heavy and
tracked vehicles are transported by freight rail meaning that freight
rail runs through every military base in the United States.\45\ DoD's
Military Traffic Management Command (MTMC) has designated nearly 39,000
miles of freight rail track as being uniquely important to our Nation's
defense, and thus part of the Strategic Rail Corridor Network, or
``STRACNET.'' STRACNET serves 193 U.S. defense installations,
connecting military bases with maritime ports of embarkation and other
key points across the country.\46\
Freight rail is also at the heart of the U.S. Transportation
Command (TRANSCOM), DoD's global defense transportation system,
coordinating people and transportation assets around the world. The
Surface Deployment and Distribution Command (SDDC), which is a
component of TRANSCOM, operates 10,000 containers and some 1,350 rail
cars of its own to deliver equipment and supplies for deployed members
of the Army, Navy, Air Force, Marines, and Coast Guard. SDCC also, of
course, leverages commercial freight rail to provide important
components of DoD's surface transportation requirements.\47\ SDCC also
utilizes a special heavy-duty flatcar fleet of 1,850 specially designed
heavy-duty flatcars managed by a company owned by the major freight
railroads.
Because of the deep reliance of our military on U.S. commercial
rail, MTMC monitors and evaluates data on railroad industry
construction, industry mergers, bankruptcies and other similar events
to determine how they may affect DoD's mobility and readiness
capabilities. We can assume that MTMC is aware of the ongoing efforts
by China's Government to dominate the U.S. rail sector. We must act on
this concern to stop CRRC's activities to assert itself in the U.S.
marketplace.
IV. Policy Action is Needed
America's domestic freight rail manufacturing base has always
played a vital role in the economic and national security of the United
States. As this report demonstrates, freight rail is the lifeblood of
the American economy--employing tens of thousands of workers, shipping
millions of tons of consumer goods and materials through every major
artery in the country and adding over $6.5 billion in GDP.
Simultaneously, freight rail is an indispensable part of our Nation's
defense infrastructure, a vital transportation system that supplies and
connects U.S. military installations across the continent. Despite our
longstanding reliance on freight rail, America remains unprepared to
protect itself from foreign entities with ambitions directly at odds
with our own. Even current cooperative efforts between industry and the
Department of Homeland Security--while commendable--remain inadequate.
The good news is that there is still time to address this threat.
Federal and state policymakers have an opportunity to adopt meaningful
laws and regulations that can significantly slow the Chinese
government's intrusion into the U.S. freight manufacturing space and,
in turn, bolster America's security in the face of ever-changing global
threats. The goal of this report is to encourage America's political
leaders to strongly consider any and all of the following
recommendations.
1) Develop comprehensive restrictions and reviews on investments from
foreign state-backed entities in critical infrastructure
integral to our national defense.
The recent reforms to the Committee on Foreign Investment in the
United States (CFIUS) through the broadly supported Foreign Investment
Risk Review Modernization Act (FIRRMA) were a welcomed step forward for
U.S. policy and come at a pivotal moment. Nevertheless, CFIUS continues
to face shortcomings. Greenfield investments--wherein a foreign entity
creates entirely new investments, rather than through an acquisition,
merger, or joint venture--are still not explicitly covered under
CFIUS's scope of authority. This means that CRRC and other Chinese SOEs
can continue to build new facilities in the U.S. without oversight. To
date, only five transactions have ever been blocked by CFIUS,\48\
suggesting that we should explore alternative tools to ensure the
integrity of the rail manufacturing sector and its associated supply
base.
One such tool that has been proposed has been to create a parallel
committee to CFIUS under the authority of the Department of Commerce to
review transactions for the effects they would have on economic
security. With a broader mandate that would allow the Committee to take
economic considerations into effect, we could address many of the
restrictions that have plagued CFIUS. Another more attainable option is
for Congress to take steps to ensure that Federal funds are not used to
further the aims of SOEs like CRRC. Three of the four manufacturing
contracts that CRRC won in the U.S. were awarded using Federal Transit
Administration (FTA) dollars, meaning that the U.S. government
effectively subsidized a Chinese state-owned enterprise to further the
Made in China 2025 initiative at the expense of American workers and
security.
2) Ensure that appropriate Federal agencies, in coordination with
states and localities, develop robust standards for cyber and
data integrity applicable to any rail or transit sector
contracts involving foreign state-backed entities.
As technology continues to advance, so must our standards for
cybersecurity. If foreign SOEs are permitted to produce any aspect of
the thousands of detector and monitoring systems onboard trains around
the country, we will face a continued national security threat capable
of halting our entire rail network. These technologies present
countless opportunities for hacking and surveillance, and with the
cybersecurity risks of other Chinese entities having been well-
documented in numerous other industries, action is urgently needed. The
Department of Homeland Security and the Department of Transportation
should coordinate with state and local agencies to develop and
implement standards that ensure cyber and data security for our rail
system in any interface with a foreign SOE. These agencies should also
engage with private industry to determine what other appropriate
measures to address the cybersecurity concerns posed by foreign SOEs
and, if appropriate, establish a task force of key stakeholders
involved in the manufacturing, operations, and oversight of the freight
rail sector. Under new and existing authority, officials must take
robust steps to ensure the cyber integrity from any SOE threat of all
rail network systems and data streams.
3) Strengthen oversight of Buy America laws to ensure that existing
laws and regulations are adhered to in federally funded transit
and rail procurements including railcar manufacturing and
explore new avenues to further ensure the manufacturing
capabilities of freight rail and other core domestic industries
that are integral to support and maintain our defense
industrial base.
CRRC's pattern of investment in other markets like Australia
suggest that China will use the transit railcar manufacturing sector as
a beachhead to then move into freight railcar manufacturing,
implicating even more pressing national security concerns. In the
transit railcar manufacturing sector, Buy America laws offer the most
comprehensive protections for the industry that, when followed, can
help mitigate the financial and strategic advantages that the
Government of China offers state-owned companies like CRRC. However,
various loopholes and lax enforcement has limited the effectiveness of
these laws, allowing CRRC to advance into the transit railcar
manufacturing sector unabated.
In April 2017, President Trump signed an executive order to
strengthen Buy America laws, requiring Federal agencies to develop
policies to maximize the use of domestic workers and materials in
procurements as well as to recommend new policies to strengthen the
implementation of Buy American laws.\49\ Nevertheless, little has been
done since then to strengthen Buy America. Buy America laws have proven
to be a vital protection for the U.S. manufacturing and industrial
base, ensuring the employment of thousands of American workers while
strengthening our ability to respond to foreign threats in the process.
These laws, however, can be easily manipulated as Federal agencies
often lack the resources to effectively police them, relying all too
heavily on the claims of manufacturers and suppliers. When those
manufacturers are foreign state-owned enterprises, we have little
incentive to take them at their word. Congress and the administration
should explore avenues to strengthen domestic content provisions and
ensure that existing laws are being followed to protect American
workers and security.
V. Conclusion
The Government of China's attack on our rail system is insidious
and ingenious. China enters at the local level, subsidizes the assembly
of Chinese transit rail cars, and supplies them to cash-strapped
transit systems at bargain prices. In the process, Chinese companies
bring small numbers of assembly jobs to the U.S. while the
manufacturing, technology, and R&D stay in China. Today and for the
foreseeable future, no American company makes transit rail cars, but
the evidence is compelling that the Chinese government has now directed
state-owned entities to target the U.S. freight rail manufacturing
sector as well. Our freight railcar industry is now in China's sights.
As our Nation's freight railcar manufacturers continue to
incorporate innovative new technologies to enhance the safety and
productivity of our rail system, the growing presence of China's CRRC
is all the more concerning. From rural communities to major cities to
seaports and government installations, freight rail not only serves as
the primary mode of transport for an array of key products and
commodities, but also for sensitive U.S. military equipment, hazardous
nuclear waste, and toxic chemicals. We must take urgent measures to
ensure freight rail remains secure and American-run. We must retain the
know-how and technology to improve our rail system in the future, and
safeguard against disruption of this strategically vital sector of our
economy and pillar of our national security.
Endnotes
\1\ Oxford Economics, ``Will We Derail U.S. Freight Rolling Stock
Production,'' May 2017. https://www.oxfordeconomics.com/recent-
releases/will-we-derail-us-freight-rolling-stock-production
\2\ Federal Railroad Administration, ``National Rail Plan Progress
Report'', September 2010. Cited in https://www.fra.dot.gov/page/P0362
\3\ Towson University, Regional Economic Studies Institute, June
2016 (quoted in AAR President Ed Hamberger's April 11, 2018 Statement
to the House Appropriations Committee THUD Subcommittee hearing on Rail
Safety, and Infrastructure).
\4\ Federal Register, ``Indexing the Annual Operating Revenues of
Railroads,'' Cited in https://www.fra.dot.gov/page/P0362
\5\ Federal Railroad Administration, `Freight Rail Background,''
March 2012. Cited in https://www.fra.dot.gov/page/P0362
\6\ Department of Homeland Security, ``Transportation Systems
Sector.'' https://www.dhs.gov/transportation-systems-sector
\7\ Oxford Economics, ``Will We Derail U.S. Freight Rolling Stock
Production,'' May 2017. https://www.oxfordeconomics.com/recent-
releases/will-we-derail-us-freight-rolling-stock-production
\8\ Towson University, Regional Economic Studies Institute, June
2016 (quoted in AAR President Ed Hamberger's April 11, 2018 Statement
to the House Appropriations Committee THUD Subcommittee hearing on Rail
Safety, and Infrastructure).
\9\ Federal Railroad Administration, ``National Rail Plan Progress
Report,'' September 2010. Cited in https://www.fra.dot.gov/page/P0362
\10\ Federal Railroad Administration, ``Freight Rail Overview,''
https://www.fra.dot.gov/page/P0362
\11\ Louisiana Department of Transportation & Development, ``A
Comparative Analysis of Intermodal Ship-to-Rail Connections at
Louisiana Deep Water Ports,'' August 2007. http://
www.sp.dotd.la.gov/Inside_LaDOTD/Divisions/Multimodal/Marine_Rail/
Misc%20Documents/
A%20Comparative%20Analysis%20of%20Intermodal%20Ship%20to%20Rail%20Connec
tions%
20at%20Louisiana%20Deep%20Water%20Ports.pdf
\12\ As Prepared Remarks of Ronald L. Batory Swearing-In Ceremony
as the 14th Administrator of the Federal Railroad Administration, U.S.
Department of Transportation Headquarters, Washington, DC, February 28,
2018. https://www.fra.dot.gov/Elib/Document/17848
\13\ The Made in China 2025 plan identifies ten priority sectors:
next-generation information technology; high-end numerical control
machinery and robotics; aerospace and aviation equipment; maritime
engineering equipment and high-tech maritime vessel manufacturing;
advanced rail equipment; energy-saving and new energy vehicles;
electrical equipment; new materials; biomedicine; and agricultural
machinery.
\14\ White House Office of Trade and Manufacturing Policy, ``How
China's Economic Aggression Threatens the Technologies and Intellectual
Property of the United States and the World,'' June 2018. https://
www.whitehouse.gov/wp-content/uploads/2018/06/FINAL-China-Technology-
Report-6.18.18-PDF.pdf
\15\ CRRC 2016 Annual Report, April 2017. http://www.hkexnews.hk/
listedco/listconews/SEHK/2017/0427/LTN201704272466.pdf
\16\ ``CRRC Corporation Limited Articles of Association,'' CRRC
Corporation Limited, at 70. http://www.crrcgc.cc/Portals/73/Uploads/
Files/2018/6-4/636637164457871915.pdf
\17\ ``America's most expensive weapons system, the F-35, is a key
symbol of Trump's trade gripe with China,'' CNBC, March 22, 2018
https://www.cnbc. com/2018/03/22/americas-most-expensive-weapons-
system-the-f-35-is-a-key-symbol-of-trumps-trade-gripe-with-china.html
\18\ ``Chinese Nationals Stole Marine Technology to Benefit Chinese
Regime, According to U.S. Justice Department,'' Epoch Times, April 30,
2018. https://www. theepochtimes.com/chinese-nationals-stole-marine-
technology-to-benefit-chinese-regime-according-to-u-s-justice-
department_2509135.html
\19\ ``United States Imposes Sanctions Against Chinese Firm,''
Nuclear Threat Initiative, September 22, 2004. https://www.nti.org/gsn/
article/united-states-imposes-sanctions-against-chinese-firm/
\20\ ``CRRC 2016 Annual Report,'' CRRC Corporation Limited, April
28, 2017 http://www.crrcgc.cc/Portals/73/Uploads/Files/2017/4-28/
636289739063167304.pdf
\21\ Focusing initially with transit freight contracts allowed CRRC
the opportunity to work with local governments and small businesses,
leveraging CRRC's economies of scale at a much lower level than were
CRRC to initially tackle the larger-scale, higher visibility, more
stringent review process associated with freight rail contracts.
\22\ ``China-based T supplier keeps rolling,'' CommonWealth, March
24, 2017. https://com
monwealthmagazine.org/politics/china-based-t-supplier-keeps-rolling/
\23\ Oxford Economics, ``Will We Derail U.S. Freight Rolling Stock
Production,'' May 2017. https://www.oxfordeconomics.com/recent-
releases/will-we-derail-us-freight-rolling-stock-production
\24\ William Vantuono, ``New tank car builder coming on line,''
Railway Age, February 13, 2014. https://www.railwayage.com/
financeleasing/new-tank-car-builder-coming-on-line/
\25\ ``CRRC to build North American wagon plant in Canada,''
Railway Gazette, May 5, 2017. http://www.railwaygazette.com/news/news/
n-america/single-view/view/crrc-to-build-north-american-wagon-plant-in-
canada.html
\26\ Letter from Rail Security Alliance to U.S. Trade
Representative, December 14, 2017.
\27\ @CRRC_global, ``Following CRRC's entry to Jamaica, our
products are now offered to 104 countries and regions. So far, 83
percent of all rail products in the world are operated by #CRRC or are
CRRC ones. How long will it take for us conquering the remaining 17
percent?'' Twitter, January 11, 2018. https://twitter.com/CRRC_global/
status/951476296860819456
\28\ Yosi Melman, ``Cause for Concern? Chinese Investment and
Israel's National Security,'' The Jerusalem Post, April 7, 2018.
https://www.jpost.com/Jerusalem-Report/Chinese-TAKEAWAY-546692
\29\ Hermine Donceel and Eric Maurice, ``EU Parliament approves new
anti-dumping methodology,'' EU Observer, November 15, 2017. https://
euobserver.com/economic/139866
\30\ David Morris, ``Railroad Association Denies Smart Train Cyber
Vulnerabilities,'' Fortune, January 22, 2016. http://fortune.com/2016/
01/22/railroad-association-denies-smart-train-cyber-vulnerabilities/
\31\ Paul Mozur, ``Inside China's Dystopian Dreams: A.I., Shame and
Lots of Cameras,'' The New York Times, July 8, 2018. https://
www.nytimes.com/2018/07/08/business/china-surveillance-technology.html
\32\ Sophie Curtis, ``Spy agencies `ban Lenovo from secret
networks,'' The Telegraph, July 29, 2013. https://www.telegraph.co.uk/
technology/news/10208578/Spy-agencies-ban-Lenovo-from-secret-
networks.html
\33\ Alwyn Scott, ``China drone maker steps up security after U.S.
Army ban,'' Reuters, August 14, 2017. https://www.reuters.com/article/
us-usa-drones-dji/china-drone-maker-steps-up-security-after-u-s-army-
ban-idUSKCN1AU294
\34\ Max Greenwood, ``US Army base removes Chinese-made
surveillance cameras,'' The Hill, January 12, 2018. http://thehill.com/
policy/defense/368710-us-army-base-removes-chinese-made
-surveillance-cameras
\35\ Hamza Shaban, ``Pentagon tells U.S. military bases to stop
selling ZTE, Huawei phones,'' The Washington Post, May 2, 2018. https:/
/www.washingtonpost.com/news/the-switch/wp/2018/05/02/pentagon-tells-u-
s-military-bases-to-stop-selling-zte-huawei-phones/?utm_term=.bf1e
99041b11
\36\ Keith Stouffer et al., ``Guide to Industrial Control Systems
(ICS) Security,'' NIST Special Publication 800-2, Revision 2, May 2015.
https://nvlpubs.nist.gov/nistpubs/SpecialPub
lications/NIST.SP.800-82r2.pdf
\37\ ``The state of cybersecurity in the rail industry,'' Rockwell
Collins, August 2017. https://www.rockwellcollins.com/-/media/Files/
rc2016/marketing/C/Cybersecurity-solutions/The-state
-of-cybersecurity-in-the-rail-industry-white-
paper.pdf?lastupdate=20171215210046
\38\ J. William Middendorf II and Dan Negrea, ``China takes a wrong
turn,'' The Washington Times, March 11, 2018. https://
www.washingtontimes.com/news/2018/mar/11/china-takes-a-wrong-turn/
\39\ Testimony of Michael T. Haley, ``Update on Federal Rail and
Public Transportation Security Efforts,'' Hearing before the
Subcommittee on Transportation Security and Infrastructure Protection,
of the Committee on Homeland Security, U.S. House of Representatives,
February 6, 2007.
\40\ ``Transportation Sector-Specific Plan: Freight Modal Annex,''
U.S. Department of Homeland Security, 2007, Pg. 2. https://
www.hsdl.org/?view&did=474331
\41\ ``Presidential Policy Directive 21--Critical Infrastructure
Security and Resilience,'' The White House, February 12, 2013. https://
obamawhitehouse.archives.gov/the-press-office/2013/02/12/presidential-
policy-directive-critical-infrastructure-security-and-resil
\42\ Government Accountability Office, ``Freight Rail Security:
Actions Have Been Taken to Enhance Security, but the Federal Strategy
Can Be Strengthened and Security Efforts Better Monitored,'' Report No.
09-243, April, 2009, Pg. 7. https://www.gao.gov/products/GAO-09-243
\43\ Id at 7. 44 Testimony of Michael T. Haley, ``Update on Federal
Rail and Public Transportation Security Efforts,'' Hearing before the
Subcommittee on Transportation Security and Infrastructure Protection,
of the Committee on Homeland Security, U.S. House of Representatives,
February 6, 2007.
\45\ ``Strategic Rail Corridor Network (STRACNET),'' Global
Security, 2012. https://www.globalsecurity.org/military/facility/
stracnet.htm
\46\ Id.
\47\ ``About SDDC,'' U.S. Army Military Surface Deployment and
Distribution Command, 2016. https://web.archive.org/web/20110818114337/
http://www.sddc.army.mil/What/default.aspx
\48\ James Jackson, ``The Committee on Foreign Investment in the
United States (CFIUS),'' Congressional Research Service, July 3, 2018.
https://fas.org/sgp/crs/natsec/RL33388.pdf
\49\ Executive Order No. 13788, ``Buy American and Hire American,''
April 18, 2017. https://www.whitehouse.gov/presidential-actions/
presidential-executive-order-buy-american-hire-american/
______
Response to Written Question Submitted by Hon. Marsha Blackburn to
Daniel H. Rosen
Question. Question: In your testimony, you state that China is
mixing political guidance with corporate governance, which distorts
market outcomes and generally serves the interests of firms in China.
Moreover, you note that given China's scale and weight, these
distortions can quickly put firms in other nations out of business. In
the context of communications and information technology equipment, to
what extent can Chinese firms put serious downward pressure on Western
technology companies?
Answer. In the context of information and communications technology
(ICT) equipment, the benefits of Chinese industrial policies for native
firms, including a mixture of political and economic incentives, can
impair the commercial viability of Western technology companies.
Chinese Communist Party committees present in all state and many
private firms have a heavy, if not controlling, influence over
leadership assignments and compensation, including at the major banking
institutions. Those financial institutions are mandated to promote
stability and other political goals, in addition to commercial
efficiency. This can translate into permissive financing terms for
domestic ICT firms, to support the government's goals in areas like job
creation and innovation. Since political stability is not a mandate for
creditors to western firms, those firms do not enjoy the financial
flexibility that their Chinese competitors do.
Chinese industrial policy can also affects the Nation's outbound
direct investment flows in a manner that creates an unlevel playing
field for foreign firms. Following decades of unsuccessful attempts to
develop a domestic semiconductor industry, for example, in 2014 China
enacted a national policy to accelerate the development of its
semiconductor industry which included overseas investment as one key
element. After the announcement of that initiative, private investors
and government funds embarked on an unprecedented buying spree of
assets along semiconductor production chains in Asia, Europe and North
America.
Before the strategy was announced, outbound investment from China
into the global semiconductor industry was low, never exceeding $1
billion in a single year. In 2014, the combined value of Chinese
takeovers announced globally increased to $3 billion. In 2015, that
figure rose to $35 billion. The total value of transactions actually
completed since 2000 adds up to $8.1 billion, a smaller figure as many
deals either fell through or were rejected for national security
purposes. But nearly all of that $8.1 billion occurred in the 3 years
since the Chinese government announced its 2014 strategic plan. Most of
these transactions were supported by funding offered on favorable terms
from strategic finance vehicles set up by China's central government
with an industrial policy mandate.
Western firms that make imprudent bets on acquisitions don't
survive. If their Chinese competitors can do so without bearing the
same consequences, they will disrupt the competitive ecosystem on which
American competitiveness depends.
______
Response to Written Questions Submitted by Hon. Todd Young to
Josh Kallmer
Question 1. Mr. Kallmer--in your testimony you raise a key point--
that China may propose many more standards in international standards
organizations, but that there is no ``first mover advantage'' that
would give them an advantage in the development of 5G. Could you please
expand on this topic?
Answer. As I noted in my testimony, China is rapidly developing a
large quantity of domestic standards on various technologies, but
quantity does not denote quality. Chinese national standards can often
be inadequate for international adoption for a number of reasons,
including a lack of technical sophistication, insufficiently addressing
interoperability, or because they overtly favor a single vendor's
technology, which is unacceptable in an international forum. While
Chinese standards are often developed on short timelines with a great
deal of downward administrative pressure to generate tangible
``deliverables,'' international standards setting bodies go through a
far more rigorous process of review with a wide range of members from
the international community. International standards setting bodies
have governance processes in place that enable participants to hold any
contribution accountable for technical viability and equality for all
implementers. The rules have been created so that all contributors are
on a level playing field and thus the notion of a ``first mover
advantage'' is a mischaracterization. If their industry produces
meaningful technical submissions and submits them to the international
process, they will have the same opportunity as the submission from any
other participants. There is no doubt that being a contributor is a
stronger position than being an observer and that is why ITI has long
been a proponent of policies and practices that encourage tech sector
R&D investment. The strongest counter to any contribution, from any
country, is highly credible technical content of our own. For the U.S.
to be most successful 5G standards development, we recommend that the
U.S. Government:
Support U.S. industry R&D investment in 5G space with
encouragement and support for international standards
participation by the private sector;
Ensure robust competition in U.S. wireless markets, which
results in stronger U.S. companies that are able to innovate
and successfully contribute to 5G standards; and
Maintain a strong USG presence in the international
standards arena in order to maintain a healthy standardization
system.
Question 2. Shouldn't we encourage U.S. industry to develop
wireless technology that will inform international standards in the
future? How can we best do that?
Answer. Yes. The U.S. should continue to incentivize R&D in the
private sector through programs like the Small Business Innovation
Research (SBIR) program, increase public-private partnerships along
with strengthening Federal R&D in this area, and ensure robust U.S.
competition in wireless, which allows American companies to gain the
experience and revenue to make investments in 5G and beyond. With
regard to developing standards, the U.S. model for consensus-based,
voluntary, industry-led standards is the very approach that has allowed
its industry to thrive in the technology space. This approach enables
the formulation of standards through qualitative and comprehensive
participation from industry technical experts. Because the private
sector is at the cutting edge of developments, the long-held U.S.
standards development approach has great flexibility and is responsive
to often rapid changes in technology. We encourage the U.S. government
to continue supporting that approach--helping to facilitate and convene
important conversations on pressing standardization issues--while also
investing in R&D and innovation as mentioned above.
______
Response to Written Question Submitted by Hon. Marsha Blackburn to
Samm Sacks
Question. Question: Through the Made in China 2025 plan, the
Chinese have been exerting influence on critical technology markets,
including polysilicon, which is the critical input for semiconductors.
What else can the U.S. be doing to help fight back on this front?
Answer. The Chinese government aspires to control the entire 5G
supply chain from applications that run on top down to servers and
chips. This kind of vertical integration would give Chinese companies
greater influence in global technology markets in ways that are harmful
from a national security and competitiveness standpoint to U.S.
interests.
The U.S. government should create more incentives for U.S.
companies to invest in bolstering U.S. capabilities in polysilicon as a
critical input for semiconductors. Seeding investment in research and
development (R&D) and other forms of public-private partnership that
can help reduce the reliance of U.S. industry on China will be key.
U.S. government efforts related to Diminishing manufacturing
sources and material shortages (DMSMS) can serve as important resource
on the challenge. The Defense Advanced Research Project Agency (DARPA)
also has a key role to play.
______
Response to Written Question Submitted by Hon. Todd Young to
Samm Sacks
Question 1. Ms. Sacks--you touched on U.S. policymakers adopting a
``small yard, high fence'' approach in addressing the challenges posed
by China. In short, we must be selective in choosing our battles and
the technologies that we are willing to go to the mat over.
Today, what are the top three technologies you believe ought to be
a part of such an approach and how would you start to address the
challenges China poses?
Answer. Updating the export control regime is a long overdue step
and necessary considering China's efforts to catch up and surpass the
U.S. in technology. The Department of Commerce has issued a list of
technologies that may be subject to new export controls due to their
importance for national security and has solicited feedback from
industry.
The challenge of identifying specific technologies in need of
stronger barriers is a very complex one that must be done in close
coordination among technical experts across the U.S. government, the
private sector, and the academic and research communities. Now is an
important window to have these discussions as the export control regime
is the process of undergoing major changes.
I have several recommendations:
Under the current export control framework, the term ``essential''
should not be interpreted to encompass technology that is simply used
or is usable by the military, especially since the defense industry is
increasingly reliant on commercial off-the-shelf technology.
Related, some experts like MIT's R. David Edelman have commented
that distinguishing between civilian and military uses of AI may be
impossible, and Jack Clark at OpenAI has said the risk of making an
error with AI export controls is therefore quite large.
It is very difficult to prevent code from crossing borders. Many
state-of-the-art AI systems like facial recognition are produced by
industry and are then (in part or fully) published openly online. It
wouldn't be too difficult for a foreign military to pick up the
technology and leverage it in a military application. In addition,
research is often done collaboratively through networks of engineers
around the world that do not confirm neatly to national borders. This
further complicates the ability of export controls to prevent
potentially harmful uses of American AI tech by foreign governments.
As discussion of new export controls moves forward, processes
should be put in place to assess the practical effects given the global
nature of R&D and understanding the American competitiveness and
innovation underpins security.
In terms of technologies that should be subject to stronger
restriction, I believe that greater access to some kinds of
semiconductor manufacturing equipment (such as photolithography
machines) could enable China to eventually replace foreign suppliers.
This is critical to American technological competitiveness since
semiconductors underpin much of the advanced computing hardware used to
train AI systems. While the Chinese government has spent over $2
billion on a national investment fund and devoted major policy
resources to support indigenous industry, local Chinese fabs in China
still lack high-end equipment to attain the kind of self-sufficiency to
which China's leaders aspire. This is one technology that should
perhaps be subject to stronger restriction.
Quantum computing is another area of technology in which to
consider stronger export restrictions. While speculation on the
construction of a powerful quantum computer varies in the range of a
few decades, its development is currently competitive across
governments, firms, and academic and other research institutions.
Quantum computers essentially would have far greater computing
complexity than standard computers in use today. If a powerful quantum
computer were developed, the entity in control would likely be able to
leverage its capabilities in applications ranging from advanced
chemical modeling to new, more sophisticated ways of training AI
systems. Powerful quantum computing capabilities may also enable new
approaches to cryptography. Related, there is a substantial risk that a
powerful quantum computer would allow the holder to break existing
public key encryption algorithms that currently protect information
``in transit'' across the Internet and other networks.
______
Response to Written Question Submitted by Hon. Marsha Blackburn to
Hon. Eric Rosenbach
Question. In regards to information security, there's so much
emphasis on the real-time sharing of cyber threats. While this is
clearly important, isn't is just as important to have a long term
outlook to analyze trends in the marketplace, potential choke points in
the supply chain, hi-jacking of standards setting bodies, and things of
that nature?
Answer. Yes, while real-time information sharing is a critical
element of our defensive strategy, there are at least three longer-term
tactics the U.S. can adopt immediately to protect the country from
foreign attacks and takeovers.
First, the U.S. must incentivize the use of strong encryption.
Making America the world leader in encryption technology could advance
both economic and national security interests. Protecting the Nation's
most important resource will require a significant expansion in the use
of encryption. The nation's defense and security agencies have relied
on encryption to protect its most precious secrets for many decades--
DoD, in fact, is the largest user of encryption in the world. The U.S.
must both clarify the legal questions around encryption and develop
real incentives to promote the use and growth of encryption products
and platforms that allow individuals and organizations to protect their
data.
Second, the U.S. should limit foreign ownership and provide
resources to support firms in key information sectors. Over the past
decade China has systematically targeted investment in and ownership of
firms developing technology, such as AI, that will drive strategic
advantage in the Information Age. Congress took encouraging action by
reforming and passing legislation that increased limitations and
oversight of foreign ownership and involvement in data-rich sectors.
This was important, but should be supplemented with new sources of
incentives to sustain American tech firms whose technology does not
have an immediate commercial application.
Third, good defenses are important, but defense alone will not
mitigate the threat of foreign attacks. The U.S. needs to quickly
develop precise and legal offensive cyber operations that change the
current dynamic of simply sitting back and absorbing the blows of
adversarial actions. The private sector cannot meet this challenge: the
U.S. Government, led by the Department of Defense, needs to bolster its
capabilities to disrupt and degrade Chinese cyber operations before
they succeed.
At the same time, the U.S. still has room to improve information
sharing efforts. The increased willingness of the Intelligence
Community, DHS, and FBI publicly to attribute Chinese cyber attacks
through indictments is crucial and positive first step in raising the
cost to adversaries. The Intelligence Community should also strive to
share as much intelligence information as possible about Chinese cyber
operations. In the past, the government has too often watched important
intellectual property or data flow out of the country without warning
impacted organizations.
______
Response to Written Questions Submitted by Hon. Todd Young to
Hon. Eric Rosenbach
Question 1. Our national security depends in large part on a
vibrant, growing, and secure economy. As we continue to face greater
international economic competition worldwide, China presents a
particular challenge, as all of the panel's testimony has elicited in
some form. A failure of the United States to compete economically will
undermine the prosperity and security of our Nation.
It is in our national interests of the United States to promote
free, fair and reciprocal economic relationships between the United
States and foreign individuals and entities. That is why last year,
with Senator Cardin as well as Senators Rubio and Coons, I introduced
the National Economic Security Strategy Act. This legislation directs
the Federal Government--the President in coordination with the National
Security Council, the National Economic Council, and the heads of other
relevant federal agencies--to periodically submit to Congress a
national economic security strategy.
My bill would enhance the ability of the Federal Government to
counter the anticompetitive economic behavior, policies, and strategies
of foreign individuals and entities. The goal is to ensure Federal
policies, statutes, regulations, and procedures are optimally designed
and implemented to facilitate the competitiveness, prosperity, and
security of the United States.
Mr. Rosenbach, could you elaborate on your thoughts as to why it is
so important for the U.S. to have a comprehensive approach to
international predatory economic practices?
Answer. States with authoritarian forms of government--and China in
particular--first recognized the strategic importance of information,
and have adapted their national laws and policies accordingly. Over the
past decade, China has pursued a national strategy to challenge the
United States' global leadership in the Information Age through a
conscious strategy of state-backed investment, loose consumer data
privacy protections, a centralized AI and technology deployment
strategy, and intelligence operations to steal crucial data and
intellectual property.
The United States, on the other hand, seems to be standing by,
beholden to large technology companies focused primarily on connecting
more people to generate more data to further bolster their profits. In
the absence of a national strategy to protect Americans' data, promote
the competitiveness of American firms, and secure our information and
technology infrastructure assets, the U.S. risks ceding its leadership
role in the future economic, military, and political landscapes.
America needs a whole-of-government strategy to improve national
competitiveness in the Information Age. Information geopolitics cuts
across all aspects of the economy, society and state security
apparatus. Authoritarian governments have adopted a highly centralized,
mercantilist approach to protecting, acquiring and using information.
Centralization will not be the answer for democracies, but coordination
must be. Unprecedented cooperation is required, across economic,
social, defense, intelligence, state department and homeland security
portfolios. For example, the American government can no longer silo
regulatory decisions about information-related companies separate from
foreign policy decisions on cyberspace.
Even further, America needs a whole-of-nation strategy that
includes coordination with the private sector. The U.S. intelligence
community needs to share threat information about foreign intelligence
organizations with the social media platforms that so directly
influence Americans' economic and political decision. Policymakers must
be willing to work with private actors to ensure regulatory red tape
does not stand in the way of innovation, and that public-private
partnerships continue to create incentives to accelerate technology
development. At the same time, American technology firms need to
understand, and be held accountable for, their role in protecting
national security interests.
Question 2. What are we--the U.S. government--missing in making our
policies data-centric?
Answer. The Information Age demands a data-centric security and
economic strategy: America needs to develop a data-focused strategy for
competitiveness. From a security perspective, a network-centric
approach to national security is failing. Focus on the threat of a low
probability catastrophic attack on critical infrastructure networks,
for example, has distracted leaders from the reality that we are not
defending the Nation's most precious resource: information. Likewise,
the government has done very little to prioritize the centers of
gravity for an economy powered for the Information Age.
The privacy of personal information is also a national security and
economic priority. Policies aimed at bolstering U.S. national security
and promoting U.S. economic competitiveness must go hand-in-hand with
consumer protection. Authoritarian governments may ignore consumer
rights in pursuit of acquiring information power, but democracies
cannot. Bolstering the global competitiveness of American companies
should remain a top priority, but not at the expense of allowing these
companies to collect, use, and sell information without user consent or
under-invest in cybersecurity measures.
Within the framework of robust national data privacy and security
laws, the U.S. government should promote more partnerships with
civilian companies and academic institutions to make progress on high-
priority AI initiatives. For example, the Defense Innovation Unit--
Experimental (DIUx), established by DoD for this purpose, provides a
model for incentivizing the private sector to develop technologies with
direct national security applications.
Question 3. Mr. Rosenbach--in your testimony you note that while
China has an undeniable advantage in data collection due to the nature
of its authoritarian government, there are things we can do to keep
America competitive. When it comes to deploying next-generation 5G
technology, your belief is we must do everything we can to reduce
regulatory red tape that slows 5G deployment.
Answer. China's authoritarian system does give it a deployment
advantage, but the U.S. can do a lot more to reduce regulatory red tape
to expedite deployment of next-generation broadband infrastructure.
Nationwide 5G deployment is a massive effort requiring equipment
installation and associated permits and approval processes across
thousands of localities. Yet without this foundation, the U.S. risks
falling behind in the next generation of wireless-enabled technologies.
Policymakers must drive toward regulation that standardizes and fast-
tracks local approvals, while giving local authorities the opportunity
to provide implementation guidance.
The U.S. should ensure regulation supports the competitiveness of
American firms in critical sectors. American firms are currently locked
in a tight competition with Chinese powerhouses to determine who will
dominate this important area. The U.S. government--and the FTC in
particular--should make sure that regulations designed to protect
consumers and competition don't inadvertently undermine the
competitiveness of American firms relative to Chinese national
champions like Huawei.
To promote American competitiveness in 5G technology development
and in other critical sectors more broadly, the U.S. must also win the
race for talent. The U.S. has a history of prizing and nurturing
openness, creativity, and innovation. Our university system is a
springboard for raw talent; our legal and government institutions allow
new businesses to thrive; and our sophisticated financial system enable
the best ideas to be successful. To maintain a competitive edge, the
U.S. needs a foundation of policies and practices that continue to
attract top talent, like the heads of AI at Apple, Facebook, Microsoft,
and Google's cloud computing division, who were all born outside the
US. The visa program is a good place to start--at minimum, Congress
should ensure that more highly skilled workers are able to obtain H-1B
visas. Policymakers should further consider special programs for
students and experts in the AI and broader set of STEM fields.
Question 4. Mr. Rosenbach, do you believe the FCC has the required
authority today to put the U.S. in a position to win the race to 5G? If
not, what additional authorities should Congress give to the FCC to
ensure burdensome regulations don't keep us from doing everything we
can to win the race to 5G?
Answer. I am not an expert on the FCC, so while I do not have
specific recommendations for FCC authority reform, I do support a
whole-of-government approach to ensuring American competitiveness in 5G
deployment.
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