[Senate Hearing 117-662]
[From the U.S. Government Publishing Office]
S. Hrg. 117-662
DEFENDING AND INVESTING IN
U.S. COMPETITIVENESS
=======================================================================
HEARING
BEFORE THE
SUBCOMMITTEE ON FISCAL RESPONSIBILITY
AND ECONOMIC GROWTH
OF THE
COMMITTEE ON FINANCE
UNITED STATES SENATE
ONE HUNDRED SEVENTEENTH CONGRESS
FIRST SESSION
__________
JULY 14, 2021
__________
[GRAPHIC NOT AVAILABLE IN TIFF FORMAT]
Printed for the use of the Committee on Finance
__________
U.S. GOVERNMENT PUBLISHING OFFICE
58-121 PDF WASHINGTON : 2023
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COMMITTEE ON FINANCE
RON WYDEN, Oregon, Chairman
DEBBIE STABENOW, Michigan MIKE CRAPO, Idaho
MARIA CANTWELL, Washington CHUCK GRASSLEY, Iowa
ROBERT MENENDEZ, New Jersey JOHN CORNYN, Texas
THOMAS R. CARPER, Delaware JOHN THUNE, South Dakota
BENJAMIN L. CARDIN, Maryland RICHARD BURR, North Carolina
SHERROD BROWN, Ohio ROB PORTMAN, Ohio
MICHAEL F. BENNET, Colorado PATRICK J. TOOMEY, Pennsylvania
ROBERT P. CASEY, Jr., Pennsylvania TIM SCOTT, South Carolina
MARK R. WARNER, Virginia BILL CASSIDY, Louisiana
SHELDON WHITEHOUSE, Rhode Island JAMES LANKFORD, Oklahoma
MAGGIE HASSAN, New Hampshire STEVE DAINES, Montana
CATHERINE CORTEZ MASTO, Nevada TODD YOUNG, Indiana
ELIZABETH WARREN, Massachusetts BEN SASSE, Nebraska
JOHN BARRASSO, Wyoming
Joshua Sheinkman, Staff Director
Gregg Richard, Republican Staff Director
______
Subcommittee on Fiscal Responsibility and Economic Growth
ELIZABETH WARREN, Massachusetts, Chair
RON WYDEN, Oregon BILL CASSIDY, Louisiana
RICHARD BURR, North Carolina
(II)
C O N T E N T S
----------
OPENING STATEMENTS
Page
Warren, Hon. Elizabeth, a U.S. Senator from Massachusetts, chair,
Subcommittee on Fiscal Responsibility and Economic Growth,
Committee on Finance........................................... 1
Cassidy, Hon. Bill, a U.S. Senator from Louisiana................ 3
Wyden, Hon. Ron, a U.S. Senator from Oregon...................... 7
WITNESSES
Spriggs, Hon. William E., Ph.D., professor of economics, Howard
University; and chief economist, AFL-CIO, Washington, DC....... 5
Houseman, Roy, legislative director, United Steelworkers,
Pittsburgh, PA................................................. 8
Gallagher, Mary, Ph.D., Amy and Alan Lowenstein Professor of
Democracy, Democratization, and Human Rights, University of
Michigan, Ann Arbor, MI........................................ 10
Luna, David M., executive director, International Coalition
Against Illicit Economies (ICAIE), Washington, DC.............. 11
Fanusie, Yaya J., adjunct senior fellow, Center for a New
American Security, Washington, DC.............................. 13
Nakano, Jane, senior fellow, Energy Security and Climate Change
Program, Center for Strategic and International Studies,
Washington, DC................................................. 15
ALPHABETICAL LISTING AND APPENDIX MATERIAL
Cassidy, Hon. Bill:
Opening statement............................................ 3
Prepared statement........................................... 37
Fanusie, Yaya J.:
Testimony.................................................... 13
Prepared statement........................................... 38
Responses to questions from subcommittee members............. 47
Gallagher, Mary, Ph.D.:
Testimony.................................................... 10
Prepared statement........................................... 48
Responses to questions from subcommittee members............. 53
Houseman, Roy:
Testimony.................................................... 8
Prepared statement........................................... 54
Responses to questions from subcommittee members............. 58
Luna, David M.:
Testimony.................................................... 11
Prepared statement........................................... 59
Responses to questions from subcommittee members............. 71
Nakano, Jane:
Testimony.................................................... 15
Prepared statement........................................... 73
Spriggs, Hon. William E., Ph.D.:
Testimony.................................................... 5
Prepared statement........................................... 77
Responses to questions from subcommittee members............. 80
Warren, Hon. Elizabeth:
Opening statement............................................ 1
Prepared statement........................................... 83
Wyden, Hon. Ron:
Opening statement............................................ 7
Communications
Center for Fiscal Equity......................................... 85
Fortive Corporation.............................................. 92
DEFENDING AND INVESTING IN
U.S. COMPETITIVENESS
----------
WEDNESDAY, JULY 14, 2021
U.S. Senate,
Subcommittee on Fiscal Responsibility
and Economic Growth,
Committee on Finance,
Washington, DC.
The hearing was convened, pursuant to notice, at 2:10 p.m.,
via Webex, in Room SD-215, Dirksen Senate Office Building, Hon.
Elizabeth Warren (chair of the subcommittee) presiding.
Present: Senators Wyden, Brown, Whitehouse, and Cassidy.
Also present: Democratic staff: Sally Laing, Senior
International Trade Counsel; and Catherine Laporte-Oshiro,
Economic Policy Advisor for Senator Warren. Republican staff:
Owen Morgan, Policy Advisor for Senator Cassidy.
OPENING STATEMENT OF HON. ELIZABETH WARREN, A U.S. SENATOR FROM
MASSACHUSETTS, CHAIR, SUBCOMMITTEE ON FISCAL RESPONSIBILITY AND
ECONOMIC GROWTH, COMMITTEE ON FINANCE
Senator Warren. This hearing will come to order. I
apologize for our delay in starting, but thank you. Good
afternoon. Welcome to this hearing before the Subcommittee on
Fiscal Responsibility and Economic Growth. I am very pleased to
be working with Ranking Member Cassidy on this hearing on
defending and investing in U.S. competitiveness.
So how does America compete in a global economy? For too
long the answer has been some variation of ``help giant
corporations make more money.'' Big multinational corporations
have no loyalty to our Nation. They say, quite openly, their
loyalty is to their shareholders, and about 40 percent of the
shareholders of publicly traded companies are not Americans.
These multinational corporations pursue profits, even if
those profits come at a cost to American workers or to our
environment. It is not the job of the U.S. Government to work
to boost profits of big multinationals that have no particular
loyalty to the United States. Instead, the goal of economic
competition should be to make our domestic economy strong, and
to raise the standard of living for the American people. That
means investing in American jobs and American workers. And here
is the best part. If we give American workers the tools they
need, they can compete with anyone, including global economic
rivals like China.
Economic competition is also political competition. Fair
competition can produce and spread the best ideas. We have a
chance to show China and the whole world that an American
approach that invests in and empowers workers is the most
effective way to compete.
There are two aspects of global competitiveness that I
would like to focus on in this hearing. The first is that, in
order to compete in a global economy, American workers need to
have a fair set of trade rules, which they do not have right
now. Our existing trade rules have undercut our workers and
promoted offshoring and a global race to the bottom in labor
and environmental standards. And that is because, for decades,
the U.S. Trade Representative has represented big multinational
corporations while workers, environmentalists, and other parts
of the diverse American economy were pushed to the side, with
their interests and concerns given second-class status.
That needs to stop. U.S. trade policy needs structural
reforms to ensure that it reflects the interests of all
Americans, not just a handful of corporations trying to
maximize short-term profits.
The second reason why workers are struggling against
international competition is that we have failed to make
critical domestic investments in our workforce. We know that
American workers, given the right tools, can out-compete China
and every other country in the world. China offers a clear
counter-approach. It fundamentally devalues and disempowers its
workers by barring them from organizing, by pressing ethnic
minorities into forced labor camps, by making migrant workers
second-class citizens, and by leaving working families to go it
alone on child care.
This has helped China cut production costs in the short
term, but there are long-term costs. The Chinese Government
recognizes that such an approach cannot build an innovative
workforce, a strong middle class, or sustainable economic
growth. Now China is desperately trying to invest in its human
capital to fuel development, especially given its aging
population, recognizing that these investments are crucial to
China's future.
This is the moment for the United States to step up. We can
and we must do better for our workers. It is the right thing to
do. It is the competitive thing to do. And it is the only way
to build a strong future for our Nation and our people.
Specifically, our investments in green technology should
center on good jobs and building a top-quality workforce. My
Build Green and Buy Green bills would do exactly that. These
bills, and other clean-energy investments with strong labor
provisions, should be included in the infrastructure package
that Congress is working on now. Doing so is good for the
environment, good for the economy, good for workers and their
families.
Similarly, we need to give American workers the security
they need to be able to do their jobs and care for their
families. Universal, high-quality, affordable child care and
early education are investments in our current and our future
workforce, working parents, and their children--and a far
better way to compete with China than endless expansion of our
spending on the U.S. military.
We need $700 billion for child care in the infrastructure
bill. It is a critical way to improve our global economic
competitiveness.
Finally, I was glad to see President Biden's executive
order last week which takes critical steps to promote
competition, strengthen antitrust enforcement, and tackle
consolidation and anticompetitive practices. Reigniting
competition will make markets work better for American families
and workers at the same time that it bolsters U.S.
competitiveness.
I am looking forward to discussing these issues today and
working with my colleagues and the administration to make sure
that America's workers can compete in a global economy.
Next, I will turn to the ranking member, Senator Cassidy,
for his opening remarks.
[The prepared statement of Senator Warren appears in the
appendix.]
OPENING STATEMENT OF HON. BILL CASSIDY,
A U.S. SENATOR FROM LOUISIANA
Senator Cassidy. Thank you, Chair Warren. Thank you to all
the witnesses. We were having a mini-hearing before Chair
Warren spoke up, and just based on the mini-hearing, it is
going to be very interesting. So I thank you all.
We, together, are just concerned about how does the United
States and the rest of the world deal with China, which has
many advantages of talented people, a large economy, that is
quite willing to--how to put it?--break, defy, ignore
international norms of behavior, and in so doing, achieve a
competitive advantage over other countries that choose to
acknowledge those international norms and behaviors.
So strengthening U.S. competitiveness in the face of a
country willing to do something such as that is something which
should ignite all Americans. And it is our responsibility in
Congress to defend our Nation's workers, citizens, and
interests.
So, common ground. We all recognize that China has been
acting with impunity, and in part because countries around the
world have been unwilling to act. But nonetheless, we suffer
the consequences.
There should be a robust discussion about China's role as a
primary source of the fentanyl that flows into the United
States, killing tens of thousands of Americans every year; and
about counterfeit medical products and other goods that put
Americans' health and lives at risk, like the counterfeit PPE
that flooded Customs facilities during the pandemic.
We should examine China's surveillance efforts and the
potential for that to grow internationally as countries around
the world are encouraged to use Chinese-developed equipment for
5G networks and other things.
We should also look at China's government-backed and -
operated blockchain-based service network, as well as their
collection of vast amounts of genetic material.
Another thing of interest is that China right now poses the
greatest global threat to climate change. China's massive
carbon emissions for every year since 2012 have exceeded the
combined U.S. and European Union carbon emissions combined--put
together, China's exceeds.
China continues to build--and although China is committed
to lowering their emissions, peaking out in 2030, they have
continued to build outdated and polluting coal-fired power
plants throughout the developing world; if you will, exporting
a problem.
A particular point of concern is China's blatant dismissal
of international trade rules and compliance with standard labor
and environmental practices. Chair Warren has mentioned forced
labor. We could also speak of forced child labor and the
absence of workers' rights. The United States does not have a
trade agreement with China, so there are no standards for
environmental or worker protections such as those that exist in
the USMCA or the CAFTA-DR, so in a sense, that serves to lower
the cost of production in China relative to those countries.
Put differently, the cost of compliance that Mexico and
CAFTA-DR countries have to invest for environmental and labor
protections, China does not. Lowering their cost of production,
if you will, incentivizes companies to move to China away from
those countries. While I cannot say it is causally related, it
is temporally related that between 2017 and 2019 China's
foreign direct investment inflow increased from $136 billion to
$141 billion, and in the same period the six CAFTA nations saw
FDI inflows decrease from $9.7 billion to $8.4 billion.
What's more, the cost of compliance inherent in the USMCA
and CAFTA put these trading partners at risk. We need to think
about how to adjust that. We try to build economies in Central
America that would keep folks in Central America as opposed to
migrating here, and yet paradoxically the standards that we ask
them to employ--which we should ask them to employ--raise the
cost of production and, once more, are an incentive for
companies to move operations to China.
There is so much more to discuss, but at this point I will
turn it over to our witnesses. I look forward to those who are
here, and those who will be participating online.
And once more, thank you, Chair Warren.
[The prepared statement of Senator Cassidy appears in the
appendix.]
Senator Warren. Thank you very much, Ranking Member
Cassidy.
So we have a great set of witnesses here today to share
their views on U.S. competitiveness. I appreciate all of you
being with us.
First, joining us virtually, we have the Honorable Dr.
William Spriggs, who is a professor of economics at Howard
University, and chief economist at the AFL-CIO, as well as
former Assistant Secretary of Labor for Policy. Dr. Spriggs is
a leading expert on many critical issues for American workers,
including workforce discrimination, national and international
labor standards, and the unequal impacts of trade.
Second, we have Roy Houseman, legislative director for the
United Steelworkers. Mr. Houseman has been standing up for
American workers for decades, including as a part of the USW's
Legislative and Policy Department since 2011, and previously as
president for USW Local 885 in Missoula, MT.
Third, we have Dr. Mary Gallagher, who is the Amy and Alan
Lowenstein Professor in Democracy, Democratization, and Human
Rights at the University of Michigan. Dr. Gallagher is an
expert in Chinese labor issues as well as Chinese politics,
law, and society.
Joining us remotely, we also have Yaya Fanusie, who is an
adjunct senior fellow at the Center for a New American
Security. His research focuses on the national security
implications of cryptocurrencies and blockchain technology.
Next, we have Mr. David Luna, who is executive director of
the International Coalition Against Illicit Economies of the
Terrorism, Transnational Crime, and Corruption Center at George
Mason University. Mr. Luna is a former U.S. diplomat and a
national security official, with expertise and experience in
transnational crime and illicit trade.
And lastly, Jane Nakano--I am getting that wrong--Jane
Nakano joins us virtually. Ms. Nakano is a senior fellow in the
Energy Security and Climate Change Program at the Center for
Strategic and International Studies. Her research interests
include U.S. energy policy and energy security and climate
issues in the Asia-Pacific region.
Economic competition from China presents serious challenges
for American workers and businesses, but it also presents a
call to action. We have a historic opportunity right now to
invest in American workers and American families; in other
words, to invest in U.S. competitiveness.
So I want to thank you all for being here with us today. I
look forward to hearing your testimony. We are going to ask
everyone to hold themselves to 5 minutes. You are always
welcome to submit longer remarks in writing.
Dr. Spriggs, can we start with you?
Senator Cassidy. Chair Warren?
Senator Warren. Oh, please. Of course.
Senator Cassidy. We have votes at 2:35. So how are we going
to inform everybody how we are going to proceed?
Senator Warren. So we are going to have the ranking member
and I trade out. One of us will go, and the other will have the
gavel, and we will make it through as quickly as we can. We
will find out how fast you move through the halls, and we will
try to both be here, but we may be moving in and out.
All right; good. Thank you very much.
And now, Dr. Spriggs, are you with us?
Dr. Spriggs. Yes, I am.
Senator Warren. Good. You are recognized for 5 minutes,
sir.
STATEMENT OF HON. WILLIAM E. SPRIGGS, Ph.D., PROFESSOR OF
ECONOMICS, HOWARD UNIVERSITY; AND CHIEF ECONOMIST, AFL-CIO,
WASHINGTON, DC
Dr. Spriggs. Thank you, Chair Warren and Ranking Member
Cassidy, for this invitation to give testimony before your
committee today on the issue of our Nation's competitiveness. I
am happy to offer this testimony on behalf of the AFL-CIO,
America's house of labor representing the working people of the
United States, and based on my expertise as a professor at
Howard University's Department of Economics.
My testimony today will discuss gaps in the U.S.
infrastructure compared to our leading trading partners. Many
of these gaps do not require Federal fiscal resources but do
require updating our institutions and legal structures to meet
the challenges of the 21st century. The current crisis of the
COVID pandemic highlights our need to improve. While Congress
has reacted swiftly and admirably with aid to support the
economy, in many dimensions the U.S. is less resilient than our
leading trading partners and is set to have major challenges
ahead that we can avoid.
Because of Congress, and now the leadership of President
Biden, the American Rescue Plan has been well received by those
who compare global economic activity. The International
Monetary Fund and the Organisation for Economic Co-operation
and Development revised their forecasts upward for this year
and next based on the passage of the ARP. And given the
importance of the U.S. economy to global economic growth, this
changed their optimism for a faster global recovery. Yet they
both still see a full recovery more than a year away.
Thanks to the rapid deployment of vaccines in the U.S.,
American hospitalization and death rates from COVID plummeted,
and, after being far above the rest of our trading partners, we
have finally now surpassed them in having lower rates of severe
outcomes from COVID. That has allowed U.S. economic activity to
accelerate and, buoyed by the ARP's support of American
households, has helped accelerate our job growth. But even if
we maintain this current record-setting pace, we will have a
hard time getting back to normal levels.
We should shift our focus to the lessons learned and make
changes to sustain the recovery to make our economy more
resilient. Several of the changes that Congress improvised to
fix our labor market safety net show key gaps the U.S. faces
relative to our competitors. Our labor market regulations are
clearly out of date. The scale at which we needed these
institutional changes highlights how, on a regular basis, the
resiliency we need is not present.
Among our leading trading partners, we have a lower level
of workers covered by collective bargaining agreements. Last
year during the pandemic, while we lost jobs across almost all
industries, relatively more non-union than union jobs were
lost, so the share of workers in unions rose. This presence of
a collective bargaining agreement helped firms in two ways. One
is that firms could retain workers and negotiate to share the
responsibility of making decisions on how to adjust hours and
pay and safety conditions. The other is that, for some
industries like the airlines, it meant management and workers
could present a consensus view to Congress and policymakers on
the best way forward to maintain an orderly slowdown of
business and keep maximum flexibility to allow for the fast
restart.
Similarly, within the trade context itself, researchers
have found that industries with stronger collective bargaining
structures had fewer jobs lost in the face of the China trade
shock of this century than in industries with lower union
density. When comparing labor market performance of OECD
nations, the OECD's research shows that stronger central
bargaining systems outperform weak systems in wages,
employment, and gender and younger workers outcomes, primarily
because they are better at smoothing economic shocks and
reducing inequality. Updating our NLRA to address changes in
the workplace since the 1940s, such as passing the PRO Act, is
key.
Our unemployment insurance system was clearly outdated and
overwhelmed. Congress reacted, and several studies showed that
the extra benefits did not slow people returning to work but
helped ensure cash balances for all households, and helped to
speed our recovery. A higher minimum wage has made people more
resilient.
Another shortcoming is that we do not have paid sick days
or holidays. This has hurt the labor force participation of
women and their recovery, coupled with our lack of Federal
policies to ensure child care. The U.S. stands out as being
sixth among the seven G7 nations for women's labor force
participation. With an aging economy, we have to have more
workers active, and we need those changes to get women at work.
We need to change the global playing field and lead in
that. We need a floor for corporate taxation so that we can
have all nations provide the help, the labor, and economic
support that we need to raise the standards for the world,
instead of a race to the bottom that hurts the United States.
Investing in America is necessary, not just investing in
our physical infrastructure. Thank you.
[The prepared statement of Dr. Spriggs appears in the
appendix.]
Senator Warren. Thank you very much, Dr. Spriggs.
I am going to pause here with our witnesses. We are joined
by our chair from the Finance Committee, Senator Wyden, who is
recognized for opening remarks.
OPENING STATEMENT OF HON. RON WYDEN,
A U.S. SENATOR FROM OREGON
Senator Wyden. Thank you very much, Chair Warren, for this
courtesy, and the ranking member, Senator Cassidy. We all look
forward to going after this issue in an aggressive and
bipartisan way.
It seems to me what is so important about your hearing,
Chair Warren, and our work with Senator Cassidy, is this is
about one basic challenge. America is never going to out-
compete China with crumbling roads and bridges and a country
full of struggling workers. That is a recipe for decline, and
it is exactly what you and I and President Biden want to turn
around. That is pretty much what we heard at lunch.
And so I very much look forward to your continued
leadership on this, because there are a lot of pieces to the
puzzle; for example, the link between physical investment and
people. And you and I have talked, for example, about the
matter of how important it is to invest in roads and bridges
and ports, but at the same time, if people do not have child
care--which has been a huge priority for you--then the
companies are not going to have people who can move goods from
point A to point B.
So I am juggling a lot today, but your ability to integrate
the various pieces into a policy that lets us out-compete China
is extraordinarily important. Our subcommittee is modest, but
with your leadership, I like to think we are mighty, and I want
you to know I am in your camp, and we are going to work closely
with Senator Cassidy----
Senator Cassidy. Wait; so the ranking member is chopped
liver? [Laughter.] Is that what you're saying?
Senator Wyden. I guess--you know, my wife always says, ``My
husband is infamous rather than famous.'' But with you two, I
feel like I am running with the right crowd, because this is a
hugely important subject. It is bipartisan. I am glad that you
wanted to do this. Chair Warren and Senator Cassidy have made
this a big priority, and I expect that we are going to have
lots of hearings like this in the days ahead.
I will have questions for the record, Chair Warren, and I
thank you for letting me run in here for a quick minute.
To all our guests, I want you to know that we at the
Finance Committee very much value your input. This is not
indicative of my manners being boorish on a regular basis. It
is just a particularly hectic day. We welcome you. You are in
good hands with Chair Warren. Thank you.
Senator Warren. Thank you very much. I appreciate your
being here, Chair Wyden.
So let's go ahead with our witnesses. Mr. Houseman, you are
recognized for 5 minutes.
STATEMENT OF ROY HOUSEMAN, LEGISLATIVE DIRECTOR, UNITED
STEELWORKERS, PITTSBURGH, PA
Mr. Houseman. Chair Warren, Ranking Member Cassidy, thank
you for the opportunity to testify today on this important
topic. As a former trade-impacted mill worker, now legislative
director for United Steelworkers, the largest industrial union
in North America, it is an honor to be a voice for organized
workers in today's discussion, and our union's international
president, Tom Conway, sends his regards.
Manufacturing commodities which Americans and people across
the globe use every day, from tissue paper to electric buses,
is what our union does. It provides a unique lens into
defending and strengthening U.S. competitiveness.
With this in mind, my remarks will focus on three strategic
efforts: refocusing Federal domestic investments on critical
infrastructure, retooling our labor and environmental laws for
a 21st-century democracy, and exporting not just our goods but
our ideals for a just global economy.
Turning first to domestic investment, the USW takes a
holistic approach to our country's infrastructure. Right now,
Steelworkers local unions across the country are working with
their respective employers in a campaign called ``We Supply
America'' for infrastructure investment.
This campaign emphasizes the critical role USW members play
in America's infrastructure supply chain. We are hopeful and
anxious to review the details of the $1.2-trillion bipartisan
infrastructure framework. We know that new investment is needed
when, for example, over 4 million gallons of drinking water is
lost from leaking pipes across the country in the time it takes
to read my remarks today.
We can do better. In the strong Buy America provisions, our
members who work at companies like McWane Pipe stand ready at
the crucible to pour melted iron should Congress make this
investment. The union also knows that the U.S. can achieve a
net zero emissions economy while maintaining production and
employment in energy-intensive trade-exposed industries. It
will require workers and government and industry working
together.
The USW is engaged with our employers and community
stakeholders to encourage investments in carbon capture
utilization and sequestration, and direct air capture
technologies, for example. Domestic investments in
infrastructure and industrial capacity will be key to building
a 21st-century clean economy. The physical infrastructure is
really only one piece to a prosperous, equitable, and just
democracy.
Our human infrastructure needs investment. Take, for
example, collective bargaining. According to the Economic
Policy Institute, the wage gap between high- and middle-wage
earners between 1979 and 2017 is roughly one-third higher
because of the de-unionization. My written testimony includes
several additional examples of human infrastructure, but
Congress should start by passing labor law reforms like the PRO
Act.
Our country will also need to improve our training programs
for both dislocated and incumbent workers. We must improve
resources available for adult worker training. The U.S. funding
for job training programs is among the worst of all 37
countries in the OECD relative to the size of our economy.
Public spending is less than half the spending levels of
Australia, Canada, and the UK, and one-sixth the level of
spending in Germany. Meanwhile, today a worker who loses their
job to unfair practices from China, where we had a $310-billion
trade deficit in 2020, cannot get Trade Adjustment Assistance
benefits because of a program reversion. This is unacceptable,
and a healthy TAA reauthorization, similar to legislation put
forward by Senator Stabenow, is needed. As a past recipient of
TAA benefits, I know how important this program can be.
Lastly, we must build a robust worker-centered trade
agenda. Trade policy must play a dual role of defending our
communities from unfair trade practices, while ensuring that
goods and services our workers produce can reach global
markets.
For example, our members have fought for their jobs in over
100 antidumping and countervailing duty investigations. And the
workers in steel and aluminum manufacturing stand behind the
successful section 232 safeguards. For us, getting trade policy
right is a must for jobs.
This is vital, as China's Belt and Road Initiative has led
to expansions of dumped and subsidized goods entering from
third-party countries. However, our trade enforcement tools
have not yet been upgraded to contain this growing problem.
Fortunately, Senators Brown and Portman are leading with a
much-needed update to our trade enforcement law, commonly
referred to as the Leveling the Playing Field Act 2.0 or Senate
bill 1187.
Ensuring that the U.S. remains competitive while requiring
a whole-of-government approach that includes investments in our
country's infrastructure requires workers in an ever-evolving
trade policy, and USW members are standing ready to make that
future.
Thank you.
[The prepared statement of Mr. Houseman appears in the
appendix.]
Senator Cassidy [presiding]. Thank you, Mr. Houseman.
Chair Warren has gone to vote, so, Dr. Gallagher, I will
call upon you.
STATEMENT OF MARY GALLAGHER, Ph.D., AMY AND ALAN LOWENSTEIN
PROFESSOR OF DEMOCRACY, DEMOCRATIZATION, AND HUMAN RIGHTS,
UNIVERSITY OF MICHIGAN, ANN ARBOR, MI
Dr. Gallagher. Thank you for the opportunity to appear
before you today to discuss China's working conditions, and how
the United States should develop policies to improve our
competitiveness while maintaining our values. I speak today as
an expert on China's labor and social policies. These are my
own views as a scholar on this topic for over 20 years.
As a two-time recipient of a Fulbright award, I am deeply
aware of the importance of area studies knowledge and language
expertise. I hope the U.S. Government will continue to invest
in training American students and scholars in area studies and
world languages. It is a national security imperative that we
maintain and cultivate this expertise.
My written testimony highlights these key findings. Since
2008, China's workplace laws and policies have expanded
considerably to improve employment security and access to
social insurance. Since 2009, the Chinese Government has
expanded basic pension and medical insurance to both rural and
urban residents. We should not ignore the achievements that
China has made.
However, in practice China's laws and policies on the books
are weakly and unevenly enforced. They often leave out workers
from rural areas, informal workers, and workers in the new
digital economy. New social insurance policies based on
residency, not employment, are insufficient, offering broad but
shallow coverage.
Let me expand a bit on the rural/urban divide in China,
because it is by far the least understood part of the Chinese
economy. Rural workers who live in cities without the legal
rights to settle there by and large are not able to take part
in the more generous pensions, medical insurance, and
educational opportunities that urban residency promises.
While 60 percent of China's population--over 850 million
people--now lives in cities, 27 percent, or 230 million people,
are still classified as rural and do not have the legal right
to settle permanently, nor will their children, even if they
are born in the city.
China risks passing on these income, health, and
educational inequalities to the next generation, imperiling
China's shift to a new development model that is built on
domestic demand. Short-term gains by cutting employers' costs
risk long-term damage to China's ambitions to become a
technologically advanced and innovative economy.
Another important inequality is gender inequality. Since
1990, Chinese women's labor force participation has dropped
from 73 percent, one of the highest in the world, to 60
percent. The gap between male and female labor force
participation is also widening.
Why? It is not because the men are choosing not to work.
Instead, it is due to two main factors: widespread gender
discrimination at the workplace, and lack of access to child
care. Gender discrimination is exacerbated by the relaxation of
China's one-child policy, which now permits Chinese couples to
have up to three children. Employers have become much more
reluctant to hire women.
Child care that is both affordable and high-quality,
particularly for infants and toddlers before preschool, is also
very scarce in urban China. Rural Chinese women who migrate to
cities for work most often leave their children behind in the
countryside to be cared for by relatives, which has long-term
negative effects on the health and the educational
opportunities of Chinese children, of which two-thirds are
stillborn in the countryside.
China's demographic crisis has further pushed the Chinese
Communist Party to promote women's roles as wives and mothers,
but insufficiently protected their rights at the workplace and
insufficiently provided access to affordable child care.
In addition to weak enforcement of law, the current
government has launched a severe crackdown on civil society
which has impaired Chinese workers' ability to protect
themselves. Since 2014, labor NGOs and other activists have
been targeted with waves of detention and social media
blackouts to end social mobilization around rights in the
workplace, demands for freedom of association, and protection
from discrimination.
I last testified in front of a congressional subcommittee
in 2012, and the difference between now and then is stark. The
previous administration in China was far more tolerant of civil
society's role and protecting rights at the workplace. But in
the current era, civil society has been completely shut down.
Thank you for this opportunity.
[The prepared statement of Dr. Gallagher appears in the
appendix.]
Senator Cassidy. Thank you, Dr. Gallagher.
Mr. Luna, you are recognized for 5 minutes.
STATEMENT OF DAVID M. LUNA, EXECUTIVE DIRECTOR, INTERNATIONAL
COALITION AGAINST ILLICIT ECONOMIES (ICAIE), WASHINGTON, DC
Mr. Luna. Good afternoon, Chair Warren, Ranking Member
Cassidy, and distinguished members of the subcommittee. I
appreciate the opportunity to testify at today's hearing.
It is an honor to be here on behalf of the International
Coalition Against Illicit Economies to outline the array of
cross-border security threats that China continues to inspire
to harm the U.S. national security, our competitiveness, and
the health and safety of our citizens. Today's criminal markets
are a multi-trillion-dollar global economy that undermines U.S.
competitive policies.
The United Nations has estimated that dirty money laundered
from such criminal activities is between 2 to 5 percent of
global GDP. China is a common denominator in expanding many of
these illicit economies. Fentanyl, which is killing tens of
thousands of Americans each year, is bought by the Mexican
cartels and facilitated by Chinese criminal groups.
When the fentanyl illegal trade converges with other
criminal activities, the overall threat becomes multiplied many
times over, including when China's state-sponsored IP theft and
economic espionage of U.S. trade secrets harm our companies at
an estimated $600 billion.
Similarly, China counterfeits are flooding the U.S. market,
accounting for 80 to 90 percent of all counterfeits seized in
the U.S. and globally. The National Association of
Manufacturers released a report last year, finding that
counterfeits cost the U.S. economy $131 billion and 325,000
jobs in 2019. Across a list of common platforms and Internet
marketplaces, fake goods have increased the health and safety
risks to all Americans.
During the current pandemic, predatory criminals generated
tens of billions of dollars selling fake PPE, mostly coming
from China. The proliferation of counterfeit electronics hurts
not only our electronics industry, but threatens the safety of
our troops, including when they had been found to infiltrate
critical military systems and supply chains.
Every IP-protected product can be counterfeited. This is
true for all consumer goods and services, but especially for
the footwear and apparel industry, in which American brands are
highly counterfeited, such as Nike, Under Armour, Polo, and
sportswear from the National Football League, Major League
Baseball, NBA, and NHL.
Like other forms of illicit trade, the illegal tobacco
trade is very profitable for criminal organizations and
kleptocratic networks and terrorist groups. The China Tobacco
Corporation is by far the largest cigarette company in the
world and produces half of the world's cigarettes, which are
moved illicitly through free trade sales in unregulated markets
and across e-commerce.
Auto parts similarly coming from China, counterfeit auto
parts, end up hurting Americans, and really our auto companies
like Ford, GM, and Tesla. Illegal logging, fishing, and mining
of natural resources not only harm our natural world, but
contribute to climate change and the financing of other
converging threats.
Chinese criminals are expanding their ties with the Mexican
cartels and other criminals in the U.S., Canada, and Latin
America, diversifying into areas such as human trafficking and
environmental crime. China constitutes the biggest money
laundering hub in the world, responsible for about half of the
laundering in the world today.
Trade fraud or trade-based money laundering are perfect
asymmetrical threat vehicles to transfer money daily by
kleptocrats, criminals, and terrorists in the form of trade
goods out of the country, by importing goods at over-valued
prices, or exporting goods at under-valued prices.
China's Belt and Road Initiative (BRI) footprint tracks
some of the biggest illicit trade routes known for corruption
and money laundering and an array of traffic contraband that is
a conduit for China to expand and bridge. A superhighway of
illicit economies globally are advanced via BRI in parts of the
developing world with debt traps.
Finally, the call for action: we must heighten the
political pressure on China and elevate the global fight
against illicit economies in Congress. As part of a national
security effort, including a bipartisan congressional caucus,
we must empower law enforcement agencies with new legal
authorities and develop a national strategy to combat trade-
based money laundering and related supply chain criminal
infiltration and market penetration.
In closing, China must become a more responsible partner.
The corruptive influence that bad actors exploit in today's
illicit economies is sabotaging legitimate commerce, American
competitiveness, and the economic growth of nations that have
played by the global trade system of rules, and by the rule of
law.
Thank you. I look forward to your questions.
[The prepared statement of Mr. Luna appears in the
appendix.]
Senator Cassidy. Please, Mr. Fanusie, for 5 minutes.
STATEMENT OF YAYA J. FANUSIE, ADJUNCT SENIOR FELLOW, CENTER FOR
A NEW AMERICAN SECURITY, WASHINGTON, DC
Mr. Fanusie. Chair Warren, Ranking Member Cassidy,
distinguished members of the subcommittee, and my fellow
panelists, it is an honor to participate in today's meeting.
Please allow me to add that, although I do consulting with the
private sector on financial technology issues, my comments
today are my personal opinion and are not on behalf of any
clients.
Today I will explain briefly how the Chinese Government's
recent foray into financial technology, including by investing
heavily in blockchain technology and piloting a central bank
digital currency, is a long-term strategy to dominate the
digital economy of the future. This strategy is a new financial
dimension to the great power competition between China and the
United States, but it is about more than money or currency. It
is really about data. Specifically, it is about which country
will be most successful at leveraging data for technical
innovation, to set the standards for the new global financial
infrastructure, and become the anchor for the information
revolution that is on the horizon.
No one entity or nation technically owns the underlying
infrastructure of the Internet; however, it cannot be denied
that the United States' decades-long investment in building it
enabled U.S. companies to lead the technological and business
growth that arose out of the Internet's information revolution.
The clearest example now of China working to upend America's
economic dominance on the Internet is its Blockchain-based
Service Network, or BSN.
It is a state-driven project that has partnered with
Chinese private tech firms to build what the Chinese Communist
Party believes is the next generation of Internet
infrastructure. The BSN, like the U.S. endeavor to build the
original Internet, is a decades-long campaign.
The BSN vision is an Internet environment where data
transmits through distributed broadcasting in which separate
applications and business systems can simultaneously access and
operate on agreed-upon authenticated data. This contrasts with
the current Internet process where data is siloed between
different systems and moves through the Internet in a linear
fashion.
In theory, this upgraded Internet would enable an Internet
of things where all digital things can communicate and transact
with each other, enabling a new era of digital innovation and
economic possibilities, but it would be an Internet where China
owns the underlying infrastructure.
Although it is commonly said now that data is the new oil,
it is more accurate probably to say that the Chinese Government
sees data as the new electricity. Like electricity, data in
China is becoming the force to power all applications and
economic processes in the country, with individual users and
their devices connected to national infrastructure.
The disruptive potential of the BSM is similar to risks to
the United States around China's Digital Currency/Electronic
Payment, which is a decentralized central bank money project,
popularly known as eCNY or the digital yuan. The eCNY is
unlikely to displace the U.S. dollar as the top international
reserve currency in the short-term or give China an immediate
buffer against U.S. sanctions power.
The risk though for U.S. displacement comes from the upper
hand that China might gain in the long term by developing
cross-border financial transaction infrastructure that a
significant group of other countries eventually adopt. Data
certainly is becoming the new electricity, but not just in
China.
Big data, machine learning, artificial intelligence, the
Internet of things, they are all driving technological
innovation in most advanced economies. The world is becoming
more, not less dependent on data moving through the Internet.
This trend is leading to a oneness of data that would appear to
power almost every aspect of our public and private lives.
At a time when advanced economies appear to be near the
precipice of a fully digitized existence, now might be the best
time for the U.S. to assert rules of the road for the
increasing role of data in our lives. The first step is to
accept the inevitability of this technological advancement in
data transmission, while managing its societal shape.
China's preemptive strategy to gain prominence in
blockchain-based broadcast transmission of data is a wake-up
call for U.S. innovation. The oneness of data does not have to
be a tool of tyranny and dehumanization if it is molded by the
principles of America's founding policymakers. Business people
and other stakeholders must consider a framework for
participating in this data revolution in a way that fits with
the U.S. Constitution.
Here are a few recommendations for how the U.S. can lead
the next data revolution. One, the National Science Foundation
should fund a decentralized Internet sandbox for colleges and
universities. Two, the Small Business Administration, through
its small business innovation research program, should offer
grants to U.S. business for fintech R&D that supports both
privacy and national security concerns. Three, the United
States Federal Reserve should expand its research of central
bank digital currencies. And four, the Securities and Exchange
Commission should give more regulatory clarity around digital
assets and blockchain technology.
Thank you very much for your time, and I look forward to
answering your questions in our discussion.
[The prepared statement of Mr. Fanusie appears in the
appendix.]
Senator Warren. Thank you very much. I appreciate your
being with us virtually.
And now we have our last witness, Ms. Nakano. I recognize
you for 5 minutes.
STATEMENT OF JANE NAKANO, SENIOR FELLOW, ENERGY SECURITY AND
CLIMATE CHANGE PROGRAM, CENTER FOR STRATEGIC AND INTERNATIONAL
STUDIES, WASHINGTON, DC
Ms. Nakano. Chair Warren, Ranking Member Cassidy, and
distinguished members of the subcommittee, thank you for the
opportunity to appear before you to discuss the rise of Chinese
competitiveness in energy technology sectors, and its
environmental and climate implications.
China's emergence as a globally competitive force in energy
technology sectors is a complex and evolving story. Despite the
country's 2060 carbon neutrality commitment, China continues to
be the largest producer and consumer of coal. What's more,
China is a major financier and exporter of the high-carbon
energy projects in the world. Since 2000, China's two global
policy banks have financed over $51.6 billion worth of coal
projects globally. In 2020, the share of coal still accounted
for 27 percent of China's global energy financing under the
Belt and Road Initiative.
A combination of the desire of the Chinese Government to
address excess manufacturing capacity at home, the capacity of
leading Chinese policy banks to support coal-fired power plant
exports, as well as a wave of coal finance bans and the
restrictions by multilateral development banks and western
governments, has propelled Chinese banks to become a major
source of financing for coal-fired power plants in the world.
Unlike its peers in the advanced, industrialized countries,
China's leading policy banks are not obligated to abide by the
OECD restrictions governing coal-fired finance. In fact, these
official Chinese institutions merely subject their coal
financing to existing host market environmental regulations.
At the same time, China has become a leading exporter of
clean energy technology components. In solar PV value chains,
China leads the world in several key segments, including
polysilicon and wafer manufacturing. China's presence is less
dominant in the wind power supply chains, but China is home to
roughly half of the global manufacturing capacity for key wind
and power components.
Moreover, today China is not only the largest EV market in
the world, but also a leading producer of key EV components
such as cathodes, anodes, and separators that are then turned
into battery cells. A key factor underpinning China's
competitiveness in these clean energy technologies is its
commanding position along the supply chains for rare earth
elements, other minerals, and metals that are vital to these
technologies.
China has cultivated its mineral wealth and developed mid-
and down-stream capabilities through various industrial
policies. China's preeminence in the mineral supply chains has
come with a high environmental cost, however. The mining and
the processing of rare earth elements use a variety of chemical
substances, and these activities--with limited environmental
protections until the mid-2010s--have led to some known
accounts of environmental and health damages in China.
Lastly, nuclear energy is also a sector where China is
emerging as a global technology supplier, following a
remarkable expansion of its domestic nuclear power generation
fleet during the last decade. China plans to expand its nuclear
power fleet to 70 gigawatts by 2025, becoming the second
largest in the world, only behind the United States.
China is pursuing multiple deals in the world, in its
efforts to become a global leader in nuclear power, by
combining good-enough technologies with attractive financing
that are again outside the bounds of OECD regulations. More
needs to be done to address China's financing practices for
energy exports that have market-distorting effects against
cleaner energy sources and technologies, as well as energy
technologies that are manufactured by advanced industrialized
democracies like the United States.
Also, while China's contribution to reducing the costs of
low-emission technologies is undeniable, their practices in
mining and processing minerals that are key to clean energy
technology will warrant closer evaluation from the
environmental, social, and governance perspectives.
Concurrently, our over-reliance on Chinese supplies of
these minerals and metals needs to be remedied. Fundamentally
however, the United States needs to do more to enhance its
energy technology competitiveness. Being competitive in energy
technology sectors means preserving a strong innovation
ecosystem, rebuilding the manufacturing base, and securing
supply chains.
Moreover, being competitive in clean energy technology
sectors is not simply about doing our share in reducing
emissions. These technologies are no longer niche, and they
already account for hundreds of billions of dollars in
investment and consumer spending, with strong outlook for
further growth. The endeavor, therefore, has a strategic value
to our Nation, as competitive clean energy sectors can augment
the U.S. position in the global economy.
Thank you very much.
[The prepared statement of Ms. Nakano appears in the
appendix.]
Senator Warren. Thank you very much, Ms. Nakano. I
appreciate your testimony here.
So I now recognize myself for 5 minutes of questions.
American workers are the foundation of U.S. competitiveness.
When we empower our workers, they drive innovation,
productivity, and sustainable economic growth. Investing in
workers should be the core of our domestic agenda and our trade
agenda.
Too often trade rules undercut workers, which promotes
offshoring and a global race to the bottom in labor and
environmental standards. That is not an accident. That is a
policy choice. For decades, workers and other activists have
been systematically shut out of U.S. trade policy, while big
corporations have bought and lobbied their way into writing our
trade rules.
Now back in 2001, the U.S. Trade Representative, the
Federal agency that is in charge of our Nation's trade policy,
spent years negotiating a trade deal that enabled China to join
the WTO and lock in permanent preferential access to the U.S.
market for China. So I want to talk a little bit about how that
trade agreement worked.
Dr. Gallagher, let me start with you. Before joining the
WTO, China had to agree to a bunch of commitments that the
United States spent years negotiating, so I want to ask you
about those commitments. Did these commitments include
enforceable labor protections like requiring that China allow
free independent unions, or that China prohibit forced labor?
Dr. Gallagher. Thank you, Senator Warren, for the question.
China's accession to WTO did not require any commitments
regarding labor protections that were enforceable. Most labor
issues were either kicked up to the International Labor
Organization, the ILO, which does not have strong levers to
induce countries to comply with international labor
conventions, or they were kicked down to companies to engage in
private regulation such as corporate social responsibility
protocols, or accreditation by different non-governmental
organizations such as the Fair Labor Association, which have
had limited impact.
The Trans-Pacific Partnership, which was put forward by the
Obama administration but never realized, and of which China was
not a member, did try to include stricter labor protections and
requirements for freedom of association with Vietnam, a
communist country with a similar trade union structure to
China's, so that would have been an interesting case. But as
you know, the U.S. pulled out of the TPP in 2017.
Senator Warren. Okay. So what you are telling me is, well,
they might have been able to negotiate something when the
negotiations were finished in 2001. Instead of making sure that
American workers could compete on a level playing field, the
U.S. Trade Representative worked with corporate lobbyists to
make offshoring U.S. manufacturing jobs to China as cheap as
possible, and as easy as possible.
And that meant lots of profits for multinational
corporations that wanted to build new Chinese factories that
ran on cheap labor, but it meant zero protections for Chinese
workers, because that would have raised labor costs for those
companies. These new rules meant that investing in Chinese
factories was a whole lot more attractive than investing in
U.S. factories, and it was a lot cheaper then to buy Chinese
imports instead of buying things that were made here in the
United States.
This had a big impact on American manufacturing
communities, as well as a disproportionate impact on Black
workers. Dr. Spriggs, let me ask you, how many U.S.
manufacturing workers lost their jobs due to increased imports
from China, and how did this impact Black communities in
particular?
Dr. Spriggs. Thank you for the question. Our best estimates
now show 6 million jobs in manufacturing lost for the United
States. My work shows a little over a million lost for Black
Americans. This disproportionate impact on local labor markets
led to other job losses, so that there were many communities
that lost all jobs and lowered the share of workers employed in
those communities, a lasting impact from which we have not
recovered, even with the expansion since the Great Recession.
Senator Warren. So 6 million lost jobs from this negotiated
trade agreement that was great for multinational corporations,
just not good for Chinese workers, and definitely not good for
American workers. I really appreciate your important
scholarship, Dr. Spriggs.
Now we have a Federal program called Trade Adjustment
Assistance to help workers who lose their jobs because of trade
deals, if those trade deals are helping our economy overall--
that is the idea behind it. We should renew it, update it to
make sure it is adequately helping Black and Brown workers. But
let's face it, a program like this is a drop in the ocean.
We should be addressing workers' concerns at the beginning,
when a trade policy is negotiated, not trying to pay them off
once they lose their jobs and their communities have been
destroyed.
Mr. Houseman, there is a Labor Advisory Committee that is
supposed to represent worker's interests. So I actually just
want to go through some questions about this. How much power
does this committee really have as part of the trade
negotiations? So for example, when the U.S. Trade Rep finalized
the 2001 trade deal with China, did the labor negotiators get
to have a sign-off on the final version of the bill? Did the
Labor Advisory Committee get a chance to weigh in on that?
Mr. Houseman. No, Senator. They provide advice and comment,
but at the end of the day, it really is not meaningful; there
is no ability to really stop the process for labor's voice.
Senator Warren. Okay. So the committee was not permitted to
weigh in on this. Let me ask you about another one. How about
the workers themselves? Was the draft text of the deal ever
published, so workers could see it before it was actually
adopted?
Mr. Houseman. Effectively, no. It is really hard for
workers, rank and file members, to see a draft text of trade
agreements.
Senator Warren. Okay. So not the Labor Committee that is
supposed to be watching out for labor during these
negotiations, not the workers themselves; how about someone
else? Did the U.S. Trade Rep, or any other agency, have to do
any kind of analysis about how the deal would affect different
groups of workers differently, for example by race or by region
in the country?
Mr. Houseman. If you look at the International Trade
Commission that just recently did a report on our trade
agreements, they highlighted very modest growth, less than 1
percent from these trade agreements, while at the same time
highlighting significant job loss in manufacturing. And then,
when you really dive through the report, there is no language
about communities of color, minority communities, or quite
frankly, communities that experience high levels of poverty.
I think about a lot of our manufacturing plants, and about
10 out of our 13 tire plants, for example, are in communities
where the poverty rate exceeds the national poverty rate.
Senator Warren. Wow.
Mr. Houseman. So you know, these manufacturing plants are
key employers for a lot of these workers. So these trade
agreements, as you have explained, without this ability to
really review them, and have worker input, and have good
analysis for you all to make a firm decision, should we enter
into these trade agreements?
Senator Warren. So thank you. That is very powerful
testimony, and I appreciate the help on this, and the data. You
know I am glad that the Biden administration is saying all the
right things about putting labor, environmental, and equity
issues at the center of our trade policy, but if we want trade
deals to work for everyone, not just for big corporations, it
is not enough to say we are going to put this on one President.
We need to make structural changes to the trade
policymaking process to ensure that workers are meaningfully
represented at the negotiating table, both now and in all
future trade deals. So thank you very much. Thank you.
Ranking Member Cassidy, would you like to ask some
questions?
Senator Cassidy. Absolutely; thank you.
Dr. Gallagher, you mentioned the demographic issues in
China, and I noticed that I saw some statistics which suggested
that they had underreported the number of COVID deaths, but the
population actually maybe went down a little bit, and the
number of births actually also decreased.
I have also read that the--you mentioned how women have a
difficult time having the same progress in the workforce, but
nonetheless, many women work. And so for them to take off from
work and have a child--it would take 20 years for that child to
enter the workforce.
So someone suggested that they really have begun a bad
phase of their demographic period; that is, as soon as 20 years
from now we could begin to see a dramatically smaller Chinese
population. Would you agree with all that?
Dr. Gallagher. Yes, that is a correct understanding of the
problem, both the demographic----
Senator Cassidy. Is your microphone on, or is it my bad
ears?
Dr. Gallagher. It says it is on.
Senator Cassidy. Okay. Pull it a little bit closer, please.
Dr. Gallagher. That is a correct summary of the demographic
crisis that China is facing today, related both to the decline
in the percentage of the working population--the very low
fertility rates--and then the rapid aging, such that by 2050,
without changes which are very hard to achieve in a short
period of time, the population of Beijing, the capital of
China, could be 50 percent people 65 and older, so China is
not----
Senator Cassidy. In terms of absolute numbers, are there
1.2 billion people now?
Dr. Gallagher. One-point-four.
Senator Cassidy. One-point-four. If current trends
continue, what will be their population in 2050?
Dr. Gallagher. We believe--but I am not a demographer, so I
do not want to get my numbers wrong--but we believe that the
Chinese population will begin to shrink in absolute terms over
the course of the century.
Senator Cassidy. Now that is very vague. [Laughter.]
Dr. Gallagher. Well, I think one way to think about China's
population problems is that it is a country with a lot of
people, right? It is still the most populated country in the
world, although India will soon surpass it, but it is more the
demographic, the structure of the population balance----
Senator Cassidy. I get that: the older versus the younger.
But in terms of absolute numbers, it would also be much
smaller, correct?
Dr. Gallagher. Over a longer period of time, yes. It is
also imbalanced in terms of its sex ratio as well.
Senator Cassidy. Male, female, which presumably also
affects birth rates.
Dr. Gallagher. Exactly.
Senator Cassidy. So okay, and also I did not pick up until
your testimony that there is a rural-urban divide; if you will,
the rural area has less potential to be productive.
Dr. Gallagher. Yes, the rural area traditionally was
agriculture, and starting in the reform period, what started to
happen is that hundreds of millions of people who are rural
residents in China left for the cities.
Senator Cassidy. I understand that. They have migrated in.
Dr. Gallagher. Right.
Senator Cassidy. But at the same time, even given that,
there is still a difference in access to services and education
such that people in the rural area, in particular those who are
in the informal economy, you could almost say would be mired in
a substandard level of living. So, when we speak about their
productive workforce, it is even worse than you might imagine,
given their demographic challenges.
There is also this rural/urban divide which leaves a whole
segment less productive.
Dr. Gallagher. Right. And those rural people, many hundreds
of millions of them, are in the cities, but their status is
still related back to their birthplace, and that is very
difficult to change unless you are very, very highly educated.
And so, for most people who are born in the countryside, even
if you migrate to an urban area and live there, it is a long
time----
Senator Cassidy. So let me ask, because I have limited
time--I do not mean to keep interrupting you. But some of
this--I read your testimony--I have a sense that I know. There
have been some who have said that, despite everything we have
spoken about with all these excellent witnesses, with regard to
the advantages of China, their demography is destiny, and it
will be difficult for them to overcome their demographic
challenges, if we are speaking over the 30-year period or 50-
year period. Do you have a sense of that?
Dr. Gallagher. The concern is that that population, which
is still a large percentage of the population, will be left
behind because they do not have the same advantages,
particularly in education----
Senator Cassidy. But I am speaking now in terms of U.S.-
Chinese competitiveness, that their competitiveness will be
undermined by this demographic challenge, and we are speaking
over the next 4 or 5 decades.
Dr. Gallagher. Certainly.
Senator Cassidy. Do you agree with that?
Dr. Gallagher. Yes, I do agree with it. But I also do not
think that the Chinese Government is unaware of it, and they
are trying to address it.
Senator Cassidy. I understand. But there is only so much
you can do to coax people to have children, particularly when
your male/female ratio is out of balance.
Mr. Luna, I think I have read that as much as a billion
dollars a day flows out of China in terms of capital flight. Is
that just a figure I vaguely remember, or what is their capital
flight issue?
Mr. Luna. I think that is correct. There have been numerous
international organizations that have those estimates, and they
could be conservative estimates.
Senator Cassidy. Really?
Now, you spoke about trade-based money laundering, and I am
very concerned about that. It seems as if trade-based money
laundering is a way that somebody could move capital from China
to a country outside of China and, if you will, avoid Chinese
Government scrutiny, et cetera.
So if you will, their participation in the TBML is not
necessarily to further criminal activity, but to get their
capital out. Is that possible?
Mr. Luna. That is a fair assessment, Senator. Going back to
your earlier question, if you look at the proceeds of
corruption since 1995, they are about $2 trillion. In my
testimony earlier, I mentioned that China is a money laundering
hub, up to $1.5 to $2 trillion a year.
Senator Cassidy. Two trillion a year.
Now the Chinese Government is a surveillance society. I
guess I am a little bit--how are they so incapable of capturing
what might be a conservative estimate of a billion dollars of
capital flight per day?
Mr. Luna. Good question, Senator. It is a little bit
complex there. You know, I think the issue of complicity is
part of the challenge.
Senator Cassidy. Now complicity in terms of a corrupt
official, or in terms of official----
Mr. Luna. Not necessarily at the national level. It could
very well be a disconnect between the national and the
subnational corrupt officials in the various provinces across
China, where in fact you see often the highest level of
corruption in China.
Senator Cassidy. So, although we see many things that China
does as threatening to the West, this is actually an area that
we could potentially--I think you highlight this in your
testimony--an area that we could potentially cooperate on,
which is to address the trade-based money laundering aspect,
which would address in turn their concern about capital flight.
Is that a fair statement?
Mr. Luna. Correct. I do think political pressure by the
Congress, the Biden administration, working together bringing
China to the table--if you just look at the various illicit
markets and weave them together, China again is the common
denominator and the major player in the global illegal economy.
Senator Cassidy. I will come back to that, because I think
it is Chair Warren's turn. I am a few minutes over. Can I go a
little longer?
So then let me ask, because it seems like we have tension
here: on the one hand, they export more albeit counterfeit
goods, which helps their economy. On the other hand, this may
be a vehicle by which there is capital flight. Is there a
tension there, or am I only imagining it?
Mr. Luna. Well, there is illicit trade, but on the illicit
trade--they do exploit illicit trade to move capital and to
move illicit proceeds----
Senator Cassidy. So, even though it is illicit goods, they
are just mismatching the pricing between the recipient country
and China in order to move capital out?
Mr. Luna. Correct. It could be over-valuation, under-
valuation on its pricing; correct.
Senator Cassidy. Got it. So the Chinese Government would in
that case--they are savvy enough to evade the Chinese
Government surveillance, correct?
Mr. Luna. The complicit corrupt officials, correct.
Senator Cassidy. Okay.
And then I am through with you, and then we will come back,
and I will ask other witnesses about a way to address that.
Senator Warren. So I would like to talk for a minute about
climate change. Climate change poses an existential threat to
every living thing on this planet. The United States should be
racing to make investments in green technology, green products,
green infrastructure, so that we are prepared, and so that our
economy grows as the rest of the world needs these products to
fight climate change. If we fail to act, then we will spend the
coming decades relying on China and other countries to sell us
the things that we need to fight climate change, and we will
cut U.S. workers out of the jobs of the future.
China is already making these investments, seeking to
combat pollution and to dominate new sectors. They are throwing
the book at the problem. They are funding basic research, they
are subsidizing commercialization of new technologies, and they
are using government purchasing power to help new products gain
a foothold in their market. Because China understands that the
private sector cannot do this alone, they are putting a lot of
government muscle behind making this happen.
Dr. Spriggs, do the necessary comprehensive investments in
green technology get made without help from the Federal
Government?
Dr. Spriggs. Thank you, Senator. No, they do not. There is
too much policy uncertainty to make this size of investment in
the type of research that needs to be taking place, and the
fact of recouping the funds, which will be massive in
transforming other elements of the economy, make it unlikely
that individual firms would make the investment on the scale we
need.
Senator Warren. Okay.
Mr. Spriggs. So we really need the government's signal and
the government's support to help companies make those
investments.
Senator Warren. So that is a powerful point. It is
important to understand what it takes to get a market like this
up and running, and it is not as if we have an open field.
China is actually already moving into this market very
aggressively. You know China, I think, recognizes this
challenge and the opportunity that it presents, so it is using
every policy tool it can to develop and deploy green
technologies.
But China's approach is missing one key thing--meaningful
protection for workers. And that means that China can cut costs
of factory production, but it also means that the Chinese
workforce is poor, it is less educated, it is less productive,
and it is less innovative.
Mr. Houseman, right now Congress is debating making
historic investments in clean technology. So I just want to ask
you, if we follow China's model--that is, if we make the
investments in research, but we do not make the investments in
workers and protecting our workers--what do you think happens?
Mr. Houseman. I believe, when you look at 70 percent of the
gross domestic product in the U.S., it is U.S. consumers; it is
U.S. workers who are putting this effort together, using their
purchasing power to grow the economy. And it means that you
need to have good labor standards, right?
I think of Joe Wrona, who testified before the Senate
Finance Committee hearing, who had this opportunity where he
was working in a Globe facility that made a subcomponent to
polysilicone, and unfortunately lost his job to that.
They made $70,000 to $100,000 a year with a good labor
contract. And so when we think about these green investments,
if we beef up our labor standards, which are historically
really low and undermined after years and decades of adverse
court cases and efforts to undermine collective bargaining,
there is this opportunity to renew our green infrastructure,
but we also have to renew our human infrastructure, our labor
rights.
Senator Warren. Well, I think this is a really powerful
point. It is something I want us to all drive home and triple
underline: that engaging in a race to the bottom with China on
labor conditions does not make America more competitive. It
undercuts our Nation's greatest competitive advantage: our
hardworking, skilled, innovative workforce.
So, this is the reason that I introduced the Buy Green Act
with Congressman Andy Levin, which would require that the U.S.
Government spend at least $1.5 trillion of the money it spends
anyway to buy materials and equipment over the next decade, to
use that money to purchase American-made, clean, renewable,
emission-free energy products.
This bill includes robust labor protections ranging from
Buy America application to better wage standards to paid leave.
Too often though, labor protections are just an afterthought on
domestic investments, and I think that is the wrong approach.
We need to think about U.S. workers, not at the end of the
process, but at the beginning of the process. So let me ask
you, Mr. Houseman, if we applied a minimum framework of labor
protections across the board to our domestic investments, would
that strengthen our global competitiveness?
Mr. Houseman. Oh, absolutely, Senator. I mean, when you
already start for such a low base--like we have some basic
protections out there such as Davis Bacon, prevailing wage,
these sorts of provisions that help certain industries. But
when we start to talk about expanding labor access and labor
rights for workers, it broadens that base, creates that
opportunity for workers to collectively bargain for those
opportunities: for health care, child care, these things that
we talk about endlessly here around the Capitol. But it is an
opportunity where we start from a low base, but with the right
policy tools we can really make the U.S. worker not only just
competitive, but competitive with an ability to thrive. And I
think that is the key piece of what you are trying to do, yes.
Senator Warren. So I love this--you know, it is fair wages,
it is Davis Bacon, it is child care, fair labor standards, the
ability to have a collective bargaining agreement--all of those
help strengthen our workers. And when we help strengthen our
workers, we help make our country more competitive.
As you know, President Biden has called for historic
investments in the green economy, and that is great, but it is
critical that Congress guarantee that those investments create
good jobs--jobs that sustain families, jobs that sustain
communities for decades to come.
It is not just the right thing to do; it is how we retain
our competitive advantage against China, so thank you very
much.
Senator Whitehouse, are you with us?
Senator Whitehouse. I am with you, Chair Warren.
Senator Warren. I recognize you for your questions.
Senator Whitehouse. Thank you very much.
Let me start, if I may, with Ms. Nakano, and ask--well,
right off the bat, what are your, or the Center for Strategic
International Studies' positions on how important climate
action is, and what your favored climate policy is with respect
to climate action?
Ms. Nakano. Thank you very much, Senator. I can only speak
for myself. I am not allowed to speak for the Center. I mean,
we are a bipartisan policy think tank.
Senator Whitehouse. Good for you.
Ms. Nakano. If I may, thank you. I do think that all these
economies that do have means really need to electrify as many
sectors as possible while decarbonizing energy sources as
quickly as we can. And in that mix, I think there are many
technologies that are new, but also some are very proven
technologies that merit closer appreciation for some of the low
carbon-emitting profiles, such as nuclear for example.
Also, there is a robust role for renewable energy sources,
and----
Senator Whitehouse. Can I ask you if a price on carbon
emissions is a policy tool that would be helpful in achieving
those goals?
Ms. Nakano. Yes, I believe so.
Senator Whitehouse. And you said something really
interesting in your testimony about electric vehicles, which is
that China is beginning to establish a commanding position. As
you know, the President's proposal with respect to climate is a
very big push in the electric vehicle space.
What advice would you have for us as we try to refine that
policy in the U.S. electric vehicles market to try to protect
against that commanding position of China's?
Ms. Nakano. Yes, and thank you for that question. So China
is not really there yet. I think in the high-capacity battery
and EV sectors, there is no clear winner yet. Some of the
things that China has not done so well include some of the
technology advancements they have been working at that they
have not really achieved.
But they have been able to give a more clear signal on both
the pace of infrastructure development, EV charging stations,
but also the type of technical specifications that investors
need to be able to go in, but then also clear demand. And
looking at the U.S., the recent endeavors, I think we also
really need to address the supply chain side as well.
When it comes to the EV sector, as opposed to, let's say
the solar PV or wind, China really does not have the absolute
dominance on minerals and metals that go into it. For example,
when we look at the lithium-ion battery-based EVs, countries
like Australia and also Chile have lithium; however, China has
invested quite heavily in processing and separation capacities
for the last couple decades.
Senator Whitehouse. Protect our supply chain would be an
important piece of advice.
Ms. Nakano. Yes, yes, and I would like to see----
Senator Whitehouse. I am running down on time, so if I may,
with appreciation, Ms. Nakano, for your answers, turn to--it
will be the same question to Dr. Spriggs and Mr. Houseman. We
are hearing an awful lot in this committee about the tax
advantages of companies when they offshore, when they send jobs
and equipment and manufacturing overseas.
And as a result of that, they pay no or little tax, and as
a result of that, they are able to become more competitive. And
that is basically the argument for defending tax advantages for
offshoring manufacturing. But the argument fails to consider,
in my view--and this is where I want your comment--that those
big offshore companies are not just competing against foreign
companies, they are also competing against American businesses,
American companies, American manufacturers that either do not
have the scale, or do not have the unpatriotic nature, to move
their manufacturing overseas for tax advantage.
And could you focus a little bit on that competitive
disadvantage that American businesses suffer when we
accommodate and indulge offshoring advantages for big American
corporations?
Dr. Spriggs. That is absolutely correct, Senator, that
issue that you raise, because it is unfair to the domestic
manufacturers that, when they increase production, are doing to
it export. And it is unfair to the host countries around the
world that are low-income, do not have leverage with major
corporations, and cannot get the revenues to enforce their
labor standards.
It is a lose-lose all the way around if we do not have an
agreement on a global minimum tax for corporations. We lose,
and we lose by setting up a set of rules that ensures a race to
the bottom by making sure that other nations cannot enforce
laws.
Senator Whitehouse. Mr. Houseman, keep your answer short,
because I am over my time, but I would love to hear you chime
in.
Mr. Houseman. Sure. I think about Mohawk Paper out of New
York. They are a small paper producer that makes high-quality
specialty papers and are represented by USW. And for us, they
are competing in an international market, and they can export
to a ton of countries, but should they be competing on tax
policy?
It is something that we, the steelworkers, firmly believe
is the last thing that workers should be competing on, and they
should be competing on the quality of the product they produce.
And so that is why we are supportive of your legislation like
no tax breaks for outsourcing.
I think it is a strong legislative piece that shows that,
when we invest in America and we ensure that we have good tax
policy that holds corporations accountable for those sort of
offshoring practices, it will not only help domestic workers,
but will help domestic companies.
Senator Whitehouse. Thank you.
Thank you, Chair Warren, for this important hearing. I
think it is really important to remember the Mohawk Papers of
America when you see an American corporation that competes with
Mohawk Paper move offshore to get tax advantages to try to make
Mohawk Paper's life more difficult. And there is no real
competitive advantage there; it is artificial, and it hurts
American manufacturing. So thank you, Chair Warren.
Senator Warren. Thank you very much for joining us, Senator
Whitehouse, and the very powerful point that you make.
I want to turn, if we can for just a minute, to
cryptocurrency. This is another area where U.S. leadership will
be key to setting the rules of the road.
Cryptocurrency has created new opportunities to scam
investors. Crypto has helped criminals get paid, and crypto has
made the climate crisis worse. Nothing will change unless
regulators step in. So let me just pick one example: illegal
financial transactions; things like online theft, drug
trafficking, evading sanctions, ransomware attacks.
Just last week, hackers infiltrated the networks of
potentially thousands of small businesses across the world,
including at least 200 American companies, and demanded $70
million in cryptocurrency, the single largest ransomware attack
on record so far.
Last year, criminals collected $412 million in ransom
through cryptocurrency. This year the number may turn out to be
higher. So, Mr. Fanusie, I know you are an expert on the
national security implications of cryptocurrency, so I want to
ask you, do you believe that cryptocurrencies are a threat to
the safety and security of our financial system?
Mr. Fanusie. Thank you for that question, Chair Warren. I
think how I would respond is that, after looking at this issue
for quite some time, I would say that this new Internet of
value that cryptocurrencies are a part of, is simply a part of
our economic ecosystem now. You know, as someone who is focused
on illicit finance and national security issues, it is true
that I have seen multiple illicit actors--from state actors,
whether it is North Korea, to non-state actors, even a
terrorist overseas--dabble, experiment, and gain revenue
through this new technology.
But I would say that what we have to do is, we have to have
the framework where we see that this is not going away.
Cryptocurrencies are not going away. I think we kind of have to
maybe double down on what we have done well, what the U.S. has
done well.
I have looked at a lot of the anti-money laundering part of
this, and interestingly, I think the U.S. leadership has
actually been good on AML. I mean, I did a study a few years
back where we compared the U.S. and other countries, and how
much elicit activity was happening in other regions. And even
though there was an absolute value which was maybe more in the
U.S. because there was a lot of crypto activity, the percentage
of illicit activity was actually smaller in the U.S. compared
to other countries.
And the reason is Treasury, FinCEN specifically, had
actually put out guidance about how to regulate cryptocurrency
businesses. So there are still gaps. There are still issues,
but I think, on the AML front, we have to sort of plug the
holes maybe a little bit, but I actually have seen progress on
that front.
Senator Warren. I am very glad to hear you say that,
because what I am hearing from this is that effective
regulation is possible; that the crypto risks are real, and
recent ransomware attacks on Kaseya and the Colonial Pipeline
may just be the tip of the iceberg here; that we need to update
our anti-money laundering infrastructure to keep up. But I
think what you are saying is, that is possible. That is
something we could do.
Let me see if I can just expand our thinking about this a
little. The United States has maintained leadership in global
financial markets over the past century. I worry that we risk
losing that competitive advantage if we do not take action to
address the risks in this rapidly and growing market in crypto.
So, Mr. Fanusie, can I ask you how important it is that the
U.S. lead in writing the rules of the road when it comes to
regulation of the cryptocurrency market?
Mr. Fanusie. Chair Warren, it is extremely important
because, as I have mentioned, even though I would say we have
done well on a lot of the AML front, there are a lot of
innovations. This technology sort of moves ahead of regulators,
I would say. There are a lot of new types of applications and
protocols that challenge our regulatory framework.
So there are gaps there, and I would say that the big
concern is that a lot of these new innovations within the
crypto space could sort of either get out of hand, or the best
innovation that may capitalize on some of this innovation
because it is so decentralized, could move elsewhere. It could
move overseas.
So it is sort of important for the U.S. to look at this
technology, accept that it is really here to stay, accept that
a lot of this innovation does not fit into some of our
regulatory framework, and then really do the tough diligence of
figuring out, well, how should protocols be regulated? How
should decentralized applications be regulated? What is the
framework that we need to have? And I think the U.S. is going
to have to do that, or other jurisdictions may provide more
opportunity for entrepreneurs.
Senator Warren. Thank you very much. I think that is a
powerful point. Cryptocurrencies are going to play a
significant role in our financial system for years to come. And
the United States has two options. You know, we can set the
rules of this market ourselves, or we can sit back and let
other countries do it.
We have an opportunity to lead the way by fostering a safe
cryptocurrency market that respects privacy, but that also
mitigates illicit activity and protects consumers. So I think
we have real challenges in front of us on this. Thank you.
Senator Brown, you are now recognized.
Senator Brown. Madam Chair, you are going to vote, I
understand?
Senator Warren. Yes. And if I am not back by the time you
finish, you keep asking questions. The gavel belongs to you,
all right?
Senator Brown. I do not want the gavel. I just want to keep
talking.
Senator Warren. Okay, keep talking.
Senator Brown. All right; thank you.
Senator Warren. Thank you, Senator Brown.
Senator Brown. Thanks for holding this hearing, and I
appreciate, Madam Chair--I know this is your doing that labor
is represented at this table. So thank you for doing that,
because I do not talk about what happens at Democratic caucuses
often, but I will say today at the lunch it was clear that
President Biden puts labor at the center, workers at the center
of all of his policies, from trade, to enforcement, to wages,
to all that. So it is a new day in Washington, and I welcome
that, and I thank Chair Warren for doing that.
Let me talk about the PVLT tire case, if I could.
Competitiveness starts on a level playing field in Ohio.
American steel companies like Cleveland Cliffs are being
targeted with unfair trade practices from China.
I did a call today on something that should be as simple
and as clean as the Made in America label. We know that company
after company--most are not--but enough are cheating and
slapping that label on and deceiving the buyer, because they
are not products typically in many cases, in some of these
cases made in Ohio. Fortunately though the Biden Federal Trade
Commission has stepped up and is going to begin to enforce that
much, much, much better, especially on e-commerce, than has
been done in the past.
As we know--back to Cleveland Cliffs--steel is not the only
industry that suffers. This kind of targeted dumping is rampant
throughout our economy, including everything from mattresses to
solar energy manufacturing. China's goal clearly--it is in
their national interest, they see it that way--but their goal
is to erode our industrial base.
Cheating is just one way to do that. They also outright
steal American IT. They exploit the loss of American innovation
that occurs when a product moves overseas. I do not entirely
blame the Chinese. I blame this Congress, and Congresses
before, who have passed trade laws and tax laws that end up
shutting down production in Mansfield and Ashtabula and Dayton,
OH and move it overseas.
So, Mr. Houseman, I am glad to support the Steelworkers
most recent petition for AD/CVD duties against the dumping in
the U.S. Thank you for the work you are doing, and can you
elaborate on your experience with the PVLT tire case?
Mr. Houseman. Yes, Senator. You know the United
Steelworkers is the largest union in tire manufacturing,
representing workers across the country in PVLT tires. These
are the tires that go on your car and your truck, right? And in
2014-2015, the United Steelworkers filed a petition against
China because we had 50 million tires come pumping into the
U.S. market, undercutting domestic workers, impacting over
5,000 domestic jobs.
And that petition--as you know, we were successful in
getting the duties put in place. Now we are 5 years later, and
we have seen strategic investments by China in South Korea, in
Thailand, in other countries where we have seen significant
increases in PVLT tire imports, so much so that in the last
year the United Steelworkers--because they have this union
density and are able to file freight cases--they filed a new
petition against South Korea, Thailand, Taiwan, and Vietnam,
and were successful in that petition.
And we thank you, Senator, for sending a letter in support
of that petition. But this became this whole point of Whac-A-
Mole, where we stopped dumping from China, but China is now
investing in these third-party countries, and now dumping into
the U.S. market all over again.
So, this Whac-A-Mole issue is one of the reasons why I was
supportive of your legislation and Leveling the Playing Field
2.0, because we have to hold China's Belt and Road Initiative
accountable in our trade enforcement laws.
Senator Brown. Let me take that in a different direction. I
am going to go way over my 5 minutes because nobody else is
here to stop me.
I was talking to a tire manufacturer last night who said
that--I am not sure I fully understand, and you can expand, or
any other person on the panel can. Apparently, he said that the
tire retread market production is down. We do not have the
ability. We have lost jobs in retreading tires because cheap
Chinese tires do not have the base to be able to retread, while
American tires, Goodyear in Akron for instance, and others,
Bridgestone and others, can actually provide the base tire, the
core tire, whatever the term is to do that.
I apologize for my ignorance. Is that generally right? Can
you comment on that?
Mr. Houseman. From a top level, yes. You know, our members
make--they call them off-the-road tires. Those are the big
tires that go on tractors for example. And you know from our
membership and what we have heard is that they do some of this
retreading work, and what we have heard is that yes, these
Chinese imports, they are of a lower quality, and you cannot
actually do this retread work.
So ultimately, the energy and all of the effort that is
expended here, you are not able to even recycle this product,
right? And I think that is why----
Senator Brown. Reuse.
Mr. Houseman. Reuse; yes, yes.
Senator Brown. Thank you.
Dr. Spriggs, I assume you are here.
Dr. Spriggs. Yes.
Senator Brown. I do not see you, but you are on the screen.
Okay, good to see you. A connection to Oberlin College; nice to
see you.
Ohio workers have paid the price, as you know, Dr. Spriggs,
for previous administrations' policies that have eroded our
manufacturing industrial base. This administration has a
different approach.
I want to work with them to make sure investments in R&D
and manufacturing, and clean energy in particular, translate
into good-paying union jobs. For Ohio workers that means making
investments in the first place to undo the decades of harm to
these industries. It also means passing the Protect the Right
to Organize Act to make sure workers have a voice in the
workplace.
Dr. Spriggs, explain what--potentially this is a really
long answer, so make it as short as you can. But explain what
the erosion of American manufacturing has done to our economy,
and what we do about it moving forward.
Dr. Spriggs. It has created--thank you for the question,
Senator. It has created this hollowing out of our communities.
The impact is not just to the immediate workers who lose their
jobs to trade, but it is to the communities. And so, if I did a
map and colored red where we have an increase in joblessness,
you would see that map light up very heavily in Ohio, but also
in other places where we see this big impact of the loss of
jobs because of trade.
It means we have to reenvision Trade Adjustment Assistance
to understand we must also help communities. Money needs to go
for active labor market policies at the worker level so that we
can ensure the community can generate enough jobs to make up
for the jobs lost. And especially, targeting our young people,
we need to have an expansion of WIOA investments and new
training and new job opportunities, because that is who gets
hurt when we lose these jobs, in addition to the workers who
are immediately impacted.
And this slowdown that took place between 2000 and 2008
with the massive expansion and shock of the China trade had
implications going even to the recovery that we had from the
Great Recession.
Senator Brown. Thank you. And when you say--using the term
``hollowing out'' is a tragic sort of term, when you look at
how it applies in real life. I know that people on this panel,
and the people watching, will know, just sort of intuitively
understand, what has happened to Cleveland and Dayton and
Youngstown and Toledo, in relation to Cincinnati and Columbus,
perhaps a bit less so.
But they won't have heard of so many of the mid-size towns
in my State where I grew up: Mansfield, Lima, Chillicothe,
Springfield, Ravenna; and smaller towns like Defiance and
Freemont and Canton--a little larger city--that have lost so
many good industrial jobs.
Where I grew up was a union town, a working-class city
where a lot of kids I went to high school with had futures and
had an opportunity because they could get good-paying union
jobs. Westinghouse at one point had 8,000 manufacturing jobs.
General Motors had 5,000. Mansfield Tire had 2,000. Gorman-
Rupp--company after company after company, so you are exactly
right when you talk about the hollowing.
And my last question, Dr. Spriggs, is for you. You spoke in
your testimony about the importance of family policy as
infrastructure, not just the narrow definition, which is water,
sewer, bridges, highways, but a broader definition of housing
and education and broadband and child care and the Child Tax
Credit.
Tell me what the expanded Child Tax Credit--and the checks
will go out this week; people will see them in their mailboxes
this week, probably tomorrow, or by direct deposit. What is
that going to mean to working families?
Dr. Spriggs. It is going to be very important to working
families on both sides of the equation when it comes to child
care. We can make child care affordable to all families, and
affordable so that the workers in the industry can finally get
the kind of wages that they need to help their families.
And so that is why it is so important. We need to increase
the labor force participation of American women. We cannot go
forward with our population growing older, the population of
the United States shrinking, without increasing the labor force
participation of women to respond to that.
We rank sixth--sixth--among the G7 nations when it comes to
women labor force participants, and as a result of this
pandemic, we were pushed back to 1985 for women's labor force
participation. We have only made it back to 1988. We cannot
continue without having paid leave, without having child care,
and without helping families pay for child care so that the
workers in the industry can get decent wages.
Senator Brown. Thank you, Dr. Spriggs.
Senator Cassidy, thank you for your indulgence.
Senator Cassidy. Thank you, and sorry to be gone so long.
It has just been an incredibly hectic day.
Ms. Nakano, one thing that has struck me--you mentioned the
increasing greenhouse gas emissions from China, and one thing
that has occurred to me is that, as the EU and the United
States ratchet down emissions, it only encourages some high-
polluting enterprises to move to China.
Would you agree with that assessment?
Ms. Nakano. Thank you so much for your question, Senator. I
think that generally without proper protections, yes, a lot of
high-emission intensive manufacturing could move to China. And
my understanding is that is why at least the EU is very much
interested in coming up with a border carbon adjustment and
other measures to ensure that these goods that are manufactured
in countries with less-than-desired levels of environmental
protections will not then be exported back to societies and
economies that do have stringent----
Senator Cassidy. So let me interrupt you, please, just
because we have limited time.
Ms. Nakano. Sure.
Senator Cassidy. The point I made in my opening statement
is that the requirement by the U.S. of certain environmental
and labor standards in CAFTA-DR, USMCA, Columbia Free Trade
Agreement, et cetera, effectively works as a subsidy if China
chooses to ignore those standards, therefore does not incur the
cost of compliance.
And that works against our interest in a variety of ways.
Would you agree with that?
Ms. Nakano. So, I do not follow trade policy agreements
closely enough to really have----
Senator Cassidy. Well, let me phrase it differently. I
assume that the reason that coal is being used is that coal
is--and particularly if you are not putting in scrubbers for
SOx and NOx--that is the cheapest form of
electricity that can be generated. Is that a correct statement?
Ms. Nakano. Yes. Coal-fired power plants without proper
equipment could be cheapest. Although if I may add, China does
have fairly high SOx and NOx and also a
particulate matter limitation since about half a decade ago.
Senator Cassidy. Don't I know from--I think I have seen
some air quality data that shows that China builds their coal-
fired plants on their Pacific seaboard, and that the trade
winds blow it away from China over to the U.S. west coast. I
was also told by somebody who is a native of Seoul that they
have a lot of particulate matter that blows into South Korea
from China. So, when you mention that they have these stringent
standards, are those stringent standards enforced?
Ms. Nakano. The enforcement has always been a challenge,
yes, whether it is environmental, or even the health side of
issues that are associated with many of the energy production
activities in China.
Senator Cassidy. Thank you.
Mr. Fanusie, in my last set of questions with Mr. Luna, we
were speaking about how there might be common ground in U.S.-
China relations in terms of stopping capital flight. To what
degree could using cryptocurrency, because I understand there
are some cryptocurrencies that actually--where you typically
think of it as a way to launder money, or otherwise move
dollars that should not be moved in a certain fashion--there
are some cryptos that actually allow for legitimate
transactions, if you will, those that can be traced, those that
can be ensured not to be tied to the illicit economy. Do I
understand that correctly?
Mr. Fanusie. I think you are in the right direction in
that. So natively, cryptocurrencies are usually anonymous, or
maybe
pseudo-anonymous. There is no identity connected to them. And
the way that we address that issue from a regulatory
perspective is that we ensure that places where people purchase
cryptocurrencies, that those places, those websites--we call
them exchanges--that they are regulated, that they are places
where they follow anti-money laundering rules, and that users,
customers, have to go through a process to be vetted and
identified.
Senator Cassidy. Now what I do not understand, sir, and I
am asking this just because I do not know the answer; I just
want to learn from the expert.
Mr. Fanusie. Sure.
Senator Cassidy. Why would a bad person choose to use that
sort of exchange as opposed to another exchange which would
allow them to remain anonymous?
Mr. Fanusie. No. You are absolutely right. They often
would, they would prefer to. The challenge is that there are
lots of jurisdictions that are not regulating their exchanges,
so you are right. I mean, sometimes bad actors do go to the
regulated exchange. They will often do it because there is more
liquidity there; it is easier to use.
Senator Cassidy. So I think I read though in your
testimony, or someone's, that China, with their cheap
hydroelectric, is a place where Bitcoin people specifically go
to mine. Does that give China more insight into--I do not
understand the process. Because people mine Bitcoin in China,
does that give China a greater ability to monitor the
transactions?
Mr. Fanusie. Well, the thing that is happening in China is,
China is actually cracking down on the mining, and it actually
maybe relates to your conversation with Mr. Luna, because there
is a lot of capital flight. China has actually been threatened
by the cryptocurrency trading sector, so really the past couple
of years China has tried to stamp it out. They are actually in
the middle of a big crackdown, and miners are actually leaving
because China is even cracking down on mining.
So I think you are actually going to see a lot of the
crypto activity that is happening in China--just because of
what the Chinese regulators want--a lot of it is going to
leave, move elsewhere in the region.
And so the key probably is to get others in the region to
make sure that they are regulating, because if people cannot do
exchanges in China, they are going to go to other parts of Asia
to do that activity.
Senator Cassidy. Well, you know I am about to sign this
back over to Chair Warren, and I have been kind of stretched
today. I have to leave once more. But my question for the
record for you, Dr. Gallagher and Mr. Luna, is that there is an
opportunity to cooperate with China on the issue of
cryptocurrency being used for illicit financing from their
perspective, from capital flight.
Is there some way that we can suggest that we work
together? I mean, China is a little bit of a frenemy, and I
want the accent to be on the ``fre'' and not on the ``enemy.''
And so, if there is a way that we could collaborate, I would
love to think about that, and you three are the ones who are
the experts on that.
And so with that, I will turn it back over to Chair Warren.
Chair Warren, I am supposed to be someplace else now again,
but I thank you for cohosting this, and a ``thank you'' to all
the witnesses for your testimony, which I read. And each one of
you just has really fabulous testimony, so thank you.
Senator Warren. Thank you very much. I really appreciate
it, Ranking Member Cassidy. And I know it has been a tough day
with the ins and outs, but we have still gotten a chance to
hear from good people, and ask some good questions--so, good.
I am going to ask one more round of questions, if you all
will bear with me. I want to talk about, once again, what are
the elements of building a stronger economy and competing with
China.
Too often in Congress the metric for whether we are making
the United States stronger and more competitive in the world
gets reduced to the number of bombers, submarines, and missiles
we have compared with China, or another country. And the U.S.
buys a lot of bombers, submarines, and missiles. Real
investment in American competitiveness would mean spending
Federal dollars on things that help families succeed
economically.
This year, women's workforce participation hit the lowest
levels since 1988. Twenty-six percent of women who became
unemployed this year said that it was due to a lack of child
care. And understand, this problem was highlighted during the
pandemic, but the problem has been out there for a long time.
Dr. Spriggs, the United States does not have any program to
provide affordable, quality child care to every family who
needs it. Is that how other wealthy countries handle this?
Dr. Spriggs. Thank you for that question, Senator. The
answer to your question is, our competitors learned long ago
that infrastructure means, how do I get to work? How is it that
I am able to show up in the economy? That does not mean roads
and bridges only.
For many workers it means, do I have child care? Do I have
help with my parents? Do I have elder-care help? They
understood this a long time ago because they took seriously
that their populations were slowing in terms of population
growth, and they understood that to get people to work means
more than roads and bridges.
It means the whole infrastructure, the rules and everything
that goes with supporting getting people to work. So it means
you have to have access to high-quality child care, elder care,
and you must have paid family leave. That is why we are sixth
out of the seven G7 nations. They have those policies; we do
not. Those two policies--paid leave and help with child care--
are the two best known policies for increasing women's labor
force participation. We do not do either.
Senator Warren. Well, that is very powerful. You know, when
we do not have child care, elder care, paid family leave,
women's workforce participation suffers. Children who need it
cannot get quality care. It is too expensive. And providers are
paid too little, so that we have a workforce that is barely
scraping by and has high turnover doing some of the most
important work in our Nation.
Our failure to support working families, and especially
working women, has left the U.S. behind. And we are not just
falling behind countries like Canada. We are also undermining
exactly the qualities that make our workforce competitive with
China.
So, Dr. Gallagher, let me come back to you. China is always
going to have more workers than we have. China can pay their
workers less, and they can spend less on benefits and provide
fewer protections for their workers. So just bring this
together by talking about what is the American worker's
competitive advantage compared with the Chinese workforce.
Dr. Gallagher. Well, in my written statement, and also
earlier, I did talk a lot about the challenges that China will
face related to its own workforce, particularly the rural/urban
inequality. American workers are better educated, they are more
productive, and there are far less government restrictions on
our choices: how many children we would like to have, where we
would like to work and settle down.
Access to good schools, good jobs, good neighborhoods, is
not based on the town my parents came from, though we do still
have significant problems and challenges that I would not
ignore related to race and other factors. We also cannot rest
on our laurels, because China is aware of the problems that it
faces and is trying to address them.
We need to invest and further improve every child's right
to a good education and access to college. Automation and
rapidly changing technology require that we invest in basic
academic skills. We also need to invest in child care. That is
essential to a functioning and flexible labor market in a
dynamic economy.
And as a working woman and a mother who has worked both in
China and the United States, I have struggled often to find the
child care that I need, so I appreciate the attention to the
problem. Thank you, Chair Warren.
Senator Warren. I appreciate it too. I think of our
advantages. We have a workforce that is more diverse, a
workforce that is better educated, and a workforce that is more
skilled. But in order to build on those advantages, we have to
make investments in our people.
Those advantages are not accidental. They did not fall out
of the sky. They are the result of direct investment in
education, in workers' rights. Public schools are free to every
family no matter how much or how little money they make, no
matter where they live.
In the 20th century we made high school universal, and we
invested to make sure that motivated students could go to
community college or a public university, get an excellent
education without drowning in debt. These investments have
frayed over the past several decades, and we have a lot of work
to do to restore their promise, but they gave us the most
educated and skilled workforce in the world, and that workforce
helped us build the strongest economy in the world.
Now we are falling behind, especially when it comes to
investing in our littlest ones. So let me just ask you. You
will get the last word here, Dr. Gallagher. How does our
failure to support working families with child care undermine
the advantages that we have built up in our workforce vis-a-vis
our competition with China and others?
Dr. Gallagher. Well, I think in some ways the problems that
we face are very similar to the problem that Chinese families
face. The lack of access to child care means that mothers,
particularly mothers who struggle to find child care and do
more household work than men, particularly in China, drop out
of the workforce when they cannot afford it or locate it.
So it hobbles a large proportion of our working population
at a time when we cannot risk it. Like China, we face also low
fertility rates, we face an aging society, and when women, or
men for that matter, drop out of the workforce because they
cannot afford good child care, our human capital is
underutilized.
So it is not just that worker's individual choices are
thwarted. It can hurt the entire economy.
Senator Warren. I will say it again: child care is
infrastructure. It supports our whole economy. I am fighting
for universal, high-quality, available child care that will
make sure that every child who needs it has access to it, and
that people who are child care workers will be paid the wages
that they deserve.
Investing in American competitiveness means more than
boosting semiconductor production and funding research and
development. It means more than buying more missiles and more
submarines. It means making broad-based investments in American
workers and families, including child care. That's how we are
going to keep up with our peers. That's how we are going to
stay competitive with countries like China, and that's how we
are going to build a future for all of our people.
So I just want to thank every one of you for being here
today, those who could come in person, those who joined us
virtually.
For Senators who wish to submit questions for the record,
those questions are due 1 week from today, that's Wednesday,
June 21st. For our witnesses, you will have 45 days to respond
to any questions.
Again, thank you very much for coming. Thanks for sharing
your expertise; we really do appreciate it. This hearing is
adjourned.
[Whereupon, at 4:10 p.m., the hearing was concluded.]
A P P E N D I X
Additional Material Submitted for the Record
----------
Prepared Statement of Hon. Bill Cassidy,
a U.S. Senator From Louisiana
Good afternoon and thank you all for being here for today's
hearing. Thank you to our witnesses for taking the time to testify
today.
Senator Warren and myself had agreed to a bipartisan hearing on
defending and investing in U.S. competitiveness against China, which is
growing more brazen in its mission to undermine the United States and
international institutions. So that is what I will be focusing on in my
remarks.
Strengthening our competitiveness in the face of unfair actions
from countries like China is an area that unites Republicans and
Democrats. It is our responsibility as members of the U.S. Congress to
defend our Nation's workers, citizens, and interests.
We should find common ground here. China has been acting out with
impunity due to world leaders' unwillingness to act. All the while, the
rest of the world is left to deal with the consequences.
We should have a robust discussion about China's role as a primary
source of the fentanyl that flows into the United States and ravages
our communities, killing thousands each year. We should talk about
counterfeit medical products and other goods that put Americans' health
and lives at risk, like the counterfeit personal protective equipment
that flooded our Customs facilities during the COVID-19 pandemic. We
should examine China's surveillance efforts, including their
government-backed and -operated blockchain-based service network, as
well as their collection of vast amounts of genetic data. We should be
discussing the fact that China is the greatest global threat to climate
change, whose massive carbon emissions, for every year since 2012, have
exceeded combined U.S. and European Union carbon emissions, who have
made it a point of foreign policy to build outdated and polluting coal-
fired power plants throughout the developing world, further increasing
global emissions.
We should discuss how to address these things.
A particular point of concern is China's blatant dismissal of
international trade rules and compliance with standard labor and
environmental practices. Chinese labor practices include slave labor,
forced child labor, and absence of worker's rights. The U.S. does not
have a trade agreement with China, and therefore no standards for
environmental or worker protections exist like those in the USMCA and
CAFTA.
Perhaps related, between 2017 and 2019 China's foreign direct
investment (FDI) inflow increased from $136 billion to $141 billion.\1\
In that same time period, the six CAFTA nations saw FDI inflows
decrease from $9.7 billion in 2017 to $8.4 billion in 2019.\2\
---------------------------------------------------------------------------
\1\ China Statistical Yearbook 2019, 2019, www.stats.gov.cn/tjsj/
ndsj/2019/indexeh.htm.
\2\ ``Foreign Direct Investment, Net Inflows (BoP, Current
U.S.$),'' The World Bank, https://data.worldbank.org/indicator/
BX.KLT.DINV.CD.WD?end=2019.
The cost of compliance inherent in USMCA and CAFTA puts these
trading partners at a competitive disadvantage relative to China. In
practice, this means that goods made in China are subsidized by the
permitted lack of worker and environmental standards. The U.S. would
never accept this in such a treaty.\3\ Yet this is the playing field we
are passively permitting China to exploit.
---------------------------------------------------------------------------
\3\ ``Workers' Rights and Labour Relations in China,'' China Labour
Bulletin, August 13, 2020, https://clb.org.hk/content/workers%e2%80%99-
rights-and-labour-relations-china. Xu, Vicky Xiuzhong, ``Uyghurs for
Sale: `Re-Education,' Forced Labour and Surveillance Beyond Xinjiang,''
Australian Strategic Policy Institute, vol. 26, 2020, s3-ap-southeast-
2.amazonaws.com/ad-aspi/2020-08/
Uyghurs%20for%20sale%2024%20August%202020.pdf?q0utM5u2Efa0YrzcjinWKIvkzF
_IZWMn.
A main foreign policy goal is to decrease illegal immigration
coming from Central America through improving economic opportunity in
potential migrant's home countries. As long as China is allowed to
undercut the U.S. and these nations economically by ignoring basic
labor and environmental norms, pursuing this goal and improving overall
---------------------------------------------------------------------------
American competitiveness will be difficult. We need to start now.
Thanks again to our witnesses. I am looking forward to discussing
these issues.
______
Prepared Statement of Yaya J. Fanusie, Adjunct Senior Fellow,
Center for a New American Security
china's fintech strategy: seeking to dominate the next data revolution
Chair Warren, Ranking Member Cassidy, the distinguished members of
the subcommittee, and my fellow panelists, it is an honor to
participate in today's hearing. Please allow me to add that although I
do consulting with the private sector on financial technology issues,
my comments today are my personal opinion and are not on behalf of any
clients.
Today, I will explain how the Chinese Government's recent foray
into financial technology (fintech), including by investing heavily in
blockchain technology and piloting a central bank digital currency, is
a long-term strategy to dominate the digital economy of the future.
This strategy is a new financial dimension to the great-power
competition between China and the United States. But it is about more
than money or currency. It is really about data. Specifically, it is
about which country will be most successful at leveraging data for
technical innovation, to set the standards for new global financial
infrastructure, and become the anchor for the information revolution
that is on the horizon. The Chinese Communist Party (CCP) intends to
upend the United States' leading economic and geopolitical status by
investing in nascent technologies that the United States is not
currently prioritizing and building the digital infrastructure that
will drive global commerce and shape the evolution of the Internet
itself. If the United States does not understand China's fintech
strategy and how it fits into seismic technological shifts that are
emerging, the United States will not be able to develop an appropriate
strategic response and could lose the geopolitical leadership position
it has held since the end of World War II. In my testimony, I will
explain key elements of China's fintech strategy, how they fit into a
continuum of innovations in the world's history of data revolutions,
and recommend ways that the United States must adapt and position
itself to compete with China in the 21st-century economy. But first,
I'd like to start with some historical context.
From the late 1960s and into the early 1980s, a revolution in
humankind's transmission of data occurred, slowly. The Internet was
born. The infrastructure of the Internet was constructed over decades.
It was a quiet data revolution. It happened largely outside the
limelight because building a network for computers to talk to each
other across great distances had little practical value for the broader
population, most of which had no direct access to computers at the
time. So, creating the Internet then was not a profit-seeking endeavor
at first. Its impetus was military. At the height of the Cold War, the
U.S. Department of Defense funded computer science academics and gave
them a long innovation leash.\1\ However, the DoD funders tethered the
research to an ultimate objective: to build computer infrastructure
that would support the U.S. military's information and communication
needs around the world.\2\ The Internet protocol that we all engage in
today, known as TCP/IP, emerged in 1983.\3\ But it was not until mostly
American firms built civilian applications on top of it, such as public
websites and private email accounts, that the Internet offered
mainstream value and revolutionized the world.
---------------------------------------------------------------------------
\1\ Ben Tarnoff, ``How the Internet Was Invented,'' The Guardian,
July 15, 2016, https://www.theguardian.com/technology/2016/jul/15/how-
the-internet-was-invented-1976-arpa-kahn-cerf.
\2\ Defense Advanced Research Projects Agency, ARPANET: Advancing
National Security Through Fundamental Research, https://www.darpa.mil/
attachments/ARPANET_final.pdf.
\3\ Justin Jaffe, ``Happy Birthday, Dear Internet,'' Wired,
December 31, 2002, https://www.wired.com/2002/12/happy-birthday-dear-
internet/.
No one entity or nation technically owns the underlying
infrastructure of the Internet. However, it cannot be denied that the
United States' decades-long investment in building it enabled U.S.
companies to lead the technological and business growth that arose out
of the Internet's information revolution. This position, however, is
being challenged, slowly and steadily, by China. The clearest example
of China working to upend America's economic dominance on the Internet
is its Blockchain-based Service Network (BSN), a state-driven project
that has partnered with Chinese private tech firms to build what the
Chinese Communist Party believes is the next generation of Internet
infrastructure. The BSN, like the United States' endeavor to build the
original Internet, is a decades-long campaign. The BSN vision is an
Internet environment where data transmits through distributed
broadcasting, in which separate applications and business systems can
simultaneously access and operate on agreed-upon, authenticated
data.\4\ This contrasts with current Internet processes, where data is
siloed between different systems and moves through the Internet in a
linear fashion. In theory, this upgraded Internet would enable an
Internet of things where all digital things can communicate and
transact with each other, enabling a new era of digital innovation and
economic possibilities. But it would be an Internet where China owns
the underlying infrastructure.
---------------------------------------------------------------------------
\4\ Yifan He, ``Consensus 2021: Rebuilding the Internet with
Blockchain Broadcasting,'' Coindesk, May 6, 2021, https://
www.coindesk.com/consensus-2021-rebuilding-internet-blockchain-
broadcasting.
Since blockchain technology emerged with the Bitcoin protocol in
2009, many technologists and entrepreneurs have argued that its
distributed architecture model could eliminate longlasting
inefficiencies in data management and dissemination. In theory, this
new way of recording and conveying data can revolutionize financial
services, supply chain management, media, and government
recordkeeping.\5\ In practice, these and other industries have yet to
be disrupted by the new technology. So blockchain, also known as
distributed ledger technology (DLT), today remains an experimental
computer science niche with no single private or public sector entity
dominating its development. Yet, it is interesting that, instead of
dismissing blockchain as over-hyped and underperforming, China is
doubling down on it. To understand why, let's look at China's overall
approach to new technologies and the state of global blockchain
development over the past few years.
---------------------------------------------------------------------------
\5\ Sam Wood, ``Technology vs. Trust: Why This Wharton Professor
Thinks Blockchain's Time Is Yet to Come,'' The Philadelphia Inquirer,
March 11, 2019, https://www.inquirer.com/business/weed/blockchain-
kevin-werbach-wharton-school-mit-press-20190311.html.
---------------------------------------------------------------------------
building infrastructure instead of applications
China's research and development (R&D) strategy has two prongs, as
described by Yifan He, the BSN's executive director.\6\ One approach is
to invest in critical technologies that have evident benefits and
established applications.\7\ Some examples are robotics,
semiconductors, and artificial intelligence. However, China faces stiff
competition with the United States, which is also prioritizing R&D in
these areas. The second approach is to pursue nascent technologies that
no country has yet to dominate (and that perhaps most countries
ignore). Such technologies may have fewer current applications, but
would offer great potential first-mover advantage. Developing
blockchain infrastructure is an example of this second approach.
Executive Director He also explained that China increasingly prefers to
build new underlying technology, rather than develop applications on
top of Western-dominated infrastructure. This approach seeks to capture
market share at the outset of a relevant new technology. According to
He, China's approach is to look 50 to 100 years ahead and then work
toward the technological future.\8\
---------------------------------------------------------------------------
\6\ BSN, ``Understand China's Pursuit in Emerging Technologies,''
Medium, June 10, 2021, https://medium.com/bsnbase/understand-chinas-
pursuit-in-emerging-technologies-af2104958a4
a.
\7\ Arjun Kharpal, ``In Battle with U.S., China to Focus on 7
`Frontier' Technologies from Chips to Brain-Computer Fusion,'' CNBC,
March 5, 2021, https://www.cnbc.com/2021/03/05/china-to-focus-on-
frontier-tech-from-chips-to-quantum-computing.html.
\8\ BSN, Understand China's Pursuit in Emerging Technologies.
There are reasons why many outside China would ignore or dismiss
the BSN. For example, although blockchain technology has received
excessive media attention in the past few years, there are no
blockchain use-cases that have wide adoption except for cryptocurrency
trading and speculation. And the largest U.S. software companies that
trumpeted the potential benefits of distributed ledger technology in
early 2016 \9\ have mostly shuttered their blockchain service offerings
by mid-2021.\10\ Blockchain has not led to a massively popular software
application that is central to daily life and dominates a consumer
market. There's no blockchain killer app yet.
---------------------------------------------------------------------------
\9\ Jamie Redman, ``Microsoft and IBM Declare Blockchain Open for
Business,'' Bitcoin.com, February 17, 2016, https://news.bitcoin.com/
microsoft-ibm-declare-blockchain-open-business/.
\10\ Ian Allison, ``IBM Blockchain Is a Shell of Its Former Self
After Revenue Misses, Job Cuts: Sources,'' Coindesk, February 1, 2021,
https://www.coindesk.com/ibm-blockchain-revenue-misses-job-cuts-
sources; Joshua Mapperson, ``Microsoft Quietly Closing Down Azure
Blockchain in September,'' Cointelegraph, May 14, 2021, https://
cointelegraph.com/news/microsoft-quietly-closing-down-azure-blockchain-
in-september.
However, this failure to achieve blockchain mass adoption and
private-sector profitability is similar to what would have happened if
U.S. firms had launched Internet service business divisions in the
1970s. Computer networking was a niche technology space with
infrastructure that was too immature to support any profitable business
applications. IBM was producing computers at that time, but the
Internet likely would not have arisen by IBM or any other private firm
trying to build global networking infrastructure single-handedly. The
Internet arose through computer scientist collaboration where academic
researchers iterated upon their protocols, seeking to build common
infrastructure for all networked computers. In contrast, in the
blockchain space, a wide variety of startups and developer groups
around the world have been launching their own blockchain protocols,
each one competing with the others and touting its architecture as the
best system to eventually deploy new, decentralized applications on the
---------------------------------------------------------------------------
Internet.
The Chinese Communist Party views blockchain technology as
strategically important, but its assessment appears separate from the
blockchain hype of 5 years ago. It was only in late 2019 that China's
President Xi Jinping called on the country to excel in blockchain
research and development.\11\ In one interview, BSN Executive Director
He said that he personally only started looking at DLT in 2018.\12\ But
much of the global hype around blockchain had already started to fade
by this time.\13\
---------------------------------------------------------------------------
\11\ ``China's Xi Urges Acceleration of Development of Blockchain
Technology,'' Reuters, October 25, 2019, https://www.reuters.com/
article/us-china-economy-xi/chinas-xi-urges-acceleration-of-
development-of-blockchain-technology-idUSKBN1X419Y.
\12\ A.J. Cortese, ``Red Date Is Lowering the Entry Point to the
Blockchain Network for SMEs,'' KrASIA, April 24, 2021, https://kr-
asia.com/red-date-is-lowering-the-entry-point-to-the-blockchain-
network-for-smes-inside-chinas-startups.
\13\ Yaya Fanusie, ``The Crypto Space Is Void,'' Forbes, December
18, 2018, https://www.forbes.com/sites/yayafanusie/2018/12/18/the-
crypto-space-is-a-void/?sh=3cad8fad70ad.
No blockchain killer app has emerged due to the regulatory
uncertainty around the technology, the lack of interoperability between
blockchain protocols, and the unsustainable costs for startups unable
to find product-market fit with unproven tech. However, a cursory study
of how the United States developed the Internet through government-
funded R&D has likely given the Chinese government a more promising
blueprint for leveraging blockchain technology, which is to play the
long game and pursue decades-long computer science experimentation and
collaboration until universal architecture emerges that can support
practical applications. But instead of developing Internet plumbing
that no one owns like the World Wide Web,\14\ China's vision of an
upgraded Internet is more proprietary. The BSN secretary-
general commented in late 2020 that the BSN is constructing an online
environment where China has ``independent intellectual property rights
and China controls the rights to Internet access.''\15\
---------------------------------------------------------------------------
\14\ ``History of the Web,'' World Wide Web Foundation, https://
webfoundation.org/about/vision/history-of-the-web/.
\15\ See 24-minute mark, ``How Blockchain Technology and BSN
Support Fintech Development,'' Youtube, November 4, 2020, https://
www.youtube.com/watch?v=k9Gtq-j__3U.
---------------------------------------------------------------------------
data is the new electricity
The BSN, as well as China's central bank digital currency, must be
understood as part of the Chinese Communist Party's broader fintech
strategy. In late 2019, China unveiled a 3-year fintech development
plan.\16\ That strategy focuses more on data than money. The plan calls
for China's financial system to get more nimble at acquiring and
leveraging data, and to develop a ``nationwide integrated big data
center.''\17\ The fintech plan is intertwined with similar CCP
directives in recent years promoting the national development of big
data analysis and artificial intelligence.\18\ The Chinese Government
aims to collect and centralize as much data as possible for the state's
monitoring and management, whether for economic aims or other party
priorities.
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\16\ ``Chinese Central Bank Releases Fintech Development Plan for
2019-2021,'' China Banking News, August 23, 2019, https://
www.chinabankingnews.com/2019/08/23/chinese-central-bank-releases-
fintech-development-plan-for-2019-2021/.
\17\ ``The Central Bank Issued the `FinTech Development Plan':
Strengthening the Development and Application of Distributed
Databases,'' Blocking.net, https://blocking.net/14752/the-central-bank-
issued-the-fintech-development-plan-strengthening-the-development-and-
application-of-distributed-databases/.
\18\ Derek Grossman, Christian Curriden, Logan Ma, Lindsey Polley,
J.D. Williams, and Cortez A. Cooper III, ``Chinese Views of Big Data
Analytics'' (RAND Corporation, 2020), https://www.rand.org/content/dam/
rand/pubs/research_reports/RRA100/RRA176-1/RAND_RRA176-1.pdf.
China's aspirations to lead the Internet's evolution rely on data
innovation. Digitization, intelligentization, and informatization are
terms promoted in recent CCP national strategy documents.\19\ While
these terms differ slightly in meaning, each is a political directive
that involves edifying state knowledge with intermeddler data. Although
it is commonly said that ``data is the new oil,'' it is more accurate
to say that the Chinese Government sees data as the new electricity.
Like electricity, data in China is becoming a force to power all
applications and economic processes in the country, with individual
users (and their devices) connected to national infrastructure.
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\19\ Elsa B. Kania, Adjunct Senior Fellow in the Technology and
National Security Program at the Center for a New American Security,
``Chinese Military Innovation in Artificial Intelligence,'' testimony
to the U.S.-China Economic and Security Review Commission Hearing on
Trade, Technology, and Military-Civil Fusion, June 7, 2019, https://
www.uscc.gov/sites/default/files/
June%207%20Hearing_Panel%201_Elsa%20Kania_Chinese%20Military%20Innovatio
n%20in%20
Artificial%20Intelligence_0.pdf; Katja Drinhausen and John Lee, ``The
CCP in 2021: Smart Governance, Cyber Sovereignty and Tech Supremacy''
(MERICS, June 15, 2021), https://merics.org/en/ccp-2021-smart-
governance-cyber-sovereignty-and-tech-supremacy.
Data also is the lens through which the United States must judge
the geopolitical and economic implications of China's fintech
advancement. The best way to do so is to consider what China's fintech
architects say about the data architecture they are building. Again,
the planning around BSN exemplifies China's wide-reaching data
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strategy.
For example, throughout the world, most discussion on safety
systems for self-driving cars proposes capabilities like simple
vehicle-to-vehicle communication to allow cars to check nearby
vehicles' current and anticipated movements.\20\ Each vehicle would
acquire and analyze data emitted from other cars directly, but in
piecemeal fashion, through linear transmissions. However, the BSN's
designers propose that blockchain-based broadcast transmission would
allow all self-driving cars within a set vicinity to exchange and
synchronize data simultaneously, allowing for more efficient and
comprehensive analysis of road activity.\21\ Assuming transportation
and safety authorities also access such broadcast data, these ongoing
streams of information could feed hazard monitoring, and help emergency
response vehicles map quicker routes to crash sites and medical
facilities. In China, such data would be distributed to approved
parties, but would likely be centralized for government big data
analysis. This constant feed of data would also inform machine learning
and lead to greater artificial intelligence capabilities for the
government and possibly private entities (like Chinese car
manufacturers), if given permissions to the data.
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\20\ National Highway Traffic Safety Administration, Vehicle-to-
Vehicle Communication, https://www.nhtsa.gov/technology-innovation/
vehicle-vehicle-communication.
\21\ He, ``Consensus 2021: Rebuilding the Internet with Blockchain
Broadcasting.''
The implications for China's transportation system and its
automobile manufacturing sector would be straightforward: potentially
safer roads and more intelligent vehicles and infrastructure. But these
enhancements would likely catalyze adjacent innovation in China's food
delivery sector, ride sharing, car insurance, mapping and geolocation
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software, and countless other areas.
The international implications would arise from the response to one
question: will other nations choose to implement this type of
transportation intelligence system, run on capable and tested BSN
infrastructure? It should not be assumed that such a complex system
could be built outside China without years of R&D. If many major cities
around the world plug their transportation networks into the BSN, car
manufacturers would be incentivized to either make their vehicles
compatible with BSN applications or to develop apps run on the BSN
themselves. What would start as a domestic transportation sector
innovation in China could transform into a significant hurdle for U.S.
automobile industry competitiveness, especially if U.S. regulators
prohibit U.S. firms from building BSN compatibility due to national
security concerns around data. And as other nations seek the adjacent
innovations for other industries operating on BSN's transportation
apps, U.S. firms in those industries could also find themselves at a
competitive disadvantage. Even if the BSN is somehow constructed in a
way where U.S. data is protected from Chinese Government acquisition
and regulators allow U.S. engagement, American firms would be forced to
develop important business applications on underlying infrastructure
run by the Chinese tech sector. This would be the inverse of the
relationship between U.S. and Chinese technology firms today.
the digital yuan is a long-term concern for the united states
The disruptive potential of the BSN is similar to the risks to the
United States around China's Digital Currency/Electronic Payment, which
is digitized central bank money known popularly as the eCNY. This new
project is better understood more as a new Chinese Government-owned
data network rather than just as a currency.\22\ Like the BSN, the
eCNY's implications for economic and geopolitical competition are long
term. This central bank digital currency (CBDC) also exemplifies the
Chinese Government's pursuit of first-mover advantage in nascent
technologies.
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\22\ Matthew D. Johnson, ``China's Digital Renminbi Initiative Is a
Network, Not a Currency,'' The Strategist, Australian Strategic Policy
Institute, June 16, 2021, https://www.aspi
strategist.org.au/chinas-digital-renminbi-initiative-is-a-network-not-
a-currency/.
The eCNY is unlikely to displace the U.S. dollar as the top
international reserve currency in the short term or to give China an
immediate buffer against U.S. sanctions power.\23\ The U.S. dollar is
too central to international trade and China's restrictive monetary
policies make the yuan, digitized or not, less attractive for global
users.\24\
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\23\ ``Digital Yuan Gives China a New Tool to Strike Back at
Critics,'' Bloomberg, April 20, 2021, https://www.bloomberg.com/news/
articles/2021-04-20/digital-yuan-gives-china-a-new-tool-to-strike-back-
at-critics.
\24\ Yaya J. Fanusie and Emily Jin, ``China's Digital Currency:
Adding Financial Data to Digital Authoritarianism'' (Center for a New
American Security, January 26, 2021), https://www.cnas.org/
publications/reports/chinas-digital-currency.
The risk for U.S. displacement comes from the upper hand that China
might gain in the long term by developing cross-border financial
transaction infrastructure that a significant group of other countries
eventually adopt. The eCNY is only in a pilot stage and its monetary
and economic benefits for China are uncertain. What is clear is that
China is seeking through the eCNY to build a more data-driven financial
environment that would enable more technological innovation in its
financial sector. For example, in early 2021, the People's Bank of
China announced a domestic call for academic research relating to the
implementation of its digital currency.\25\ In particular, the PBOC
sought input on how smart contracts \26\ could be integrated with the
eCNY, including what legal frameworks would be needed. The central bank
also requested research work on incorporating the state's digital
currency with 5G and Internet of things systems in order to spur more
innovative payment applications.\27\
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\25\ ``Fading shuzi huobi chuangxin yanjiu kaifang keti shengqing
zhinan (2021 niandu) [Application Guidelines for the Open Project of
Legal Digital Currency Innovation Research (2021)],'' The People's Bank
of China, March 26, 2021, http://archive.today/t84QT.
\26\ A smart contract is computer code that executes an agreement
programmed within a blockchain platform. See: Stuart D. Levi and Alex
B. Lipton, ``An Introduction to Smart Contracts and Their Potential and
Inherent Limitations,'' Harvard Law School Forum on Corporate
Governance, May 26, 2018, https://corpgov.law.harvard.edu/2018/05/26/
an-introduction-to-smart-contracts-and-their-potential-and-inherent-
limitations/.
\27\ ``Application Guidelines for the Open Project of Legal Digital
Currency Innovation Research (2021),'' The People's Bank of China.
Such research and experimentation is likely to give China leading
expertise in the global pursuit of CBDCs. This knowledge advantage
would put the Chinese Government in position to drive the CBDC
technical design and policy standards that other nations adopt. Signs
of this are visible now. For instance, China is part of a Bank for
International Settlements pilot project with the central banks of Hong
Kong, Thailand, and the United Arab Emirates.\28\ The project, known as
the Multiple CBDC or mCBDC Bridge, is testing cross-border transactions
between those central banks using a DLT platform. The United States
does not appear to be closely involved with the pilot project.
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\28\ ``Multiple CBDC (MCBDC) Bridge,'' The Bank for International
Settlements, February 19, 2021, https://www.bis.org/about/bisih/topics/
cbdc/mcbdc_bridge.htm.
Because China is the largest economy with the most progress in CBDC
development, it is likely to have an outsized influence in the
multilateral organizations that will recommend CBDC prototypes and
standardization. This fits squarely with the CCP's strategic approach:
gain the first foothold in a nascent technology and dominate its
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proliferation as the rest of the world adopts it.
The long-term risk for an alternative cross-border payment system
to arise should not be dismissed. U.S. adversaries are not the only
nation-states seeking to remove the centrality of the dollar to the
global economy. Even central banks in U.S. ally countries are looking
to lessen the world's dependence on the dollar. In 2019, the governor
of the Bank of England suggested that the international community
should construct a new ``synthetic hegemonic currency'' through a
network of CBDCs to facilitate international trade in the long run.\29\
The mCBDC bridge seems to be piloting that idea.
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\29\ Mary Carney, ``The Growing Challenges of Monetary Policy in
the Current International Monetary and Financial System'' (Jackson Hole
Symposium, Jackson Hole, Wyoming, August 23, 2019), https://
www.bankofengland.co.uk/-/media/boe/files/speech/2019/the-growing-
challenges-for-monetary-policy-speech-by-mark-carney.pdf.
If the future global financial system is built on the backbone of
CBDC infrastructure, then the nation with the most CBDC expertise is
likely to influence how the system is run. And although the U.S.
Federal Reserve is conducting some initial CBDC research and plans to
release a discussion paper on the topic soon,\30\ China is clearly
leading in this arena. The People's Bank of China has been researching
digital currency since 2014 \31\ and has released over $300 million
worth of eCNY to the public in pilots around the country.\32\ Those
pilot transactions are likely generating immense data for the Chinese
Government to analyze and learn from.
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\30\ Lael Brainard, ``Private Money and Central Bank Money as
Payments Go Digital: An Update on CBDCs'' (Consensus by CoinDesk 2021
Conference, Washington, DC, May 24, 2021), https://
www.federalreserve.gov/newsevents/speech/brainard20210524a.htm.
\31\ Fanusie and Jin, ``China's Digital Currency: Adding Financial
Data to Digital Authoritarianism.''
\32\ ``Spending with China's Digital Yuan Around $300 Million, PBOC
Says,'' Reuters, November 2, 2020, https://www.reuters.com/article/
china-currency-digital/spending-with-chinas-digital-yuan-around-300-
million-pboc-says-idUSL1N2HO0B1.
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the oneness of data
Data certainly is becoming the new electricity, but not just in
China. Big data, machine learning, artificial intelligence, and the
Internet of things are driving technological innovation in most
advanced economies. The world is becoming more, not less, dependent on
data moving through the Internet. This trend is leading to a oneness of
data that would appear to power almost every aspect of our public and
private lives.
The prospect of living in a world plugged into ubiquitous and
seemingly omniscient data can seem scary, and for good reason. The
risks of undermining privacy, strengthening authoritarianism, and
increasing digital financial crime are great as more of our life
activity operates online. There are also various social spillover
effects from our culture getting more fixated and dependent on our
devices, screens, and data feeds.
But at a time when advanced economies appear to be near the
precipice of a fully digitized existence, now may be the best time for
the United States to assert rules of the road for the increasing role
of data in our lives. The first step is to accept the inevitability of
this technological advancement in data transmission, while managing its
societal shape. China's preemptive strategy to gain prominence in
blockchain-based broadcast transmission of data is a wake-up call for
U.S. innovation. In order to chart a way forward that is consistent
with American values, it is essential to understand the long history of
data revolutions.
Data is simply information recorded and conveyed in written form.
One of the world's first data revolutions occurred around 3000 BCE when
the ancient Egyptians began writing on papyrus. That plant-based
papyrus technology allowed for ink to be retained more easily on a
portable writing surface compared to writing on walls, stone, and clay.
Later, the Egyptians began using parchment made from animal skins as a
writing tool. Parchment was more durable than papyrus and it became the
medium that members of the early Jewish, Christian, and Islamic
traditions used to record and spread the Abrahamic message.\33\ The
Chinese are credited with inventing paper from plant fibers and cloth
around the second century CE, but for hundreds of years, it was used
very selectively and the art of papermaking was a closely guarded
skill.\34\ It wasn't until the rising Islamic civilization in the
eighth century CE learned of paper from the Chinese that papermaking
received assembly-line-like production. Thus, the scholars of the
Golden Age of Islam wrote and reproduced hand-copied manuscripts on
paper to transmit the leading scientific and literary knowledge of
their time.\35\ However, interestingly, the Chinese were the first to
invent paper money during the Tang Dynasty between the 7th and 10th
centuries CE.\36\ Papermaking spread throughout areas under Muslim
control and to Europe by the 11th century through the Moorish influence
in Spain.\37\ Within a few hundred years, paper mills were common
throughout Europe. It is important to note that initially, some
European rulers resisted paper, seeing it as an unworthy,
heathen-derived form of data transmission, especially unsuitable for
Christian religious texts, which continued to use parchment.\38\ The
civilizational tables turned with Johannes Gutenberg's printing press,
invented in Germany in 1440. European church leaders initially rejected
the new technology, with clergy in France claiming that books
duplicated with movable type were ``work of the Devil.''\39\ However,
soon, printing press technology spread throughout Europe. It can be
argued that the printing press was the most revolutionary technology
the world has seen, perhaps rivaled by the steam engine. More books
were printed in the 50 years after the printing press than in the
previous 1,000 years.\40\ It enabled a flourishing of scientific,
religious, and philosophical knowledge. Data transmitted through the
printing press eventually sparked the Protestant Reformation and seeded
the Renaissance. But it was banned by the Ottoman Empire for hundreds
of years, which some say accounted for much of Islamic civilization's
scientific and economic decline.\41\
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\33\ Keith Houston, ``Hidebound: The Grisly Invention of
Parchment,'' Longreads, December 1, 2016, https://longreads.com/2016/
12/01/hidebound-the-grisly-invention-of-parchment/.
\34\ Neathery Batsell Fuller, ``A Brief History of Paper,'' St.
Louis Community College, July 2002, http://users.stlcc.edu/nfuller/
paper/.
\35\ Holland Cotter, ``SHELF LIFE; The Story of Islam's Gift of
Paper to the West,'' The New York Times, December 29 2001, https://
www.nytimes.com/2001/12/29/books/shelf-life-the-story-of-islam-s-gift-
of-paper-to-the-west.html.
\36\ Szczepanski, Kallie. ``The Invention of Paper Money in
China.'' ThoughtCo, https://www.thoughtco.com/the-invention-of-paper-
money-195167.
\37\ Fuller, ``A Brief History of Paper.''
\38\ Fuller, ``A Brief History of Paper.''
\39\ Tom Wheeler, From Gutenberg to Google: The History of Our
Future (Washington, DC: Brookings Institution Press, 2019), 42.
\40\ Keith Houston, The Book: A Cover-to-Cover Exploration of the
Most Powerful Object of Our Time (New York: W.W. Norton and Company,
2016), 128.
\41\ Benjy Cannon, ``A Brief History of Disruptive Innovation, Part
I,'' Disruptive Competition Project, August 7, 2013, https://
www.project-disco.org/competition/080713-a-brief-history-of-disruptive-
innovation-part-i/#.V081avkrLcs.
Elements within societies often initially rejected a new technology
of data transmission due to the concern that it was associated with
unworthy individuals or subversive activity. Special interests
typically focused on the new technology's downsides, especially the
displacement it could cause to established institutions. Many scribes,
for example, were disintermediated by the printing press. Today, many
people criticize the proliferation of Bitcoin and other
cryptocurrencies due to their easy exploitation by criminal elements.
But the broadcast data capability of blockchain is not an easy function
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to dismiss.
Historically, new data transmission technology, when it was better
at recording, preserving and spreading information, and in the long
run, more cost efficient, has always won out over legacy systems.
Blockchain technology has similar potential. The ``broadcast
transmission'' of the Internet is likely to be the world's next data
revolution. This new capability, if it scales up for mass use, would
allow for different parties and different technical systems to operate
off of the same data, simultaneously. The ability to harness data in
unprecedented ways will likely spur new inventions and new occupations,
just as the original Internet did. And it eventually would eliminate
certain applications, jobs, and business lines. But this data
revolution is in its infancy. The United States has time to compete in
this technology and influence its development in an American way.
american values and the oneness of data
The oneness of data does not have to become a tool of tyranny and
dehumanization if it is molded by the principles of America's founding.
U.S. policymakers, business people, and other stakeholders must
consider a framework for participating in this data revolution in a way
that fits with the U.S. Constitution. Rising data ubiquity should be
anchored with the Bill of Rights. For example, many former U.S.
officials are arguing for a digital dollar.\42\ If the United States is
to develop its own central bank digital currency system, it must be
constructed so that the government's access to data does not violate
the Fourth Amendment's protection against unreasonable search and
seizure of one's ``person, houses, papers, and effects.''\43\
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\42\ Michael B. Greenwald and Michael A. Margolis, ``Why a Digital
Dollar Is Good for the World'' (Harvard Kennedy School Belfer Center,
June 4, 2021), https://www.belfercenter.org/publication/why-digital-
dollar-good-world; Hon. J. Christopher Giancarlo, ``Building a Stronger
Financial System: Opportunities of a Central Bank Digital Currency,''
Statement to the Subcommittee on Economic Policy, Committee on Banking,
Housing, and Urban Affairs, U.S. Senate, June 9, 2021, https://
www.banking.senate.gov/imo/media/doc/Giancarlo%20Testimony
%206-9-21.pdf.
\43\ ``Fourth Amendment: Search and Seizure,'' Constitution Center,
https://constitutioncenter.
org/interactive-constitution/amendment/amendment-iv.
Fourth Amendment protection can be threatened by transactions
involving digital assets due to their ``always on,''\44\ trackable
nature. Complete access to real-time financial transaction data is not
possible in the current banking system where there is no single
database (government or otherwise) of everyone's digital transactions.
If the United States launches a CBDC, permission to access CBDC data
would need to be strictly controlled and compartmentalized so that the
government cannot search one's digital person without legal probable
cause. And CBDC architects would need to design the system so that
personal data discovered even under subpoena power is expunged from
monitoring and analysis when an individual is no longer considered a
legitimate suspect in wrongdoing. This requires smarter information
systems than we have in financial regulatory infrastructure today, but,
in principle, could borrow from practices in the intelligence community
that mask identities of U.S. persons when disseminating FISA-derived
intelligence reporting.\45\
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\44\ Tony McLaughlin, ``The Regulated Internet of Value,''
Citibank, June 2021, https://www.
citibank.com/tts/insights/articles/article191.html.
\45\ Office of Civil Liberties, Privacy, and Transparency, Office
of the Director of National Intelligence, Protecting U.S. Person
Identities in Dissemination Under the Foreign Intelligence Surveillance
Act (November 2017), https://www.dni.gov/files/documents/icotr/CLPT-
USP-Dissemination-Paper---FINAL-clean-11.17.17.pdf.
As the U.S. Government and private sector seek to develop
decentralized applications powered by broadcast transmission data, both
must think through potential scenarios where new technological
capabilities would infringe upon key constitutional rights. It will be
challenging to build forward-looking guidelines to manage data ubiquity
when most innovations are unforeseen. But this is why the United States
must advance in blockchain technology research and experimentation. The
way to anticipate the risks from a new technology's spread is to pilot
its deployment and learn from it slowly, just as the United States did
in developing the Internet in the 1970s and 80s. Below are
recommendations for how the United States can lead the next data
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revolution.
The National Science Foundation (NSF) should fund a
Decentralized Internet Sandbox for Colleges and Universities (DISCU).
The NSF should fund the development of an interoperable blockchain
ecosystem where university students and faculty in the United States
can build decentralized applications. This would require two phases.
The first would be to develop a common architecture across institutions
for programmers to build blockchain protocols that talk to one another.
The second would be to create and test applications in this academic-
only sandbox environment. I found the practical need for such an
environment when I taught a college course on blockchain technology at
Morgan State University's business school in 2018.\46\ My students
developed and pitched ideas for decentralized applications to solve
long standing business efficiency problems on campus. The class came up
with several intriguing business propositions. However, there was no
easily accessible platform for students to test out and deploy their
ideas, especially since they were not trained blockchain programmers. A
nation-wide, academic-only sandbox would provide a low-risk environment
for blockchain-related research and collaboration. It would enable
students and professors from around the country to work in an
interoperable programming environment, share best practices, and
iterate on projects. As the functionality of projects on the DISCU
system matures, universities could propose to move elements of the
sandbox into the open Internet. The aim should be to create open
architecture for the world to use, just like the Internet, and not
infrastructure wholly owned or controlled by one nation or any other
entity. This process would take several years, but would be a critical
investment in digital infrastructure for future generations.
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\46\ Morgan State's First Blockchain Course Finds Use Cases on
Campus, Stephen Babcock, Technical.ly, December 5, 2018, https://
technical.ly/baltimore/2018/12/05/morgan-state-blockchain-course/.
The Small Business Administration, through its Small Business
Innovation Research (SBIR) program, should offer grants to U.S.
businesses for fintech R&D that supports both privacy and national
security concerns. The scope of U.S. digital finance innovation is
likely to correlate to the extent to which transactions can conform to
global regulatory standards for anti-money laundering and counter-
terrorist financing. Financial platforms that operate fully
pseudonymously are unlikely to scale to mass use due to the regulatory
considerations of financial crime risks that come from pseudonymous
transactions. And at the same time, as digital transactions attached to
personal identification grow in volume and in their relevance to the
economy, data privacy is likely to become more vulnerable to
exploitation and abuse. Recently, the U.S. Treasury's Financial Crime
Enforcement Network (FinCEN) announced it would host an innovation
workshop for tech firms to present privacy-preserving technologies that
could secure privacy and deter illicit financing.\47\ This is a good
step to help inform financial regulators about the current innovations
available to preserve privacy, but more investment is actually needed
to develop such solutions. The SBIR's competitive, private-sector-
focused award system would be a fitting way to incentivize small
businesses to take on this important digital challenge.\48\
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\47\ ``FinCEN to Host Innovation Hours Program Workshop on Privacy
Enhancing Technologies,'' FinCEN, press release, May 26, 2021, https://
www.fincen.gov/news/news-releases/fincen-host-innovation-hours-program-
workshop-privacy-enhancing-technologies.
\48\ Small Business Innovation Research and Small Business
Technology Transfer Programs, About: The SBIR and STTR Programs,
https://www.sbir.gov/about.
The United States Federal Reserve should expand its research
of central bank digital currencies. Digital currency experts working on
the Fed's CBDC research have spoken to Congress about a variety of CBDC
models and called for more multidisciplinary research.\49\
Cybersecurity is likely to be a key concern. But evaluating the
appropriateness of a digital dollar should not just be a technical
affair. The United States must also consider many complex public policy
and social questions relating to privacy, financial crime, and
financial access. Instead of just one Fed study, it would make sense
for various branches to conduct CBDC research, each focusing on a
specific policy or technical dimension of digital currencies. More
extensive Fed research will help U.S. public and private sector
stakeholders gain expertise needed to navigate the rise of CBDCs,
whether the United States creates a digital dollar or not.
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\49\ Dr. Neha Narula, ``Building a Stronger Financial System:
Opportunities of a Central Bank Digital Currency,'' Statement to the
Subcommittee on Economic Policy, Committee on Banking, Housing, and
Urban Affairs, U.S. Senate, June 9, 2021, https://
www.banking.senate.gov/imo/media/doc/Narula%20Testimony%206-9-21.pdf.
The Securities and Exchange Commission (SEC) should give more
regulatory clarity around digital assets and blockchain technology.
While U.S. anti-money laundering requirements for cryptocurrency
exchanges have been clear since FinCEN issued guidance in 2013,\50\
securities regulation has been murky to many U.S. blockchain
innovators. The threat of SEC enforcement actions \51\ has lessened
much of the fraudulent and unregistered securities activity that has
been rampant in the crypto space, but it also has likely discouraged
many legitimate innovative U.S. fintech projects and encouraged some
American blockchain entrepreneurs to relocate abroad. To compete in the
digital economy race with China, the United States must foster a more
innovative fintech environment. It might even be possible to transfer
the technical benefits of blockchain technology into conventional
finance by tokenizing the regulated securities market.\52\ If U.S.
securities regulation does not evolve to account for the new technical
and entrepreneurial capabilities offered by blockchain technology and
broadcast data transmission, the United States could be hamstrung in a
data revolution that is only just beginning.
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\50\ ``FinCEN Issues Guidance on Virtual Currencies and Regulatory
Responsibilities,'' FinCEN, press release, March 18, 2013, https://
www.fincen.gov/news/news-releases/fincen-issues-guidance-virtual-
currencies-and-regulatory-responsibilities.
\51\ Tom Robinson, ``Crypto Enforcement Actions by U.S. Regulators
Reach $2.5 Billion,'' Elliptic, June 21, 2021, https://www.elliptic.co/
blog/https/www.elliptic.co/blog/crypto-enforcement-actions-by-us-
regulators-reach-2.5-billion.
\52\ McLaughlin, The Regulated Internet of Value.
______
Question Submitted for the Record to Yaya J. Fanusie
Question Submitted by Hon. Ron Wyden
Question. The Chinese Government imposes strict capital controls on
its citizens, which may cause some who would otherwise rather stay
within the rules to use illicit means such as trade-based money
laundering (TBML), sometimes through cryptocurrencies, to move money
out of China, facilitating illicit finance and organized crime in the
United States and Latin America. It seems like there is room for us to
cooperate here, since both countries have an interest in stopping TBML
and other similar crimes.
Is there some way that we can suggest that we work together?
Answer. No matter where criminals are located, they will exploit
jurisdictions with weak financial regulations. So, the most important
way for the U.S. and China to cooperate on countering illicit activity
associated with cryptocurrencies is to help close the gaps across
jurisdictions where cryptocurrency businesses are poorly regulated.
This should happen mainly through the Financial Action Task Force
(FATF), the intergovernmental body that sets global standards for anti-
money laundering and combating the financing of terrorism (AML/CFT).
There already is a precedent for U.S.-Chinese collaboration on this
issue. The United States prioritized the development of global AML/CFT
standards for the virtual asset industry during the U.S. presidency of
FATF from mid-2018 and mid-2019.\1\ China served as FATF vice president
at that time.\2\ FATF released its landmark formal guidance on virtual
assets in June 2019.\3\ China then succeeded the United States for the
FATF presidency from 2019 to 2020 and FATF continued to push
jurisdictions to strengthen virtual asset regulations.\4\ But despite
this progress, FATF is still struggling to address some of the
innovations in the virtual asset space that challenge longstanding
regulatory frameworks. In particular, jurisdictions need clearer
guidance on how to account for rising activity around non-custodial
wallets, decentralized finance (DeFi) protocols, and decentralized
exchanges.
---------------------------------------------------------------------------
\1\ ``Objectives for the FATF During the U.S. Presidency (2018-
2019).'' Financial Action Task Force, June 2018, www.fatf-gafi.org/
publications/fatfgeneral/documents/objectives-2018-2019.html.
\2\ ``FATF Presidents Since 1989.'' Financial Action Task Force,
www.fatf-gafi.org/pages/fatfpresidentssince1989.html.
\3\ ``Guidance for a Risk-Based Approach to Virtual Assets and
Virtual Asset Service Providers.'' Financial Action Task Force, June
21, 2019, www.fatf-gafi.org/publications/fatfrecommendations/documents/
guidance-rba-virtual-assets.html.
\4\ ``Xiangmin Liu's End of Presidency Statement.'' Financial
Action Task Force, www.fatf-gafi.org/publications/fatfgeneral/
documents/chinese-presidency-outcomes.html.
China has taken a hardline approach to the cryptocurrency industry,
banning cryptocurrency trading activity in its borders.\5\ Some
blockchain analysis shows that Chinese illicit finance in virtual
assets has decreased in recent years, probably due to this
crackdown.\6\ But banning the cryptocurrency industry has not been the
U.S. approach, nor should it be. I coauthored a study in 2018 that
showed that the United States' early and clear AML regulatory guidance
is likely to have accounted for much lower percentages of illicit
cryptocurrency transactions in the United States compared to other
cryptocurrency-active jurisdictions.\7\ Although both countries have
very different regulatory approaches, they should share with other
nations, through FATF, lessons learned from their successes in reducing
illicit cryptocurrency crime over time.
---------------------------------------------------------------------------
\5\ MacKenzie Sigalos, ``China's War on Bitcoin Just Hit a New
Level with Its Latest Crypto Crackdown.'' CNBC, July 7, 2021,
www.cnbc.com/2021/07/06/china-cracks-down-on-crypto-related-services-
in-ongoing-war-on-bitcoin.html.
\6\ Samuel Haig, ``China Crypto Crime: Still `Top Ranked' for
Illicit Activity, but Crime Is Falling.'' Cointelegraph, August 4,
2021, www.cointelegraph.com/news/china-crypto-crime-still-top-ranked-
for-illicit-activity-but-crime-is-falling.
\7\ Yaya J. Fanusie, and Tom Robinson. ``Bitcoin Laundering: An
Analysis of Illicit Flows into Digital Currency Services.'' Foundation
for Defense of Democracies, January 10, 2018, www.fdd.org/analysis/
2018/01/10/bitcoin-laundering-an-analysis-of-illicit-flows-into-
digital-currency-services/.
On a more tactical level, China and the U.S. could collaborate more
effectively on law enforcement operations involving drug money
laundering. According to the U.S.-China Economic and Security Review
Commission, Chinese law enforcement cooperation with the United States
has improved in recent years, but is still lacking at the ground
level.\8\ In the appendix to a recent report on illicit fentanyl from
China, the commission outlined the step-by-step process in which
Chinese brokers typically launder funds for Mexican drug cartels.\9\
U.S. and Chinese drug enforcement authorities should study this process
and assess how launders might be adapting this typology with virtual
assets and cryptocurrency exchanges.
---------------------------------------------------------------------------
\8\ Lauren Greenwood, ``Illicit Fentanyl from China: An Evolving
Global Operation.'' U.S.-China Economic and Security Review Commission,
August 24, 2021, www.uscc.gov/research/illicit-fentanyl-china-evolving-
global-operation.
\9\ Ibid.
______
Prepared Statement of Mary Gallagher, Ph.D., Amy and Alan Lowenstein
Professor of Democracy, Democratization, and Human Rights, University
of Michigan
Chair Warren, Ranking Member Cassidy, distinguished members of the
committee, thank you for the opportunity to appear before you today to
discuss China's working conditions, gender discrimination at the
workplace, and ongoing problems in the implementation and enforcement
of China's labor and employment laws.
As the director of the International Institute at the University of
Michigan (UM), and the former director of the Lieberthal-Rogel Center
for Chinese Studies, I would like to acknowledge the important support
that I personally have received and that our centers at UM have
received from the United States government as a grantee of the
Department of Education's title VI awards to promote expertise in area/
international studies and world languages. As a two-time recipient of a
Fulbright award, I am deeply aware of the importance of area studies
knowledge, language expertise, and time in the field to complete
academic research. At the University of Michigan, we have five National
Resource Centers (title VI), and six centers are recipients of the
Foreign Language and Area Studies (FLAS) fellowships for language
training. We train the next generation of scholars, area specialists,
foreign policy experts with this funding. I hope the USG will continue
to invest in training American students and scholars in area studies
and world languages. It is a national security imperative that we
maintain and cultivate this expertise.
My testimony will discuss these key findings:
Over the course of the last 2 decades, China's workplace laws
and policies have expanded considerably to improve employment security
and access to social insurance. Since 2009, the Chinese Government has
expanded basic pension and medical insurance to both rural and urban
residents.
However, laws and policies ``on the books'' are weakly
enforced. They often leave out workers from rural areas, informal
workers, and workers in the new digital economy. New social insurance
policies based on residency, not employment, are shallow and
insufficient.
Income, health, and educational inequalities between rural and
urban citizens threaten China's shift to a new development model that
is built on domestic demand and consumption. Short-term gain by cutting
employers' costs risks long-term damage to China's ambitions to become
a technologically advanced and innovative economy.
An ongoing crackdown on civil society and social activism has
impaired Chinese workers' ability to protect themselves. Labor NGOs,
lawyers, and other social activists have been targeted in waves of
crackdown to silence grievances and social mobilization.
In light of new concerns about China's demographic challenges,
the Chinese Government has relaxed its restrictive population policies.
Women are now encouraged to have two children, but face increasing
discrimination at the workplace and lack access to affordable early
child care.
There is ample evidence that in addition to forced detention
in reeducation camps, China's Muslim minorities are also being forced
to work in factories or other worksites located nearby. Forced labor in
the Xinjiang Uyghur Autonomous Region has been linked to global supply
chains.
background on workplace protections and social security in china
Nine years ago, nearly to the day, I gave testimony to a hearing on
Working Conditions and Workers Rights in China for the Congressional
Executive Commission on China. Rereading that testimony as preparation
for today provided me with a stark reminder of how much China has
changed since 2012. It is a wealthier and more powerful country, but it
is also far more closed and politically repressive than it was then.
The new labor and social security laws of 2008 and 2010 have failed to
deliver their promises of increased employment security and closing
income and social security gaps between rural and urban workers. Social
activism around workplace protections, better conditions and wages has
also been nipped firmly in the bud. Lawyers and labor activists have
been detained. Student activists have been harassed and tormented.
Nascent civil society organizations and legal aid centers have
shuttered. Social activism now brings accusations of treasonous
behavior. The nationalistic administration of Xi Jinping has painted
these experiments as foreign attempts to destabilize China.
The previous administration of Hu Jintao and Wen Jiabao championed
policies of redistribution and social protection. From 2008 until 2012,
China's National People's Congress passed several laws to enhance
workplace rights, employment security, and access to social insurance
and to simplify the dispute resolution system for labor disputes. The
Hu-Wen administration also expanded China's social insurance system by
developing new pension and medical insurance programs for rural
residents and expanding urban programs for the unemployed and those
working in the informal sectors. Coupled with the new legal protections
in the 2008 Labor Contract Law, these laws and policies significantly
expanded the rights ``on the books'' for Chinese workers. For the first
time, the Chinese government began to offer social welfare to its rural
residents who at the time still made up over 60 percent of the entire
population.
The Hu-Wen administration was also relatively tolerant of social
mobilization that advanced their policy goals. There was much greater
political openness toward social and legal activism by civil society,
including labor NGOs, cause lawyers, and university-run legal aid
clinics. The Chinese media was often openly sympathetic toward the
plights of workers and covered stories about industrial unrest,
corporate malfeasance, and workplace disasters. To be clear, repression
and crackdowns still occurred, but in comparison to today's China,
there was much greater latitude for civil society actors to advocate
for change and to use social mobilization and media attention to gain
public support. In sum, there were both top-down and bottom-up levers
to improve China's income equality, investments in human capital and
social security (Gallagher 2017).
how china's weak laws and social security net threaten
its new development model
This period of relative political openness and legislative activism
ended as Xi Jinping took office in 2013. By the following year, Xi's
government had launched a series of crackdowns on social activism,
including the 2014 crackdown on labor activism, the July 2015 crackdown
on lawyers, and the 2018 crackdown on activist students. The 2008 Labor
Contract Law has been weakly enforced such that the main goals of the
law, to reduce informality and improve workers' access to social
insurance, have been completely thwarted. Rozelle and Boswell (2021)
find that informal employment increased from 144 million workers in
2013 to 227 million workers in 2017. At the same time, formal
employment has fallen slightly from 181 million workers to 176 million
workers. Many of the informal workers are in China's burgeoning digital
and platform economies, such that the most dynamic part of the Chinese
economy is not held to its legal standards for workplace conditions
(Lei 2021; Liu and Friedman 2021).
These developments should be of great concern to the Xi government
because these policy failures undermine the new economic development
model championed by Xi Jinping and his administration. This new
economic model is premised on boosting domestic consumption and relying
on China's internal markets to foster new economic growth that is less
reliant on both government investment and export markets (Blanchette
and Polk 2021). It is also premised on human capital improvements and
education inclusion such that the Chinese workforce can withstand the
transition away from labor-intensive manufacturing toward more skills-
intensive/capital intensive manufacturing and services. These goals
have only intensified in importance with the downturn in U.S.-China
bilateral relations and the 2018 trade conflict.
The academic research on the advancement of informality
demonstrates that the Chinese workforce continues to be bifurcated
between the relatively well-off and secure formal workforce in cities
and the less well-off, less secure informal workforce in rural areas
and among the rural workforce temporarily residing in cities.
Informality is also a problem for older workers and for workers in
China's dynamic digital and platform economies. This problem of
informality continues and deepens despite central government policy
pronouncements for nearly 20 years to close the gap (Rozelle and
Boswell 2021; Yang 2021; Rozelle and Hell 2020; Gallagher et al. 2015;
Kuruvilla, Lee and Gallagher 2011).
Research by Scott Rozelle and his research team has also found that
work-related inequality and the need for long-term temporary migration
by parents has also left a generation of left-behind children who face
significant educational and health inequalities, which will have knock-
down effects on the next generation of rural residents. So little of
these problems are known outside of China that Rozelle and Hell's book
on the topic is entitled ``Invisible China'' (Rozelle and Hell 2020).
In addition to the inequalities between China's urban and rural
populations, these challenges thwart the Chinese Government's goal of
using urbanization to boost economic growth and consumption. Rural
migrants overwhelmingly do not have the education or skills to find
formal employment in China's cities (Rozelle and Boswell 2021). Yet
formal employment is the key to accessing China's much more generous
employment-based social insurance programs that mostly are out of reach
for China's rural populations (Yang 2021; Huang 2015). Formal
employment is also the key to legal residency in cities, which can
ensure access to better educational opportunities for the children of
migrant workers and more reliable health care. Permanent legal
residency in cities, through hukou transfer, is also the key to
intergenerational social mobility. And yet, despite the importance of
formal employment to China's future development, the number of people
employed in the formal sector has stagnated while informal employment
is growing rapidly.
china's demographic challenges and rising gender discrimination
During the first 3 decades of China's ``reform and opening'' (1978-
2008), rapid economic growth was fueled in part by favorable
demographics. China's working population was large in proportion to
both dependents and the elderly. It was also overwhelmingly rural and
poor. Once internal migration restrictions were lifted, rural migrants
could leave the countryside for China's booming cities and development
zones. Year after year, hundreds of millions of rural migrants poured
into cities and kept wages extremely low. Labor-intensive
manufacturing, global trade liberalization, and supply chain
consolidation with other Asian economies produced a Chinese growth
miracle. This miracle would not have been possible with China's rural
migrant workforce (Roberts 2020).
By 2021, China's demographic dividend had disappeared. Population
aging and a rapid decline in the birth rate, accelerated by China's
restrictive ``one child policy,'' have now produced an unprecedented
demographic crisis and imbalances of both age and sex. Due to these
restrictive population policies and a traditional preference for male
children, boys continue to be born at a far higher rate than girls
(Ljunggren 2021). China's demographic structure, especially its rapid
aging and declining fertility, pose significant challenges to its
future growth and to the sustainability of its pension and social
insurance systems.
To address these problems, the Chinese Government lifted the one
child policy in 2016, allowing each family to have up to two children.
After it became clear that this relaxation did not arrest the decline
in fertility, in 2021 the Chinese Government further expanded the birth
quota to three children. It also pledged to improve child care and
workplace policies for families. However, research on China's
demographic crisis and its impact on women, both as mothers and
workers, has shown that these more generous population policies are
unlikely to reverse China's extremely low fertility rate. Gender
discrimination at the workplace, expensive and scarce child care,
particularly for infants and toddlers, and economic concerns about the
costs of raising children to adulthood all contribute to young women's
reluctance to have children (Zhang, Hannum, and Wang 2008; Zhou 2019;
Wallace 2020).
As with other labor and employment issues, social mobilization and
activism around gender issues have become more sensitive during the Xi
administration with several crackdowns on activists and movements (Hong
Fincher 2020). Most recently, the online accounts of groups advocating
for LGBT rights in China were removed from Chinese social media
platforms. In April 2021, accounts of women activists and organizations
were also removed. Xi Jinping has put greater emphasis on the role of
women as wives and mothers to encourage family values and greater
propensity to marry and have children (Deng 2021). It remains to be
seen whether the government will also develop concrete policies to
supply early child care that is affordable and to deter employers from
rampant discrimination against women of child-bearing age.
forced labor in the xinjiang uyghur autonomous region
The problem of forced labor in the Xinjiang Uyghur Autonomous
Region (XUAR) is a separate and distinct problem. The forcible
detention of China's Muslim minorities in reeducation and ``vocational
training'' camps has been well documented by academic researchers and
the media (Smith Finley 2019; Roberts 2020; Milward and Peterson 2020).
Both the detentions and the related occurrence of forced labor are
policy choices to assimilate China's Muslim population (Lehr and
Bechrakis 2019). The government envisions participation in factory or
agricultural work as a mechanism to foster assimilation and to reduce
religiosity among its Muslim citizens. The government has targeted a
wide range of religious and cultural practices as indications of
extremism or propensity for extremism. Engaging in these practices are
reason enough to be involuntarily detained in the camps. Engaging in
work, Chinese language study, and political indoctrination are all part
and parcel of a campaign to dilute Uyghur cultural identity and to
assimilate Muslim citizens into the dominant Han majority (Zenz 2019).
As with other forms of forced labor that have been used by the Chinese
Communist Party for decades, labor is seen as an important component of
an individual's transformation into a new kind of citizen--patriotic,
obedient, and hardworking for the collective goals of the nation.
Despite foreign condemnation of these practices and fears of cultural
genocide, the Chinese Government has defended these policies as
necessary to reduce threats of domestic terrorism.
Forced labor in cotton and solar panel production in XUAR has
implicated the supply chains of many multinational corporations (Lehr
and Wu 2021). Some forced companies have found themselves caught
between external condemnations of the Xinjiang camps/forced labor and
Chinese public opinion that is overtly supportive of the Chinese
Government policies. When H&M, a large Swedish apparel company,
expressed concern about the use of forced labor in cotton production in
Xinjiang, it faced a Chinese consumer boycott, was dropped from some
app stores and online retail platforms, and rejected by some Chinese
celebrities who cut ties with the brand (BBC 2021).
The forced labor issue in Xinjiang underlines important challenges
that foreign governments and corporations must increasingly confront.
Both the camps themselves and related forced labor demonstrate the
widening gap in the conception of human rights between the Chinese
Government and much of the rest of the world. Involuntary and
extralegal detention of China's own citizens on a mass scale is now
justified by the government, and apparently, supported by a wide swathe
of Chinese society. Corporations must consider the reputational costs
of producing in China and the economic costs of arousing the ire of the
Chinese government and public.
recommendations
In China's current political environment, foreign support for
Chinese civil society can backfire because foreign support is construed
as evidence of an external plot to foment social instability. It is
also increasingly difficult for journalists and academic researchers to
have access to China. However, there are steps that can and should be
taken to support our values and promote pluralism and inclusion.
The United States should invest in our infrastructure and in
our workforce to compete in the global economy. This includes education
and a social security system that provides for illness, injury, and old
age. Access to affordable childcare is also essential. While China
falls short in many of these areas now, it has already made impressive
investments in its infrastructure and technological base. In labor and
social policy, it has at least developed the legal and policy framework
to make future improvements. We ignore these achievements at our peril.
Support freedom of expression and freedom of association,
domestically and abroad.
As supply chains in China become more fraught with risks, of
both rampant human rights violations in Xinjiang, and national security
risks elsewhere, the United States should invest in trade partnerships
with other countries that share similar political values and
commitments to human rights and labor rights.
Citations
``H&M: Fashion Giant sees China sales slump after Xinjiang Boycott.''
BBC News, July 2, 2021. Accessed July 12, 2021, https://
www.bbc.com/news/business-57691415.
Blanchette, Jude and Andrew Polk. ``Dual Circulation and China's New
Hedged Integration Strategy.'' Center for Strategic and
International Studies, https://www.csis.org/analysis/dual-
circulation-and-chinas-new-hedged-integration-strategy.
Deng, Chao and Liyan Qi. ``China Stresses Family Values as More Women
Put off Marriage, Childbirth.'' The Wall Street Journal, April
19, 2021.
Gallagher, Mary E. Authoritarian Legality in China: Law, Workers, and
the State. New York: Cambridge University Press, 2017.
Gallagher, Mary, John Giles, Albert Park, and Meiyan Wang. ``China's
2008 Labor Contract Law: Implementation and Implications for
China's Workers.'' Human Relations 68, no. 2 (February 2015):
197-235. https://doi.org/10.1177/0018726713509418.
Hell, Natalie, Rozelle, Scott. Invisible China: How the Urban-Rural
Divide Threatens China's Rise. United Kingdom: University of
Chicago Press, 2020.
Hong Fincher, Leta. Betraying Big Brother: The Feminist Awakening in
China. United Kingdom: Verso Books, 2020.
Huang, Xian 2015. ``Four Worlds of Welfare in China: Understanding
Subnational Variation in Chinese Social Health Insurance.'' The
China Quarterly, Vol. 222 (June): 449-474
Human Rights Watch. `` `Take Maternity Leave and You'll Be Replaced':
China's Two-Child Policy and Workplace Gender Discrimination.''
Human Rights Watch, 2021, https://www.hrw.org/report/2021/06/
01/take-maternity-leave-and-youll-be-replaced/chinas-two-child-
policy-and-workplace.
Kuruvilla, Sarosh, Lee, Ching Kwan, Gallagher, Mary E. From Iron Rice
Bowl to Informalization: Markets, Workers, and the State in a
Changing China. United States: Cornell University Press, 2011.
Lei, Ya-Wen. ``Delivering Solidarity: Platform Architecture and
Collective Contention in China's Platform Economy.'' American
Sociological Review 86, no. 2 (April 2021): 279-309.
Ljunggren, Borje. ``The Chinese Population Implosion: An Unparalleled
Demographic Challenge with Global Consequences.'' The Ash
Center for Democratic Governance and Innovation, Harvard
Kennedy School, 2021, https://ash.harvard.edu/publications/
chinese-population-implosion-unparalleled-demographic-
challenge-global-consequences.
Lehr, Amy K. and Mariefaye Bechrakis. ``Connecting the Dots in
Xinjiang: Forced Labor, Forced Assimilation, and Western Supply
Chains.'' CSIS Human Rights Initiative, October 2019.
Lehr, Amy K. and Henry C. Wu. ``Addressing Forced Labor in the Xinjiang
Uyghur Autonomous Region: Collective Action to Develop New
Sourcing Opportunities.'' CSIS Human Rights Initiative,
February 2021.
Liu, Chuxuan and Eli Friedman. ``Resistance Under the Radar:
Organization of Work and Collective Action in China's Food
Delivery Industry.'' The China Journal 86 (2021): 68-89,
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Roberts, Dexter. The Myth of Chinese Capitalism: The Worker, the
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Roberts, Sean R. The War on the Uyghurs: China's Internal Campaign
Against a Muslim Minority. United Kingdom: Princeton University
Press, 2020.
Rozelle, Scott and Matthew Boswell. ``Complicating China's Rise: Rural
Underemployment.'' The Washington Quarterly, 44:2 (2021): 61-
74. DOI: 10.1080/0163660X.2021.1932097
Smith Finley, Joanne. ``Securitization, insecurity and conflict in
contemporary Xinjiang: Has PRC counter-terrorism evolved into
state terror?'' Central Asian Survey, 38:1 (2019): 1-26. DOI:
10.1080/02634937.2019.1586348
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Policies in Urban China and the Implications for Working
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52. https://doi.org/10.1177/02685809198852
82.
Yang, Yujeong. ``The Politics of Inclusion and Exclusion: Chinese Dual-
Pension Regimes in the Era of Labor Migration and Labor
Informalization.'' Politics and Society 49, no. 2 (June 2021):
147-80.
Zenz, Adrian. `` `Thoroughly reforming them towards a healthy heart
attitude': China's political re-education campaign in
Xinjiang.'' Central Asian Survey, 38:1 (2019): 102-128.
Zhang, Yuping, Emily Hannum, and Meiyan Wang. ``Gender-Based Employment
and Income Differences in Urban China: Considering the
Contributions of Marriage and Parenthood.'' Social Forces 86,
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______
Questions Submitted for the Record to Mary Gallagher, Ph.D.
Questions Submitted by Hon. Ron Wyden
Question. Ensuring that American workers can compete with--and out-
compete--China and other countries around the world requires us to
invest in our workers. It also means that we need to enforce laws
already on the books that protect our workers from unfair competition.
One of those laws is the ban on importation of products made with
forced labor. From a moral perspective alone, forced labor is
abhorrent. And from a competitiveness angle, the use of forced labor
effectively acts as a subsidy that puts American workers at a
competitive disadvantage.
U.S. law bans importation of products made with forced labor,
depriving those goods of access to the American market. How can the
United States work with our allies to ensure that we are taking
concerted action and ensuring that goods produced with forced labor are
not simply sent to other markets around the world? Do you have any
views on the EU's new provisions regarding ensuring supply chains do
not include products made with forced labor?
Answer. As I noted in my original statement regarding forced labor
in the XUAR, multinational corporations operating in some supply chains
in China (cotton apparel, for example) are at some risk of having
forced labor in their supply chains and related condemnations from
outside NGOs and activists, while also earning the ire of Chinese
citizens who oppose boycotts of Chinese cotton and goods made in China
with forced labor. The United States should work with its allies to
encourage stronger international condemnation of the re-education camps
in the XUAR and the related forced labor in the camps. It should also
work with allies and other economies to rebuild supply chains outside
of China. The EU new provisions are laudable, but are not sufficient to
deal with state-sponsored forced labor of religious and ethnic
minorities, which is strongly supported by some large portion of the
Chinese dominant majority ethnic group.
Question. China's digital environment is subject to sophisticated
and comprehensive censorship. In addition to government monitoring and
blocking of Internet access, major Internet platforms in China are also
required to establish self-censorship mechanisms. U.S. companies
seeking to participate in the Chinese market are expected to meet
similar requirements.
Can you describe the impact of China's censorship and digital
policies on both workers seeking to identify jobs, organize or
otherwise participate in the Chinese economies and innovators who are
seeking to start new firms in China? Are these policies helpful or
harmful to these groups?
Answer. China's censorship and digital surveillance policies are
harmful to Chinese workers' ability to organize and mobilize for better
workplace conditions and protections. These policies limit workers'
ability to communicate to each other about workplace issues and they
significantly raise the risks of mobilization, whether virtual or real.
Workers and labor activists have been detained and imprisoned for such
mobilization.
Question. Can you describe the impact of China's censorship and
digital policies on small and medium-sized enterprises, and the workers
upon which they rely, operating in China or seeking to enter the
Chinese market?
Answer. China's censorship and digital policies place certain
burdens of self-
censorship on all companies entering or operating in the Chinese market
regardless of the companies' size. Many companies entering the Chinese
market have also faced pressure to comply with Chinese censorship
restrictions (Google, most famously, which then left the Chinese
market.) These restrictions might place heavier burdens on small and
medium-sized companies if they lack the internal expertise on these
issues. Non-compliance with China's censorship demands also pose
significant economic risks to all companies, regardless of size.
Chinese Government threats to restrict or reduce access to the Chinese
market have compelled some very large multinational companies to comply
with Chinese censorship policies.
______
Question Submitted by Hon. Bill Cassidy
Question. The Chinese Government imposes strict capital controls on
its citizens, which may cause some who would otherwise rather stay
within the rules to use illicit means such as trade-based money
laundering (TBML), sometimes through cryptocurrencies, to move money
out of China, facilitating illicit finance and organized crime in the
United States and Latin America. It seems like there is room for us to
cooperate here, since both countries have an interest in stopping TBML
and other similar crimes.
Is there some way that we can suggest that we work together?
Answer. This question is outside my area of expertise. There were
at least two other panelists providing testimony who are better
equipped to answer Senator Cassidy's good question.
______
Prepared Statement of Roy Houseman, Legislative Director,
United Steelworkers
Chairwoman Warren, Ranking Member Cassidy, thank you for the
opportunity to testify today on defending and investing in U.S.
competitiveness. As a former trade-impacted mill worker, and now
legislative director for the largest industrial union in North America,
it is an honor to be a voice for organized workers in this discussion,
and our union's international president Tom Conway gives his regards.
The United Steelworkers (USW) is the largest industrial union in
North America, representing workers throughout the manufacturing
sector. Our union's representation in commodities, which Americans and
people across the globe use every day--from paper, steel, fiber optics,
to tires--provides a unique lens into U.S. competitiveness. It is also
important to note that as our economy has changed over the decades, our
union continues to evolve, representing workers in industries from
software development to electric bus assembly to health care.
Defending and strengthening our country's competitiveness requires
at least three key strategic shifts: (1) refocusing Federal domestic
investments on critical infrastructure; (2) retooling our labor and
environmental laws for a 21st-century democracy; and (3) exporting not
just our goods, but our ideals, for a just global economy. Trade policy
in particular must play a dual role of defending our communities from
unfair trade practices by governments and foreign multi-national
corporations, while ensuring the goods and services our workers produce
can reach global markets.
domestic investment
Turning first to domestic investment, the USW takes a holistic
approach to our country's infrastructure. Right now, Steelworkers local
unions across the country are working with their respective employers
to send letters to the Biden administration in a campaign called ``We
Supply America.'' This campaign emphasizes the critical role USW
members play in America's infrastructure supply chain. For example, on
our country's interstate highway system Steelworkers provide everything
from steel for the over 6 million tons of guard rails to the pigment
for paint that guides travelers every day.\1\ They provide the steel
that supports our bridges and buttresses our ports. From roads and
bridges to our electric grid to broadband and so many other areas, our
members produce the products that are needed. That is why we are
hopeful and anxious to review the details of the $1.2-trillion
bipartisan infrastructure framework.
---------------------------------------------------------------------------
\1\ https://pubs.usgs.gov/fs/2006/3127/2006-3127.pdf.
If done right, this framework has the potential to upgrade our
crumbling infrastructure and coupled with strong domestic procurement
policies that ensure American manufacturing workers benefit from the
tax dollars spent across the country. We know this new investment is
needed when, for example, 6 billion gallons of treated water is lost
each day in the U.S. That is over 4 million gallon jugs of lost
drinking water in the 5 minutes set aside for my oral testimony. We can
do better, and our members who work at companies, like McWane, stand
ready at the crucible to pour melted iron for the next generation of
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water infrastructure should Congress move on this historic investment.
As the largest union in hard rock mining, we recognize the
potential that a changing transportation infrastructure creates for
miners of copper and other metals here in the U.S., and the new
opportunities that clean technology will present for workers in the
supply chain. But even aggressive electric vehicle (EV) uptake will not
completely replace traditional fuels in the near term. For example,
Bloomberg estimates that EV sales will only reach 34.3 percent by
2030.\2\ This means there will be a continuing need for traditional
fuels and refineries, most of which are represented by our union. These
workers have bargained generous pay and benefits for safely and
efficiently refining hydrocarbons over the years, supplying America
with the needed fuels to drive the country and our military.
---------------------------------------------------------------------------
\2\ https://www.bloomberg.com/news/articles/2021-06-26/where-we-
are-on-the-road-to-electric-vehicles-quicktake?sref=HEwoTbCT.
The U.S. can achieve a net-zero emissions economy by 2050, while
still maintaining production and employment in energy-intensive, trade-
exposed industries, but it will require workers, government, and
industry working together. Our union is prepared to tackle this
challenge in the many carbon intensive industries where we have
members. That is why we are working closely with our member companies
and community stakeholders to encourage investment in Carbon Capture,
Utilization, and Sequestration (CCUS) and Direct Air Capture (DAC)
Technology and supporting legislation like the SCALE Act (S. 986) and
---------------------------------------------------------------------------
the CATCH Emissions Act (S. 2230).
A mix of policies will be needed for these changes. For example,
the USW urges Congress to invest in section 132 Manufacturing
Conversion/Industrial Retooling Grant program, which was established
under the Energy Independence and Security Act (EISA) of 2007, but
never funded. This and other strategic manufacturing investment
programs would provide capital for the conversion and retooling of
industrial facilities.\3\
---------------------------------------------------------------------------
\3\ https://docs.house.gov/meetings/AP/AP10/20210317/111330/HHRG-
117-AP10-Wstate-BrownR-20210317.pdf.
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investing in american workers
Domestic investments in infrastructure and industrial capacity will
be key to building a 21st-century economy. But physical infrastructure
is only one leg in a stool toward a prosperous, equitable, and just
democracy. Our human infrastructure needs investment as well to ensure
that America's workers have the knowledge and skills to face global
competition and to combat growing income inequality. Whether it is
preparing for the next pandemic, eliminating systemic racism, improving
child care, or increasing worker power--the tools to empower workers
and their communities need improving.
According to the Economic Policy Institute, de-unionization
explains approximately a third of the growth of the wage gap between
high- and middle-wage earners over the 1979-2017 period.\4\ Unions have
played a key role in improving hours, wages, and working conditions for
the country's 150 million plus workers, but eroded labor laws are
undermining take home pay for everyone. The drop in union membership
has taken $52 weekly out of nonunion working men's wages alone since
1979.\5\
---------------------------------------------------------------------------
\4\ https://www.epi.org/publication/unions-help-reduce-disparities-
and-strengthen-our-democracy/.
\5\ Ibid.
Economic disparities for communities of color are also reduced with
unionization. Black workers--both men and women--are more likely than
White workers to be covered by collective bargaining, and the wage
boost that they get from being covered by collective bargaining is 13.1
percent, above the 10.2 percent average wage boost for unionized
---------------------------------------------------------------------------
workers overall.
These are a few of the reasons why the USW supports the passage of
the PRO Act (H.R. 842). Labor law reform has the potential to reduce
income inequality, which is vital to creating a competitive economy.
For example, research indicates in Organisation for Economic Co-
operation and Development (OECD) countries, the average increase in
inequality of 3 Gini points over the past couple of decades is
estimated to have cut GDP by around 8.5 percent.\6\ We are seeing
reduced economic mobility for the middle class and fewer children
growing up in the bottom of the income distribution are able to climb
to the top.\7\ Improved bargaining power through simple things, such as
holding corporations truly accountable for unfair labor practices and
allowing workers to get a contract, when combined with investments in
our children and our working families, will bend the arc of inequality
back in favor of workers.\8\
---------------------------------------------------------------------------
\6\ https://www.oecd-ilibrary.org/docserver/9789264246010-6-
en.pdf?expires=1625932386&id
=id&accname=guest&checksum=DE7CCC1AD26D92DBB4C2F988581753B6.
\7\ https://www.theguardian.com/commentisfree/2021/mar/13/american-
dream-broken-upward-mobility-us.
\8\ https://edlabor.house.gov/imo/media/doc/PRO%20ACT%20-
%20Fact%20Sheet.pdf.
Inequality destabilizes and undermines long term educational
achievement as well, creating jarring inequities. Research has shown
spending on ``enrichment'' activities for children like books, child
care, and non-school activities among the bottom fifth of the income
distribution rose by just over 55 percent between the mid-1970s to
around $1,300 in the mid-2000s. Among the top fifth, however, it rose
by over 155 percent to $9,000 per child.\9\ We are permitting an
increasingly tiered society with an enormous waste of human potential,
but the Steelworkers union sees a path to reverse this trend with the
Biden administration's proposals to upgrade and invest in child care
facilities, while providing aid to workers who need child care through
the American Jobs Plan and American Family Plan.
---------------------------------------------------------------------------
\9\ https://www.oecd-ilibrary.org/docserver/9789264246010-6-
en.pdf?expires=1625932386&id
=id&accname=guest&checksum=DE7CCC1AD26D92DBB4C2F988581753B6.
Our country will also need to improve our training programs for
both dislocated and incumbent workers. Unions already provide a
significant role in training the manufacturing workforce. As an
example, United States Steel and USW have contract language, which
incorporates training coordinators who work with management to ensure
that workers ``receive sufficient training to allow for all reasonable
opportunities to progress within the workforce and maximize their
skills to the greatest extent possible.''\10\ For manufacturing
employers who often have specialized equipment that require hands-on
experience, the Federal Government should provide resources to support
hands-on training coordinators, and also to reward employers who have
established relationships with incumbent worker training programs
through collective bargaining.
---------------------------------------------------------------------------
\10\ https://uswlocals.org/system/files/2018_uss-
usw_pm_bla_printer.pdf.
The U.S. must improve resources available for adult worker
training. The U.S. is among the worst of all 37 countries in the OECD
in job training programs relative to the size of our economy. Public
spending is less than half the spending levels of Australia, Canada,
and the U.K., and one-sixth the level of spending in Germany.\11\
---------------------------------------------------------------------------
\11\ https://www.oecd.org/unitedstates/back-to-work-united-states-
9789264266513-en.htm.
The USW is dismayed that Congress has allowed the Trade Adjustment
Assistance (TAA) for dislocated workers impacted by an increasing
globalized economy to revert to an inadequate older program. Today a
worker who loses their job to unfair competition from China--with which
we had a $310.8 billion trade deficit in 2020--cannot get TAA
benefits.\12\ This is unacceptable and the union supports a healthy
reauthorization of the TAA program similar to legislative proposals put
forward by Senator Stabenow.\13\ As a past recipient of TAA benefits, I
know how important this program is.
---------------------------------------------------------------------------
\12\ https://www.thebalance.com/u-s-china-trade-deficit-causes-
effects-and-solutions-3306277.
\13\ https://www.stabenow.senate.gov/news/senators-stabenow-peters-
introduce-bill-to-support-workers-impacted-by-trade.
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a worker-centered trade agenda
This discussion on dislocated worker training leads to the final
leg of the U.S. competitiveness stool: building a robust worker-
centered trade agenda. The USW, which has participated in over 100
anti-dumping and countervailing duty investigations, and is the largest
union in steel and aluminum manufacturing vital to our critical
infrastructure and national security, and currently benefit from
section 232 safeguards. For us, getting trade policy right is a must
for a sustainable, competitive economy.
Our trade policy must continue to evolve. The United States-Mexico-
Canada Agreement (USMCA) was a significant improvement over inadequate
multilateral trade agreements like the Trans-Pacific Partnership. The
Brown-Wyden rapid response mechanism is already leading to
investigations of labor violations by employers in Mexico and the first
remediation plan was announced last week.\14\ We will closely watch the
results of this remediation plan, but remain concerned that Mexico's
labor reforms are moving too slowly. The resources must be quickly
deployed to enhance on-the-ground labor capacity building.
---------------------------------------------------------------------------
\14\ https://ustr.gov/about-us/policy-offices/press-office/press-
releases/2021/july/united-states-and-mexico-announce-course-
remediation-workers-rights-denial-auto-manufacturing.
Other elements of the USMCA agreement also provide framework for a
more worker-centered trade policy. The rules of origin for automobiles,
which require 75 percent of a vehicle content to originate in North
America, is a solid step to rewarding employers who manufacture in
North America. Combined with the novel labor value content rule for
automobiles, future trade agreement negotiations can no longer ignore
wages and benefits. These provisions were an improvement over the
original flawed NAFTA, but they are far from perfect. They provide a
floor for potential future trade agreements, but they are not a
---------------------------------------------------------------------------
template.
It should also be noted that the voting margins in support of USMCA
in Congress show that the Trade Promotion Authority or expedited voting
authority is unnecessary if stakeholders are meaningfully engaged.
U.S. competitiveness requires a ``zero tolerance'' policy toward
forced labor and the countries who permit its existence in their supply
chains, from manufacturing to fishing, and must be severely sanctioned.
Earlier this year USW member and tire worker Joe Wrona testified before
the full Finance Committee on the impact of forced labor on his job and
the solar supply chain in China.\15\ Broader reforms are needed to
combat forced labor, particularly in China, and the USW supports
Representatives McGovern and Smith's bipartisan Uyghur Forced Labor
Prevention Act (H.R. 1155).
---------------------------------------------------------------------------
\15\ https://www.finance.senate.gov/download/03182021-wrona-
testimony.
But there must also be broader unilateral and multilateral reform
efforts to uphold democratic values in our trade negotiations. Global
overcapacity in products, such as steel and aluminum, will need to be
reduced if we are to preserve strategic domestic industries and push
back on state-capitalist models. China's Belt and Road Initiative has
led to expansions of dumped and subsidized goods entering from third-
party countries. However, our trade enforcement tools have not yet been
---------------------------------------------------------------------------
upgraded to contain this growing problem.
Fortunately, Senator Brown and Senator Portman are leading with a
much-
needed update to our trade enforcement laws. Commonly referred to as
``Leveling the Playing Field Act 2.0,'' S. 1187 recognizes that as
globalization accelerates, our trade enforcement mechanism must move at
the speed of our increasingly digitalized economy. USW urges the
Congress to pass this legislation.
The World Trade Organization (WTO) will also need to be reformed to
better account for labor and environmental protections. Trade policy
debates can no longer be conducted simplistically in terms of Economics
101 notions of comparative advantage, but require a recognition that
repression of fundamental workers' rights in China and other countries
violates international law and adversely affects American workers. We
are heartened by Ambassador Tai's recent remarks at the AFL-CIO on
increasing workers' voices at the WTO to improve global labor
rights.\16\
---------------------------------------------------------------------------
\16\ https://ustr.gov/about-us/policy-offices/press-office/press-
releases/2021/june/remarks-ambassador-katherine-tai-outlining-biden-
harris-administrations-worker-centered-trade-policy.
Finally, 52 years ago a U.S. river physically catching fire from
industrial pollution finally pressed lawmakers over the line to create
the Environmental Protection Agency, an agency responsible for dramatic
improvements of our air and water quality.\17\ But, a lack of
recognition that corporations will outsource their pollution if
permitted has led to ecological disasters such as less than a third of
Mexico's industrial wastewater being treated.\18\ This lack of equal
treatment and accountability has meant corporate investments abroad
have avoided domestic pollution controls such as those for lead acid
batteries.\19\ And, it is well documented that trade agreements can
also shrink the ``policy space'' available to countries to tackle
climate change.\20\
---------------------------------------------------------------------------
\17\ http://ohiohistorycentral.org/w/Cuyahoga_River_Fire.
\18\ https://www.nytimes.com/2019/12/30/world/americas/mexico-
environment-trade.html.
\19\ https://www.sierraclub.org/sites/www.sierraclub.org/files/
uploads-wysiwig/NAFTA%
20and%20Climate%20Report%202018.pdf.
\20\ https://iccwbo.org/content/uploads/sites/3/2019/03/icc-report-
trade-and-climate-change.pdf.
Future trade policy will also need to address carbon in a sensible
way that prevents ``carbon leakage.'' The USW has long advocated for
sensible climate change policy, including policy which addresses carbon
border adjustments so carbon intensive industries are not disadvantaged
as they adhere to new government policies.\21\
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\21\ https://www.congress.gov/116/meeting/house/110026/documents/
HHRG-116-CN00-20190926-SD003.pdf.
Ensuring that the U.S. and its workers remain competitive will
require a whole of government approach that includes both investment in
our country's infrastructure and workers, and an ever-evolving trade
policy, which defends against trade abuses and encourages exports while
raising global labor and environmental standards. USW members stand
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ready to make this the future.
Thank you for the opportunity to testify.
Questions Submitted for the Record to Roy Houseman
Questions Submitted by Hon. Ron Wyden
Question. In the past, U.S. infrastructure policies focused on
short-term repair and bare-bones maintenance of our physical
infrastructure, instead of smart, bold, long-term investments. When it
comes to human services infrastructure, we have seen a similar lack of
investment in the safety net programs and training programs that
support our workforce.
Please describe the importance of the United States taking bold
action to invest in both physical and human services infrastructure,
and how these significant investments today can pay off in the future.
Answer. The lack of Federal investment in our physical and human
services infrastructure has meant decreased competitiveness for U.S.
businesses, and for workers it means additional insecurity and
uncertainty in planning for long-term decisions that allow for a more
solid economic well-being. United Steelworkers in May of 2020 put out a
press release after the failure of the Edenville and Sanford dams,
which caused historic flooding and forced at least 10,000 people from
their homes in and around Midland, MI. Besides the immediate human
costs, USW represented employers like DOW were impacted as well.\1\
That is why our union is supportive of the Infrastructure Investment
and Jobs Act and urges final passage. Recently workers across the
country provided testimony of the various products they make and how
infrastructure investments would benefit not just them but their
communities. It is available on Facebook: https://fb.watch/91nKmUSWUH/.
---------------------------------------------------------------------------
\1\ https://www.usw.org/news/media-center/releases/2020/usw-dam-
failure-disaster-spotlights-need-for-large-scale-infrastructure-
commitment.
Social infrastructure is important as well. A better quality of
life for workers in America means ensuring workers don't have to worry
about child care costs, know that their parents and grand-parents can
access affordable dental and vision care through their Medicare
programs and that we reduce the cost of collective bargaining by
creating an above the line deduction for union dues. When we care for
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our communities, we make better communities.
Question. Please explain why such investments are needed now, and
whether in your view such investments are urgent.
Answer. The need for immediate investments are obvious in a global
competitive setting. In late 2020, USW provided testimony to the Senate
Banking committee which highlighted how the People's Republic of China
has invested heavily into the country's manufacturing and physical
infrastructure and how the impacts of those investments have led to
decreased competition globally. For example, in 2019, the U.S. spent
just 2.5 percent of our GDP on infrastructure, down from 4.2 percent in
the 1930s.\2\ This decrease in domestic spending has meant that
businesses lose sales to international competitors and workers have to
spend more of their take home pay fighting clogged streets and
inadequate infrastructure.
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\2\ https://www.banking.senate.gov/imo/media/doc/
Houseman%20Testimony%2012-16-20.pdf.
______
Prepared Statement of David M. Luna, Executive Director,
International Coalition Against Illicit Economies (ICAIE)
Chair Warren, Ranking Member Cassidy, and distinguished members of
the subcommittee, I appreciate the opportunity to testify in today's
hearing.
As the executive director of the International Coalition Against
Illicit Economies (ICAIE, https://www.icaie.com/), it is an honor to be
here today to outline some of the national security impacts related to
China's involvement in the expansion of illicit economies, the booming
trade in counterfeit and fraudulent goods, money laundering/trade-based
money laundering, and the corruptive and malign influence of the
Chinese Communist Party (CCP) that continues to harm American
interests, our economy and competitiveness, and the health and safety
of our citizens.
In my testimony, I will discuss some concerning trends and cases of
the illegal trade and cross-border criminal activities that are harming
U.S. national security and impacting numerous American brands across
industries, including ICAIE members and partners.
I will then devote the last part of my testimony to possible
solutions and approaches that can help to not only check and sanction
illicit trade from China, but that can serve as a basis for more
constructive engagement with the Chinese Government to investigate and
prosecute complicit bad actors in an array of cross-
border trafficking crimes.
First, let me state that having in the recent past chaired and
participated in several initiatives on fighting corruption and illicit
trade as part of the U.S.-China Anti-Corruption Working Group of the
Law Enforcement Joint Liaison Group (JLG ACWG), and multilaterally in
several diplomatic fora such as the Asia Pacific Economic Cooperation
(APEC) economic forum and the G20 in which China is also a member, I
always believed that it was important to have frank and direct talks
with China on the tough issues in order to work together to solve
complex and difficult challenges.
China is an adversary with numerous geopolitical ambitions that
threaten U.S. national security interests. However, China can also be a
responsible partner working with the United States where national
interests align to do good in our world including safeguarding the
peace, promoting shared prosperity, and addressing today's
transnational illicit threats.
But before the United States can embark on encouraging China to
shutdown illicit trade flows and tackle unfair trade and business
practices, it is important to have an understanding of the increasingly
diverse array of market security threats that China continues to
inspire across borders. These threats are harming U.S. national
interests, including our economic competitiveness internationally, and
also have had a considerable impact domestically on our businesses and
the well-being of our citizens.
To put in perspective China's role in diverse forms of illicit
trade and dark commerce, we must recognize that the global illicit
economy is booming as Dr. Louise I. Shelley--Director, Terrorism,
Transnational Crime and Corruption Center (TraCCC), Schar School of
Policy and Government, George Mason University--has often highlighted
in her research.\1\
---------------------------------------------------------------------------
\1\ Louise I. Shelley, ``Dark Commerce: How a New Illicit Economy
Is Threatening Our Future,'' Princeton University Press, 2018,
accessible at https://traccc.gmu.edu/publication-and-resources/
external-resources/.
The effects of illicit trade and illicit economies are
multifaceted. Corruption and illicit finance are at the core of these
complex cross-border issues, and corrode the underpinnings of
democracy, good governance, clean markets and supply chain security,
and economic development efforts. They also impede progress on human
rights and implementation of national sustainability strategies related
to the UN Sustainable Development Goals (SDGs).\2\
---------------------------------------------------------------------------
\2\ United Nations, Sustainable Development Goals (SDG), 2030
Agenda for Sustainable Development, accessible at: https://www.un.org/
sustainabledevelopment/sustainable-development-goals/.
The lucrative criminal activities enabling and fueling the multi-
trillion-dollar illicit economies include the smuggling and trafficking
of narcotics, opioids, weapons, humans, counterfeit and pirated goods;
illegal tobacco and alcohol products; illegally harvested timber,
wildlife, and fish; pillaged oil, diamonds, gold, natural resources and
precious minerals; and other contraband commodities.\3\
---------------------------------------------------------------------------
\3\ Channing (May) Mavrellis, ``Transnational Crime and the
Development World,'' Global Financial Integrity, March 27, 2017,
accessible at https://www.gfintegrity.org/report/transnational-crime-
and-the-developing-world/.
Such contraband and illicit goods are sold on our main streets, on
social media, in online marketplaces, and on the dark web every minute
of every day. The United Nations has estimated that the dirty money
laundered generated annually from such criminal activities is between 2
and 5 percent of global GDP, or $1.6 to $4 trillion.\4\
---------------------------------------------------------------------------
\4\ https://www.imf.org/external/pubs/ft/fandd/2018/12/imf-anti-
money-laundering-and-economic-stability-straight.htm.
Make no mistake: China today is helping fuel this global illegal
economy through the illicit manufacturing and unauthorized exporting of
harmful products, such as the chemical precursors to make deadly
fentanyl and other opioids, fake goods that can cause great bodily harm
or death, and other contraband that hurts our industries, supply
chains, and economy.
fentanyl and precursor chemicals
Among the harms to our homeland and health and safety of American
citizens is the lethal trade in fentanyl, synthetic opioids, and
precursor chemicals from China.
Such dangerous contraband is killing tens of thousands of Americans
each year, especially our youth. Its potency is fueling the addiction
crisis in the United States, especially when it is mixed with heroin or
cocaine to increase profits for the Mexican cartels and other criminal
organizations in their narco-trafficking operations.\5\ Mexican
criminal networks earn tens of billions of dollars a year supplying
narcotics, fentanyl, and other synthetic drugs to U.S. users.\6\
---------------------------------------------------------------------------
\5\ Earl Anthony Wayne and David M. Luna, ``Attack Fentanyl Flows
Across Borders: A Real Emergency'', The Wilson Center, March 18, 2019,
accessible at https://www.wilsoncenter.org/article/attack-fentanyl-
flows-across-borders-real-emergency.
\6\ Drug Enforcement Administration (DEA), ``2020 National Drug
Threat Assessment,'' DEA, U.S. Department of Justice, March 2021,
accessible at https://www.dea.gov/sites/default/files/2021-02/DIR-008-
21%202020%20National%20Drug%20Threat%20Assessment_WEB.pdf.
China is a principal source of the lucrative illicit synthetic
fentanyl, its analogs, and precursor chemicals that are arriving in
North America, bought by Sinaloa and Cartel de Jalisco Nueva Generacion
(CJNG), and facilitated by Chinese organized criminal groups.\7\
Significant quantities flow from China through Mexico and Canada, as
well as arriving directly in the U.S. from China. Most fentanyl or
fentanyl analogs (as well as other synthetic opioids), pill presses,
and binding agents are smuggled through legal points of entry and via
international mail carriers.\8\ As our law enforcement officials have
discovered, containers are often mislabeled and packets hidden to avoid
detection at legal ports of entry. Selling fentanyl on-line via the
open Internet in China and the ``dark'' web in the U.S. has also become
prevalent.
---------------------------------------------------------------------------
\7\ Naveed Jamali and Tom O'Connor, ``Chinese Chemicals in Mexican
Cartel Hands Feed Deadly U.S. Fentanyl Crisis,'' Newsweek, May 5, 2021,
accessible at https://www.newsweek.com/chinese-chemicals-mexican-
cartel-hands-feed-deadly-us-fentanyl-crisis-1588948.
\8\ Ibid.
In recent years, as the U.S.-China Economic and Security Review
Commission has noted, there has been no substantive curtailment of
fentanyl flows from China to the U.S. due to weak regulations governing
pharmaceutical and chemical sectors in China.\9\ Moreover, in China
webs of corruption and criminality have complicated both U.S. and
Chinese law enforcement agencies' ability to disrupt manufacturing,
distribution, and trafficking of illicit drugs, including fentanyl and
chemical precursors into Canada, Mexico, and the United States.
---------------------------------------------------------------------------
\9\ U.S.-China Economic and Security Review Commission, ``Fentanyl
Flows From China: An Update Since 2017,'' November 26, 2018, accessible
at https://www.uscc.gov/sites/default/files/Research/
Fentanyl%20Flows%20from%20China.pdf.
When these illegal drugs converge with other criminal activities
across illicit economies, the overall threat becomes multiplied many
times over. Such crime convergence fuels greater violence, corruption,
insecurity, instability, and sometimes conflicts in many parts of the
world.\10\
---------------------------------------------------------------------------
\10\ David M. Luna, ``Biden's foreign policy shift should address
cross-border corruption and illicit trade,'' South China Morning Post,
February 17, 2021, accessible at https://www.
scmp.com/comment/opinion/article/3121847/bidens-foreign-policy-shift-
should-address-cross-border-corruption.
As I will continually stress today, we need to heighten the
political pressure on China to work with the U.S. to disrupt these
illicit trafficking flows and target complicit criminals' dirty money.
illicit trade and illicit markets
Chinese state-sponsored hackers and criminals are stealing the
intellectual property (IP) of the United States and American companies.
Intellectual property theft and economic espionage of U.S. trade
secrets are estimated to be as high as $600 billion annually. China is
responsible for much of this IP crime, hurting American innovation,
competitiveness, good-paying jobs, and economic growth.\11\
---------------------------------------------------------------------------
\11\ Federal Bureau of Investigation (FBI), ``China: The Risk to
Corporate America,'' U.S. Department of Justice, 2019, accessible at
https://www.fbi.gov/file-repository/china-risk-to-corporate-america-
2019.pdf/view. See also, Dennis C. Blair and Keith Alexander, ``China's
Intellectual Property Theft Must Stop,'' August 15, 2017, Opinion, The
New York Times, accessible at https://www.nytimes.com/2017/08/15/
opinion/china-us-intellectual-property-trump.html.
Another harm to American interests driven from China's illegal
trade and unregulated economy are the flooding of counterfeits--
oftentimes dangerous and toxic fake products--into U.S. markets
including foodstuffs, footwear and apparel, toys, electronics, and
pharmaceuticals. This is especially true across ecommerce platforms and
Internet marketplaces, including third-party sellers and online
pharmacies that sell counterfeits and fake medicines that increase the
health and safety risks to all American consumers. As the U.S.
Department of Homeland Security (DHS) underscored in a 2020 report on
counterfeits and pirated goods:\12\
---------------------------------------------------------------------------
\12\ U.S. Department of Homeland Security, Combating Trafficking in
Counterfeit and Pirated Goods, DHS, January 24, 2020, accessible at
https://www.dhs.gov/sites/default/files/publications/
20_0124_plcy_counterfeit-pirated-goods-report_01.pdf.
Counterfeits threaten national security and public safety
directly when introduced into government and critical
infrastructure supply chains, and indirectly if used to
generate revenue for transnational criminal organizations.
Counterfeits also pose risks to human health and safety, erode
U.S. economic competitiveness and diminish the reputations and
---------------------------------------------------------------------------
trustworthiness of U.S. products and producers.
The National Association of Manufacturers (NAM) released a report
last year finding that counterfeits sapped the U.S. economy of $131
billion and 325,500 American jobs in 2019.\13\ More globally, both the
U.S. Department of Homeland Security (DHS) and the Organisation for
Economic Co-operation and Development (OECD) have found China
(including Hong Kong) accounts for up to 80-90 percent of all
counterfeits seized in the United States and around the world ($509
billion a year or 3.3 per cent of global trade).\14\
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\13\ National Association of Manufacturers (NAM), ``NAM Leads Fight
Against Counterfeits During COVID-19 Pandemic,'' June 22, 2020, NAM
Press Release, accessible at https://www.nam.org/nam-leads-fight-
against-counterfeits-during-covid-19-pandemic-9909/.
\14\ Organisation for Economic Co-operation and Development (OECD)
and European Union Intellectual Property Office (EUIPO), Trends in
Trade in Counterfeit and Pirated Goods, March 2019, accessible at
http://www.oecd.org/gov/risk/trade-in-counterfeit-and-pirated-goods-
978926
4252653-en.htm and https://euipo.europa.eu/tunnelweb/secure/webdav/
guest/document_li
brary/observatory/documents/Mapping_the_Economic_Impact_study/
Mapping_the_Economic_
Impact_en.pdf.
While the COVID-19 pandemic brought economic malaise to most
sectors during pandemic economic lockdowns, according to Euromonitor
\15\ the illicit economy continues to accelerate, especially across the
digital world with billions of vulnerable consumers on-line. This is
especially true across online marketplaces that are generating
tremendous prosperity for e-commerce platforms, scammers, fraudsters,
counterfeiters, and other predatory criminals that are generating tens
of billions of dollars selling fake pharmaceuticals and vaccines,
personal protective equipment (PPE), counterfeit apparel and footwear,
copyrighted electronics knock-offs, and other illicit goods mostly
coming from China.
---------------------------------------------------------------------------
\15\ Euromonitor International, ``Coronavirus Accelerates Demand
for Illicit Trade,'' Market Research Blog, March 1, 2021, accessible at
https://blog.euromonitor.com/coronavirus-accelerates-demand-for-
illicit-trade/.
As a factory to the world, China's illegal production is being
generated not only from state-owned enterprises (SOEs) but among some
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of its registered companies.
In other specific sectors, the story is the same on the economic
impact of counterfeits from China.
Pharmaceuticals
Counterfeit and fake pharmaceuticals is an illicit market which
generates billions of dollars for criminal entrepreneurs. According to
a 2019 Better Business Bureau study, companies based in China, Hong
Kong, Singapore, and India shipped 97 percent of the counterfeit
medicines seized in the U.S.\16\ Across numerous illicit trafficking
routes, Chinese counterfeit medicines arrive in American, European, and
other markets around the world in dangerously high volumes.
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\16\ Better Business Bureau (BBB), ``Fakes Are Not Fashionable: A
BBB Study of the Epidemic of Counterfeit Goods Sold Online,'' BBB, May
2019, accessible at https://www.bbb.org/globalassets/local-bbbs/
council-113/media/scam-studies/bbb-study-of-counterfeit-goods-sold-
online.pdf.
According to the World Health Organization (WHO), 10 percent of
global commerce involves counterfeit and fake medicines, which have
caused hundreds of thousands of deaths in some of the world's most
impoverished countries.\17\ For example, counterfeit anti-malarial and
other fake medicines from China end up causing tremendous health
complications and fatalities.\18\ Other known counterfeited and fake
pharmaceuticals seized have been intended to treat cancer, heart,
diabetes, COVID-19, human immunodeficiency virus (HIV), genitourinary
diseases, and other serious medical ailments. Often the ingredients in
these counterfeit prescription drugs or fakes found in open markets
contain no active ingredient or in some cases, chalk, flour, pollen, or
even toxic and deadly chemicals such as rat poison, boric acid or anti-
freeze.\19\
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\17\ World Health Organization, ``Substandard and Falsified Medical
Products,'' WHO, January 31, 2018, accessible at https://www.who.int/
news-room/fact-sheets/detail/substandard-and-falsified-medical-
products.
\18\ Jackson Thomas, Erin Walker, Gregory Peterson and Mark
Naunton, ``Are Fake Drugs the Reason Malaria Sickens Millions a
Year?'', Smithsonian Magazine, April 24, 2018, accessible at https://
www.smithsonianmag.com/science-nature/fake-drugs-are-one-reason-
malaria-still-kills-so-many-180968882/.
\19\ The Center for Safe Internet Pharmacies (CSIP), ``Top Poisons
Found in Counterfeit Drugs,'' Blog, SafeMedsOnline, July 31, 2013,
accessible at https://safemedsonline.org/2013/07/top-poisons-found-in-
counterfeit-drugs/.
On counterfeit PPE products related to the COVID-19 pandemic, 40
million
Chinese-produced counterfeit N95 and other face masks that are
substandard and do not protect medical workers and first responders,
have been seized in the U.S.,\20\ after having entered the legitimate
supply chain. Other Chinese counterfeit PPE and pharmaceuticals that
have endangered our medical professionals and citizens during the
pandemic have similarly been seized by U.S. law enforcement
authorities.
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\20\ U.S. Customs and Border Protection (CBP), ``CBP Seizes
Counterfeit N95 Masks,'' U.S. Department of Homeland Security, CBP
Press Release, April 15, 2021, accessible at https://www.cbp.gov/
newsroom/local-media-release/cbp-seizes-counterfeit-n95-masks. (Numbers
cited reflect update as of July 1, 2021.)
In the U.S. and several other countries, fake websites are
purporting to sell COVID-19 vaccines with the purpose of obtaining
people's personal information. According to The Wall Street Journal,
Pfizer confirmed counterfeit versions of the COVID-19 vaccine it
developed with BioNTech SE had been seized in Mexico, highlights how
criminals are exploiting the current pandemic for profit especially the
world-wide vaccination campaign.\21\ In March 2021, INTERPOL seized
hundreds of fake COVID-19 vaccines, while early this month in India,
thousand were being scammed into getting similar pandemic fakes made of
salt water.\22\
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\21\ Jared S. Hopkins and Jose de Cordoba, ``Pfizer Identifies Fake
COVID-19 Shots Abroad as Criminals Exploit Vaccine Demand,'' The Wall
Street Journal (WSJ), April 21, 2021, accessible at https://
www.wsj.com/articles/pfizer-identifies-fake-covid-19-shots-abroad-as-
criminals-exploit-vaccine-demand-11619006403.
\22\ Sarah Al-Arshani, ``Thousands of people in India may have been
scammed into getting fake COVID-19 vaccines made of saltwater,''
Insider, July 4, 2021, accessible at https://www.insider.com/thousands-
people-india-scammed-fake-covid-19-vaccines-2021-7/.
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Electronics
The proliferation of counterfeited electronics significantly hurts
not only our electronics industry but threatens our national security,
the safety of our troops, American jobs, and our consumer-citizens. In
the electronics industry, fake parts cost component manufacturers about
$100 billion annually. Cell phones such as the Apple iPhones, tablets,
computers, smart watches, bluetooth earbuds, Microsoft software, and
other high-demand consumer electronics are also counterfeited in the
tens of billions every year.\23\
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\23\ Akash Bhatia, Zia Yusuf, Usama Gill, Neil Shepherd, Maciej
Kranz, and Anoop Nannra, ``Stamping Out Counterfeit Goods with Block
and IoT,'' May 17, 2021, BCG, accessible at https://www.bcg.com/
publications/2019/stamping-out-counterfeit-goods-blockchain-internet-
of-things-iot.
With regard to our national security, counterfeit electronic parts
from China have been found to have infiltrated critical military
systems and supply chains, including military war fighting jets and
tanks, special operation cargo planes, navigation and radar systems,
missiles, and other hardware and software.\24\ In the past, counterfeit
computer microprocessor-chips have been falsely labeled as products
coming from Intel, Motorola, and Texas Instruments.
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\24\ Brett Daniels, ``10 Shocking Facts About Counterfeit
Electronics'' (Defense and Aerospace), February 18, 2021, Blogs by
Trenton Systems, accessible at https://www.trentonsystems.com/blog/10-
shocking-facts-counterfeit-electronics.
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Luxury Handbags, Footwear, and Apparel
It is expected that the global luxury goods market will reach $300
billion by 2026.\25\ MarkMonitor reports that almost half (47 percent)
of brands will lose sales revenue due to counterfeiting or pirated
goods.\26\
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\25\ Global Industry Analysts, Inc., ``Global Luxury Goods Market
to Reach $296.9 Billion by 2026,'' May 27, 2021, accessible at https://
www.prnewswire.com/news-releases/global-luxury-goods-market-to-reach-
296-9-billion-by-2026--301301077.html.
\26\ MarkMonitor, ``MarkMonitor Online Barometer: Global Business
Survey 2018--Brand Protection Challenges,'' Clarivate, April 10, 2018,
accessible at https://clarivate.com/news/nearly-half-brands-admit-
sales-lost-counterfeiting/.
Every IP-protected product can be counterfeited. This is true
across all consumer goods and services but especially for the footwear
and apparel industry which accounted for more than a third of all
customs seizures from China and Hong Kong.\27\ The most commonly
counterfeited American footwear and apparel products are NIKE, the
North Face, Under Armour, Levi's, Michael Kors, Polo, and other brands.
Clearly such criminal counterfeiting hurts the creative innovations,
investments in R&D, intellectual property, and trademarks of American
footwear and apparel companies.
---------------------------------------------------------------------------
\27\ Organisation for Economic Co-operation and Development (OECD)
and European Union Intellectual Property Office (EUIPO), Trends in
Trade in Counterfeit and Pirated Goods, March 2019, accessible at
http://www.oecd.org/gov/risk/trade-in-counterfeit-and-pirated-goods-
9789264252653-en.htm.
Social media sites like Instagram and Facebook as well as online
marketplaces have become a boon for criminals in counterfeiting luxury
fashion brands, including footwear and sportswear from American team
sports from the National Football League (NFL), Major League Baseball
(MLB), National Basketball Association (NBA), National Hockey League
(NHL), and those associated with international sports federations such
as Union of European Football Associations (UEFA), FIFA, and
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International Olympic Committee (IOC).
In addition to this counterfeit sportswear and gear, anonymous
companies and money laundering--including trade-based money laundering
(TBML)--have helped criminals across the United States sell in recent
years several billion dollars in fake and counterfeited luxury handbags
and apparel accessories coming from China including those branded as
Burberry, Louis Vuitton, Gucci, Fendi, Coach, and Chanel.\28\
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\28\ David M. Luna, ``Anonymous Companies Help Finance Illicit
Commerce and Harm American Businesses and Citizens,'' The Fact
Coalition, May 2019, accessible at https://thefactcoalition.org/report/
anonymous-companies-help-finance-illicit-commerce-and-harm-american-
businesses-and-citizens/.
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Tobacco
Like other forms of illicit trade, the illegal tobacco trade is
incredibly profitable for criminal organizations and kleptocratic
networks. According to a Department of State report, the illicit trade
in tobacco products costs governments and taxpayers between $40 billion
and $50 billion annually in tax revenues.\29\
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\29\ U.S. Department of State, ``The Global Illicit Trade in
Tobacco: A Threat to National Security,'' December 2015, accessible at
https://2009-2017.state.gov/documents/organization/250513.pdf.
China National Tobacco Corporation (CNTC) is by far the largest
cigarette company in the world and produces nearly half of the world's
cigarettes.\30\ The Chinese state-owned conglomerate is vying for a
larger market share within the tobacco industry, and it has been
forging new markets from Africa to Europe. According to experts,
smuggling is an important part of that strategy, especially across Free
Trade Zones and unregulated markets where Chinese illicit cigarettes
are often re-shipped to Somalia, Libya, Syria and other hot spots of
instability.\31\ Panama's lax oversight and law enforcement has enabled
CNTC's push into Latin America.
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\30\ Organized Crime and Corruption Reporting Project (OCCRP),
``China's State Tobacco Company Is Massive at Home. Now it's Ready to
Take Over the World,'' June 22, 2021, accessible at https://
www.occrp.org/en/loosetobacco/china-tobacco-goes-global/chinas-state-
tobacco-company-is-massive-at-home-now-its-ready-to-take-over-the-
world.
\31\ United Nations Commodity Trade Statistics Database (UN
ComTrade Data), accessible at https://comtrade.un.org/db/mr/
rfCommoditiesList.aspx?px=H2&cc=24/.
The Organized Crime and Corruption Reporting Project (OCCRP) has
also recently uncovered Chinese smuggling networks that have flooded
illegal markets with numerous CNTC illicit cigarettes, evading customs
authorities and dodging taxes.\32\ Multiyear operations, Smoking Dragon
and Royal Charm,\33\ led by the Federal Bureau of Investigation and
numerous U.S. and Canadian law enforcement agencies, acquired over $40
million worth of counterfeit cigarettes and other illegal commodities
coming into the United States from China and North Korea. The route ran
from China directly to United States ports such as the Port of Newark
in New Jersey and ports located in Los Angeles and Long Beach,
California. The operations led to the indictment of 87 individuals from
the United States, Canada, China, and Taiwan.
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\32\ Ibid.
\33\ Federal Bureau of Investigation (FBI), ``Operation Smoking
Dragon,'' U.S. Department of Justice, July 5, 2011, accessible at
https://www.fbi.gov/news/stories/operation-smoking-dragon.
Tests on counterfeit cigarettes from China showed each cigarette
had up to 80 percent more nicotine and emitted up to 130 percent more
carbon monoxide than legally produced on in regulated markets. In
addition, other impurities such as rat poison, feces and asbestos were
found in some cigarettes.\34\
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\34\ Lorraine Kember, ``Toxic Black-Market Cigarettes Fuel
Mesothelioma Concerns,'' Asbestos.com, January 22, 2021, accessible at
https://www.asbestos.com/news/2018/01/22/black-market-cigarettes-
mesothelioma/.
But China is not the only player expanding its footprint
internationally and taking advantage of U.S. ports. Most recently, the
United Arab Emirates has emerged as a large manufacturer of cigarettes
intended for the sole purpose of being smuggled, with an estimated
production of more than 80 billion cigarettes annually. These
unregulated products are transiting through US custom bonded warehouses
to be then illegally diverted into Mexico in collaboration with narco-
cartels such as CJNG or the Zetas Cartel. In 2020, DHS Homeland
Security Investigations (HSI) of 422 million cigarettes in McAllen,
TX,\35\ the single largest seizure of tobacco products in history.
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\35\ U.S. Immigration and Customs Enforcement (ICE), ``South Texas
man pleads guilty of attempting to export millions of cigarettes,''
U.S. Department of Homeland Security, ICE Press Release, May 26, 2020,
accessible at https://www.ice.gov/news/releases/south-texas-man-pleads-
guilty-attempting-export-millions-cigarettes.
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Automotive Parts
Another economic and safety harm caused by illicit trade relates to
fake automotive components, which are also a highly lucrative business
for counterfeiters and damage brand reputations of carmakers. Fake and
counterfeited auto parts have caused great bodily injuries, and even
deaths to consumer-drivers. According to World Trademark Review, the
estimated global economic costs of counterfeiting in the automotive
industry could reach $2.3 trillion by 2022.\36\
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\36\ World Trademark Review, ``Counterfeit automotive parts
increasingly putting consumer safety at risk,'' May 13, 2019,
accessible at https://www.worldtrademarkreview.com/anti-counterfeiting/
counterfeit-automotive-parts-increasingly-putting-consumer-safety-risk.
In the United States, counterfeit parts are costing automotive
companies like Ford, GM, Tesla, and others tens of billions of dollars
a year with most of fakes originating in China. Among the most popular
counterfeited auto parts are tires, batteries, airbags, oil and air
filters, brake pads, spark plugs, transmissions, wheels, and electrical
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components.
Across the digital world, especially ecommerce platforms and online
marketplaces, automotive fakes are listed for sale that make it
difficult for consumer to distinguish a counterfeited auto part from a
real one.\37\ This is why it is important to know and trust reputable
supply chains and parts distributors.
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\37\ Richard Brown, ``Fighting back against counterfeit parts,''
Automotive Logistics, January 28, 2021, accessible at https://
www.automotivelogistics.media/service-parts-logistics/fighting-back-
against-fake-parts/40052.article.
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Endangered Wildlife
The illegal wildlife trade generates between $7 billion and $23
billion each year.\38\ Since 1970, humans have decimated animal
populations by almost 68 percent according to World Wildlife Fund
(WWF).\39\ For years, Chinese demand for illegal wildlife products has
driven a global trade in endangered species including iconic animals
such as rhinoceros, tigers, elephants, pangolins, bears, and so many
other animals. Rhino horn and tiger parts are not only used for
traditional medicinal treatments, but also to make exotic wines and
aphrodisiac drinks.
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\38\ Global Environment Facility (GEF), ``Illegal Wildlife Trade,''
accessible at https://www.thegef.org/topics/illegal-wildlife-trade.
\39\ World Wildlife Fund (WWF), ``Living Planet Report 2020,'' WWF,
September 9, 2020, accessible at https://livingplanet.panda.org/en-us/.
Investigations by Earth League International--an ICAIE Advisory
Council member--have found strong Mexican cartel links with criminal
syndicates in China who smuggle totoaba bladders from Mexico and U.S.
into Asian black markets.\40\ These Mexican-Asian criminal joint
ventures, that operate as well in the United States, have also been
involved in human smuggling, money laundering, and other illicit
trafficking areas.\41\
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\40\ Earth League International (ELI), ``Operation Fake Gold--The
Totoaba Cartels and the Vaquita Extinction,'' ELI, accessible at
https://earthleagueinternational.org/operations-re-
ports/. See also National Geographic's ``Sea of Shadows,'' accessible
at https://films.
nationalgeographic.com/sea-of-shadows.
\41\ Ibid.
While China has made some good efforts in the past year during the
COVID-19 pandemic to curtail the illegal wildlife trade, it remains a
country of concern as a source, transit point, or consumer demand
market of wildlife products. Chinese banks help to launder the funds of
illegal wildlife traffickers and related Chinese triads involved in
smuggling, in some ways being complicit in the further financing of
other forms of crime as these bad actors have diversified their illicit
portfolios, especially in the Golden Triangle in Southeast Asia.\42\
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\42\ TRAFFIC, ``Illegal Wildlife Trade and the Banking Sector in
China,'' TRAFFIC Report, April 14, 2021, accessible at https://
www.traffic.org/publications/reports/the-illegal-wildlife-trade-and-
the-banking-sector-in-china-the-need-for-a-zero-tolerance-approach/.
Illegal and predatory fishing, logging of rainforests, and mining
of natural resources by Chinese criminal syndicates and facilitators
also harm our natural world, contribute to climate change, and converge
with other illicit activities such as corruption, forced labor, human
smuggling, and sex trafficking.
human trafficking and forced labor
Human trafficking and modern slavery are among the world's fastest
growing criminal enterprises, generating an estimated $150 billion in
illicit profits every year.\43\
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\43\ International Labour Organization (ILO), ``ILO says forced
labor generates annual profits of U.S.$ 150 billion,'' ILO Report, May
20, 2014, accessible at https://www.ilo.org/global/about-the-ilo/
newsroom/news/WCMS_243201/lang--en/index.htm.
Human smuggling is also a major source of illicit trade. The U.S.
Department of State has continually called China a source, destination,
and transit country for men, women, and children subjected to forced
labor and sex trafficking. In its most recent 2021 Trafficking in
Persons report,\44\ the State Department noted that in China there
continue to be ``reports of law enforcement officials benefiting from,
permitting, or directly facilitating sex trafficking and forced labor,
[while] the government did not report any investigations, prosecutions,
or convictions of law enforcement officials allegedly involved in the
crime.''
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\44\ U.S. Department of State, ``2021 Trafficking in Persons
Report,'' Office to Monitor and Combat Trafficking in Persons, June
2021, accessible at https://www.state.gov/reports/2021-trafficking-in-
persons-report/.
In this 2021 report, there was also mention of state-sponsored
forced labor as part of China's mass detention, political
indoctrination, and labor transfer campaign against the Uyghurs and
other members of Muslim minority groups.\45\ Chinese nationals
reportedly are suffering forced labor in several countries in Asia,
Africa, and Europe that are hosting Belt and Road Initiative (BRI)
projects.
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\45\ Ibid.
Human smuggling from China to the United States--both by land and
by sea--is reported to be on the rise. The going rate per person
smuggled is believed to be $50,000 or more.\46\ From a crime
convergence perspective, Chinese criminal syndicates are expanding
their ties with the Mexican cartels and other criminal organizations in
Latin America and diversifying into other illicit markets. According to
the Polaris, human trafficking and massage parlors involving Chinese
organized criminals are also a significant concern to the United States
especially related to illicit massage businesses (IMBs), which generate
$2.5 billion annually.\47\ The vast majority of women reported to have
been trafficked in IMBs are from China, with a relatively high number
coming from the Fujian province.\48\
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\46\ Michael Lipin, ``U.S. Media Scrutinize Wave of Chinese
Migrants Illegally Crossing From Mexico,'' Voice of America, June 28,
2016, accessible at https://www.voanews.com/usa/us-media-scrutinize-
wave-chinese-migrants-illegally-crossing-mexico.
\47\ Polaris, ``Human Trafficking in Illicit Massage Businesses,''
Polaris, 2018, accessible at https://massagetherapy.nv.gov/
uploadedFiles/massagetherapy.nv.gov/content/Resources/
FullReportHumanTraffickinginIllicitMassageBusinesses.pdf.
\48\ Ibid. See also United States of America v. Zongtao Chen a.k.a.
Mark Chen, Weixuan Zhou, Yan Wang a.k.a. Sarah, Ting Fu, Chaodan Wang,
November 15, 2018, retrieved August 5, 2019, accessible at https://
www.justice.gov/usao-or/press-release/file/1124296/download. Department
of Justice, U.S. Attorney's Office, District of Oregon, ``Nationwide
Sting Operation Targets Illegal Asian Brothels, Six Indicted for
Racketeering,'' January 16, 2019, retrieved August 5, 2019, accessible
at https://www.justice.gov/usao-or/pr/nationwide-sting-operation-
targets-illegal-asian-brothels-six-indicted-racketeering.
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china's money laundering, tbml, and cross-border illicit finance
activities
On the Chinese threats related to money laundering including trade-
based money laundering (TBML), John Cassara, Global Financial Integrity
(GFI), and board member of ICAIE, has been doing some innovative
research on the breath and scale of China's involvement in money
laundering and trade-based money laundering operations globally.\49\
Mr. Cassara characterizes Chinese criminals' cross-border illicit
finance activities as the biggest money laundering hub in the world,
introducing and laundering approximately $1.5 to $2 trillion of illicit
proceeds into the world's licit economy every year.\50\ In other words,
according to Mr. Cassara, China is responsible for approximately one-
half of the money laundering in the world today, as measured by
China's/the CCP's involvement in predicate offenses for money
laundering.\51\
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\49\ John Cassara, ``Money Laundering and Illicit Financial Flows:
Following the Money and Value Trails,'' @John Cassara, 2020, accessible
at https://www.uscc.gov/sites/default/files/Research/
Fentanyl%20Flows%20from%20China.pdf.
\50\ John Cassara, ``China Is the Biggest Money Laundering
Threat,'' August 21, 2020, accessible at http://www.johncassara.com/
articles.html.
\51\ Ibid.
The U.S. Department of State similarly recognizes China as a global
center for money laundering for criminals in the country and from
around the world, and notes that ``corruption is a major factor in
money laundering.''\52\ An estimated $2 trillion representing proceeds
in corruption alone have been laundered out of China since 1995.\53\
Given the illicit enrichment from the numerous criminal activities that
I have already mentioned here today, when you include corruption and
illicit financial flows, it should not come as a surprise that
trillions of dollars in illicit proceeds are being generated from the
predicate offenses for money laundering that touch China's jurisdiction
and markets.
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\52\ U.S. Department of State, ``International Narcotics Control
Strategy Report, Volume II, Money Laundering,'' Bureau of International
Narcotics and Law Enforcement Affairs (INL), March 2021, accessible at
https://www.state.gov/wp-content/uploads/2021/02/21-00620-INLSR-
Vol2_Report-FINAL.pdf.
\53\ Christine Duhaime, ``$2,000,000,000,000 in Proceeds of
Corruption Removed from China and Taken to U.S., Australia, Canada and
Netherlands,'' Duhaime Anti-Money Law in China, January 2, 2017,
accessible at https://www.antimoneylaunderinglaw.com/2017/01/qa-on-the-
2-trillion-in-proceeds-of-corruption-removed-from-china-and-taken-to-
us-australia-canada-and-netherlands.html.
In both the 2016 report by the Organisation for Economic Co-
operation and Development (OECD) on counterfeit and pirated goods as
well as the 2017 GFI report ``Transnational Crime and the Developing
World'' that outlined some of the top illicit markets, China seems to
be the common denominator, with Chinese illicit proceeds dwarfing all
others.\54\
---------------------------------------------------------------------------
\54\ Channing (May) Mavrellis, ``Transnational Crime and the
Development World,'' Global Financial Integrity, March 27, 2017,
accessible at https://www.gfintegrity.org/report/transnational-crime-
and-the-developing-world/. Organisation for Economic Co-operation and
Development (OECD) and European Union Intellectual Property Office
(EUIPO), Trends in Trade in Counterfeit and Pirated Goods, March 2019,
accessible at http://www.oecd.org/gov/risk/trade-in-counterfeit-and-
pirated-goods-9789264252653-en.htm.
Building on earlier illicit finance methodologies such as the Black
Market Peso Exchange (BMPE)--where drug proceeds were used to purchase
trade items such as electronics, garments, and toys--money launderers
today import cheaply manufactured Chinese goods or counterfeits at
overvalued prices to wash criminally derived dirty money.\55\ There
have been major multi-billion-dollar investigations showing that
Chinese authorities actively obstructed justice and did not work with
law enforcement counterparts in jurisdictions where money laundering
predicate offenses have occurred.
---------------------------------------------------------------------------
\55\ John Cassara, ``China Is the Biggest Money Laundering
Threat,'' August 21, 2020, accessible at http://www.johncassara.com/
articles.html.
Shadow banking, Chinese underground banking systems (CUBS), the use
of mirror accounts, Chinese capital flight, and alternative remittance
systems such as ``fei-chein'' (flying money) all sometimes use trade-
based value transfer. Trade fraud is the largest component of TBML.
Trade-based value transfer is a perfect vehicle to transfer money/value
in the form of trade goods out of the country by importing goods at
---------------------------------------------------------------------------
overvalued prices or exporting goods at undervalued prices.
China is the biggest trading nation in the world. The magnitude of
international trade masks the occasional illicit trade transaction,
making it very difficult for Customs and law enforcement to identify
individual instances of TBML, Yet, according to a 2020 GAO report on
TBML, Homeland Security Investigations notes that China is one of the
countries of most concern.\56\
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\56\ U.S. General Accounting Office (GAO), ``Trade Based Money
Laundering: U.S. Government Has Worked With Partners to Combat the
Threat, but Could Strengthen Its Efforts,'' GAO-20-333, April 2020,
accessible at https://www.gao.gov/assets/gao-20-333.pdf.
According to FATF,\57\ China has not effectively enforced their
anti-money laundering laws which has enabled corrupt officials and
criminals to launder cash through anonymous shell companies and other
methods. For example, recent reporting has highlighted how Chinese
citizens are leveraging the ``flying money'' informal value transfer
systems to circumvent the current strict foreign currency controls and
personal foreign exchange transaction limits (U.S. $50,000) or smurfing
of lesser amounts of the thresholds.\58\
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\57\ Financial Acton Task Force (FATF), ``China's progress in
strengthening measures to tackle money laundering and terrorist
financing,'' FATF Mutual Evaluations, Follow-Up Report China, September
2020, accessible at https://www.fatf-gafi.org/publications/
mutualevaluations/documents/fur-china-2020.html.
\58\ Vaishali Basu Sharma, ``China emerging as a global hub for
money laundering operations,'' The Week Magazine, September 18, 2020,
accessible at https://www.theweek.in/news/world/2020/09/18/china-
emerging-as-a-global-hub-for-money-laundering-operations.html.
Cybercrime, virtual currency, and online e-commerce have enabled
some criminals to convert electronic funds in China into hard currency
overseas.\59\ There has been discussion in China on easing of capital
controls and whether it will further accelerate money laundering and
TBML activities in China. This is difficult to answer given the growing
influence of cryptocurrency and other value transfer systems in licit
and illicit transactions, the lack of transparency in China, and
continued weaknesses in fighting corruption and predicate crimes to
money laundering. But it is possible that the easing of capital
controls across borders could ``encourage money laundering and asset-
stripping'' through the commingling of licit and illicit funds.\60\
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\59\ Ibid.
\60\ Yu YongDing, ``The Temptation of China's Capital Account,''
Project Syndicate, March 27, 2013, accessible at https://www.project-
syndicate.org/commentary/the-risks-of-easing-china-s-capital-controls-
by-yu-yongding.
In addition to TBML, Chinese criminal syndicates and their money
facilitators have laundered great sums of dirty money through the use
of anonymous shell companies and the purchasing of expensive real
estate in the United States, Canada, Europe, UAE, luxurious resort
islands, and top offshore destinations such as the British Virgin
Islands, Singapore, Cook Islands, and Panama. According to the National
Association of Realtors (NAR), China has continued to exceed all other
buyers in the United States both in units and dollar volume of
residential housing.\61\ Despite capital flight controls in China, many
of the purchases are made in cash. There is also a lack of beneficial
ownership information.
---------------------------------------------------------------------------
\61\ National Association of Realtors (NAR), ``Realtor Survey Shows
Decline in Foreign Investment in U.S. Residential Real Estate,'' NAR
Press Release, July 17, 2019, accessible at https://www.nar.realtor/
newsroom/realtor-survey-shows-decline-in-foreign-investment-in-u-s-
residential-real-estate.
Canada, in particular Vancouver, has also been a favorite place for
Chinese organized crime and corrupt officials to launder their ``hot
money'' through real estate and other investments such as luxury sports
cars and apparel.\62\ Chinese Organized Crime in Canada is connected to
a global network and ``has strong linkages to Hong Kong and China,
which is a source country for counterfeit goods, contraband tobacco,
and chemicals used to produce synthetic drugs, as well as migrants who
are smuggled into this country.''\63\
---------------------------------------------------------------------------
\62\ Stephen Schneider, Ph.D., ``Money Laundering in British
Columbia: A Review of the Literature,'' report submitted to The Cullen
Commission of Inquiry into Money Laundering in British Columbia, May
29, 2020, accessible at https://www.researchgate.net/profile/Stephen-
Schneider-3/publication/
343655967_Money_Laundering_in_British_Columbia_A_Review_of_the_Litera
ture/links/5f36ae4992851cd302f44852/Money-Laundering-in-British-
Columbia-A-Review-of-the-Literature.pdf.
\63\ Ibid.
Finally making matters worse, China has shown little cooperation
with the international law enforcement community in combatting many of
the criminal activities and corresponding money laundering that I have
been underscoring at this hearing. Here let me take a moment to thank
Senator Cassidy for his leadership in the Congress in elevating the
importance of fighting trade-based money laundering, as a critical tool
in our arsenal to protect our national security.
free trade zones and belt and road initiative:
the expansion of illicit economies
A few points on the abuse of free trade zones and how China
leverages the Belt and Road Initiative to expand illicit economies
around the world.
Free Trade Zones (FTZs) can have a catalytic effect on economies,
including attracting Foreign Direct Investment and helping to expand
economic growth.\64\ But in too many parts of the world, those FTZs
that are unregulated or unmonitored are exploited on a daily basis by
criminals to facilitate illicit activities that produce broader market
reputational harm and put the physical security of many communities in
danger.\65\
---------------------------------------------------------------------------
\64\ The Economist Intelligence Unit (EIU), ``The Global Illicit
Trade Environment Index: Free Trade Zones,'' EIU and Transnational
Alliance to Combat Illicit Trade (TRACIT), 2018, accessible at https://
www.tracit.org/uploads/1/0/2/2/102238034/
eiu_ftz_illicit_trade_paper.pdf.
\65\ OECD, ``Trade in Counterfeit Goods and Free Trade Zones,''
OECD Task Force on Countering Illicit Trade (TF-CIT), March 15, 2018,
accessible at https://www.oecd.org/gov/trade-in-counterfeit-goods-and-
free-trade-zones-9789264289550-en.htm.
The FATF has identified FTZs as posing a high risk for money
laundering and a threat to the integrity of global financial regulatory
standards. For example, as recently reported by the U.S. State
Department in this year's Country Reports on Terrorism, the free trade
zones in the Tri-Border Area of Argentina, Brazil, and Paraguay
remained regional nodes for money laundering and are vulnerable to
terrorist financing.\66\
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\66\ U.S. Department of State, ``Country Reports on Terrorism,''
Office of the Coordinator for Counterterrorism, accessible at https://
www.state.gov/country-reports-on-terrorism-2/.
The reality is that criminals are diligently moving illegal
products from FTZs into surrounding markets, evading customs, not
paying excise duties, and putting locally manufactured and legitimately
imported goods at a competitive disadvantage.\67\ Payments for
counterfeits being trafficked through the UAE from China and on to
Africa may eventually wind up in Panama or Europe, where they then help
to fund other types of illegal activity, be it more illicit trade or
other forms of criminality.\68\
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\67\ Royal United Services Institute (RUSI), ``Criminal Risks in
Free Trade Zones,'' April 26, 2021, accessible at https://rusi.org/
explore-our-research/projects/criminal-risks-in-free-trade-zones.
\68\ The Economist Intelligence Unit (EIU), ``The Global Illicit
Trade Environment Index: Free Trade Zones,'' EIU and Transnational
Alliance to Combat Illicit Trade (TRACIT), 2018, accessible at https://
www.tracit.org/uploads/1/0/2/2/102238034/
eiu_ftz_illicit_trade_paper.pdf.
China's Belt and Road Initiative (BRI) is an ambitious multi-
trillion-dollar economic development assistance program that is funding
massive projects across the developing world including roads, ports,
pipelines, electrical power grids, mining, telecommunications,
railroads, and other infrastructure.\69\ The licit trade channels and
supply chains that the BRI is constructing are also creating illicit
pathways exploited by kleptocrats, furthering market penetration by
criminals, and contributing to the expansion of illicit economies
globally.\70\
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\69\ Judy Woodruff, ``China's massive Belt and Road initiative
builds global infrastructure--and influence,'' PBS News Hours,
September 27, 2019, accessible at https://www.pbs.org/newshour/show/
how-historic-belt-and-road-infrastructure-project-is-building-chinas-
global-influence.
\70\ Will Doig, ``The Belt and Road Initiative Is a Corruption
Bonanza: Despots and crooks are using China's infrastructure project to
stay in power--with Beijing's help,'' Foreign Policy (FP) Magazine,
January 15, 2019, accessible at https://foreignpolicy.com/2019/01/15/
the-belt-and-road-initiative-is-a-corruption-bonanza/. Elaine Dezenski,
``Below the Belt and Road--Corruption and Illicit Dealings in China's
Global Infrastructure,'' Foundation for Defense of Democracies (FDD),
May 6, 2020, accessible at https://www.fdd.org/analysis/2020/05/04/
below-the-belt-and-road/.
The BRI global footprint tracks some of the biggest illicit trade
routes known for corruption, money laundering, and the trafficking of
narcotics, weapons, counterfeits, humans, illegally mined natural
resources, and other contraband. The use of AI and data mapping can
show overlays of illicit routes and criminal networks and how China is
helping to expand and bridge a super highway of illicit economies
globally, exporting forced labor practices, and violating human rights
of both Chinese and local workers.\71\ China's economic exploitation,
reliance on cheap labor, and unfair trade practices in BRI projects are
against the spirit of free trade, puts U.S. competitiveness at a
disadvantage, and the ability of U.S. firms to compete in these
markets.\72\
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\71\ Jennifer Hillman and Alex Tippett, ``Who Built That? Labor and
the Belt and Road Initiative,'' Council on Foreign Relations (CFR)
Blogs, The Internationalist, July 6, 2021, accessible at: https://
www.cfr.org/blog/who-built-labor-and-belt-and-road-initiative.
\72\ Ibid.
In Africa, Southeast Asia, and other parts of the world, China's
BRI saddles recipient countries with long-term loans. These serve as
debt-traps that impoverish communities, as kleptocrats line their
pockets and pad their offshore accounts while enabling China to expand
its influence and control of these countries' natural resources and
strategic critical infrastructure.\73\ Through its BRI leverage,
China's investments have increased their influence and control of key
ports in Latin America and the Caribbean.
---------------------------------------------------------------------------
\73\ Anna Gelpern, Sebastian Horn, Scott Morris, Brad Parks, and
Christoph Trebesch, ``How China Lends a Rare Look into 100 Debt
Contracts with Foreign Governments,'' joint publication by Georgetown
Law and Peterson Institute for International Economics; Kiel Institute
for the World Economy; AidData, William and Mary, and Center for Global
Development; and Kiel Institute, Kiel University, and CEP, March 2021,
accessible at https://docs.aiddata.org/ad4/pdfs/
How_China_Lends__A_Rare_Look_into_100_Debt_Contracts_with_Foreign_Govern
ments.
pdf.
Over the past 15 years, Chinese state-owned policy banks have
provided close to $150 billion in loan commitments in Latin America,
exceeding lending of the World Bank, the Inter-American Development
Bank (IDB), and CAF Development Bank of Latin America combined.\74\
China's overall investments and expenses related to the BRI could reach
$1.2-1.3 trillion by 2027.\75\ At the June 2021 G7 summit, President
Biden and other G7 leaders announced a new ``Build Back Better World
(B3W)'' to counter China's BRI and to help developing countries on
their infrastructure needs and address some of their sustainable
development national priorities.\76\
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\74\ Pepe Zhang, ``Belt and Road in Latin America: A regional game
changer?'', The Atlantic Council, October 8, 2018, accessible at
https://www.atlanticcouncil.org/in-depth-research-reports/issue-brief/
belt-and-road-in-latin-america-a-regional-game-changer/.
\75\ Andrew Chatzky and James McBride, ``China's Massive Belt and
Road Initiative,'' Council on Foreign Relations, January 28, 2020,
accessible at https://www.cfr.org/backgrounder/chinas-massive-belt-and-
road-initiative.
\76\ Steve Holland and Guy Faulconbridge, ``G7 rivals China with
grand infrastructure plan,'' Reuters, June 13, 2021, accessible at:
https://www.reuters.com/world/g7-counter-chinas-belt-road-with-
infrastructure-project-senior-us-official-2021-06-12/. See also, The
White House, ``FACT SHEET: President Biden and G7 Leaders Launch Build
Back Better World (B3W) Partnership,'' June 12, 2021, accessible at
https://www.whitehouse.gov/briefing-room/statements-releases/2021/06/
12/fact-sheet-president-biden-and-g7-leaders-launch-build-back-better-
world-b3w
-partnership/.
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conclusion: forward engagement, honest dialogue, and ppp vigilance
The risks and gravity of China's cross-border support for illicit
trade, corruption, and criminality are impacting market stability, the
integrity of the international financial system, the competitiveness of
our industries, the rule of law, and the public health and safety of
people across societies.
Given the scale of today's illicit economies, the U.S. Congress and
the Biden administration, working with the business community and our
international partners, must engage China constructively, honestly, and
cooperatively to address many of the illicit trade threats that I have
outlined today.
We need to elevate the fight against illicit economies and
crime convergence in Congress as a national security and foreign policy
priority, including through a strong bipartisan congressional caucus
and/or an Advisory Commission. Such a platform can send a strong and
united message to China, and others, urging them to work with the
United States towards collective action and high visibility to shut
down illicit markets, investigate and prosecute corrupt and criminal
actors and their complicit facilitators, and to confiscate their dirty
money.
We must find ways to further empower our law enforcement
agencies with new legal authorities and the necessary resources to
disrupt illicit markets and anonymized criminal communications,
prosecute illicit actors and threat networks, and combat corruption and
money laundering safe havens.
We must develop a national security strategy to combat trade-
based money laundering (TBML) and to confiscate criminally derived
proceeds; promote information sharing, coordinate actionable
intelligence across borders; leverage blockchain, AI, and innovative
technologies; and to develop more innovative and smarter global supply
chain solutions to combat illicit pathways and illicit financial flows.
We also need to build greater awareness on the
threats posed by TBML and threat finance through training, education,
and outreach. As the Co-Director of the Anti-Illicit Trade Institute
(AITI, https://traccc.gmu.edu/projects/current/anti-illicit-trade-
institute/) of the Terrorism, Transnational Crime and Corruption Center
(TraCCC, https://traccc.gmu.edu/), Schar School of Policy and
Government, George Mason University, AITI-TraCCC has embarked on an
innovative executive program to combat TBML and illicit trade.\77\
---------------------------------------------------------------------------
\77\ Anti-Illicit Trade Institute (AITI) of the Terrorism,
Transnational Crime and Corruption Center (TraCCC), Schar School of
Policy and Government, George Mason University, accessible at https://
traccc.gmu.edu/.
We urge Congress to pass the Shop Safe Act \78\ and other laws
that stipulate all on-line items for sale must list in the product
description clearly identifiable country or origin; sanction high-risk
violators that are shipping and receiving illicit contraband through
international mail facilities and express consignment hubs; establish
trademark and contributory liability for online marketplace platforms
when a third-party sells a counterfeit product that poses a risk to
consumer health or safety, and other harms, and where platforms do not
follow best practices; incentivize through best practices and due
diligence the verification and vetting of such third-party sellers to
ensure their legitimacy, removing counterfeit listings, and removing
sellers who repeatedly sell counterfeits.\79\
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\78\ The Shop Safe Act 2020, accessible at https://
judiciary.house.gov/uploadedfiles/shop_safe_-_bill_text.pdf.
\79\ John H. Zacharia and Kari Kammel, ``Congress's Proposed E-
Commerce Legislation for Regulation of Third-Party Sellers: Why It's
Needed and How Congress Should Make It Better,'' Business Law Journal,
21 U.C. DAVIS BUS. L.J. 91, February 8, 2021, and accessible at https:/
/blj.ucdavis.edu/archives/vol-21-no-1/zacharia-and-kammel.html.
We should also explore more effective cooperative partnerships
between China, Mexico Canada, and the United States through a new four-
way framework--a Quadrilateral Commission against Illicit Trade and
International Organized Crime--to halt this deadly commerce, and the
flooding of illicit goods into the United States. Such a four-party
confidence-building process would reinforce the homeland security of
each country.\80\
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\80\ Earl Anthony Wayne and David M. Luna, ``Attack Fentanyl Flows
Across Borders: A Real Emergency,'' The Wilson Center, March 18, 2019,
accessible at https://www.wilsoncenter.org/article/attack-fentanyl-
flows-across-borders-real-emergency.
There are no global problems that can be solved by any one
---------------------------------------------------------------------------
partner working alone or in any one sector.
We need more holistic whole-of-society
approaches in dealing with China in order to strengthen their political
will, including dynamic public-
private partnerships, to end illicit economies including those that the
BRI is aiding. That's why ICAIE is proud to support the United to
Safeguard America from Illegal Trade (USA-IT) public education
initiative, and other public and private sector partnerships such as
the U.S. Council for International Business (USCIB)-led efforts with
the OECD, G20, and APEC, working to protect American security and
prosperity from black markets, illegal trade, and criminal
entrepreneurs.\81\
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\81\ United to Safeguard America from Illegal Trade (USA-IT),
accessible at https://www.usait.org/.
As long as China continues to aggressively build a ``great wall of
steel'' as President Xi recently said during the celebration of the
100th anniversary of China's ruling Communist Party,\82\ the United
States must be vigilant of its own national interests and hold China
accountable.
---------------------------------------------------------------------------
\82\ Ben Westcott and Steven Jiang, ``Foreign countries that
`bully' China will meet a `great wall of steel,' says Xi during
Communist Party centenary,'' CNN, July 1, 2021, accessible at https://
www.cnn.com/2021/07/01/china/ccp-100-beijing-china-xi-celebration-intl-
hnk/index.html.
The U.S. must also confront and constructively engage China to be a
more responsible market driver and citizen of the world in addressing a
multitude of the illicit threats that harm U.S. national security, and
the collective security of all nations.\83\ Working with China, we must
end the corruptive influence of today's bad actors who are exploiting
today's illicit economies and are sabotaging legitimate commerce and
the economic sustainability of nations who play by the global trade
system of rules, and by the rule of law.
---------------------------------------------------------------------------
\83\ Congressional Research Service (CRS), ``China's Engagement
With Latin America and the Caribbean,'' July 1, 2021, accessible at
https://crsreports.congress.gov/product/pdf/IF/IF10982.
Through shared responsibility, the United States must find common
ground with China on mutually shared interests of economic growth,
shared prosperity, and cross-border law enforcement cooperation to
combat the multidimensional threats posed by illicit economies harming
both countries and other nations across the globe, thereby helping to
ensure greater market security, safer communities, and sustainable
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peace.
Thank you, and I look forward to your questions.
______
Question Submitted for the Record to David M. Luna
Question Submitted by Hon. Bill Cassidy
Question. The Chinese Government imposes strict capital controls on
its citizens, which may cause some who would otherwise rather stay
within the rules to use illicit means such as trade-based money
laundering (TBML), sometimes through cryptocurrencies, to move money
out of China, facilitating illicit finance and organized crime in the
United States and Latin America. It seems like there is room for us to
cooperate here, since both countries have an interest in stopping TBML
and other similar crimes. Is there some way that we can suggest that we
work together?
Answer. If China wanted to stop the hundreds of billions of dollars
in illicit financial flows related to illicit trade, corruption, and
money laundering, it could easily do so. The failure to constructively
engage China will continue to have long-term impacts to U.S. national
security if unaddressed. This is why it is critical that the United
States hold China accountable and ensure that it is a more responsible
partner. The United States must bring China to the negotiating table
towards more effective enforcement actions to counter cross-border
trafficking threats harming U.S. national security.
constructive diplomatic engagement for more fruitful cooperation
On specific ways to harness political will and work together, we
must:
Elevate the fight against illicit economies globally in
Congress through the creation of a bipartisan Congressional Caucus
Against Illicit Economies (CCAIE) including democratic transparency and
a strong rule-of-law playing field for constructive engagement with
China.
Halt the illicit commerce of deadly fentanyl, synthetic
opioids, and other dangerous illegal goods from China into our country,
and create a new four-way framework--a Quadrilateral Commission against
Illicit Trade and International Organized Crime between Canada, China,
Mexico and the United States. The U.S. should aim to strengthen law
enforcement coordination with other Five Eyes (FVEY) partners. It
should also engage in constructive dialogue with China bilaterally, and
multilaterally through the G20, APEC, and other relevant diplomatic
fora.
Require greater transparency from China on its financial
regulatory system, capital controls, beneficial ownership, anonymous
shell companies, high-value asset purchases, cryptocurrencies,
underground financial systems, use of offshores, Chinese underground
banking (CUBS) and flying money, and third-party payment systems, and
other methods.
The U.S. may want to work with China and provide mutual legal
assistance examining money laundering methodologies especially when
licit and illicit funds are commingled related to financial controls
and capital flight.
Pass the CROOK ACT and TBML legislation to counter corrosive
corruption, kleptocracy, and illicit finance in China, and other
authoritarian states.
A strong TBML legislation should leverage diplomatic
engagement to strengthen the political will in China and other
jurisdiction, and the development of a TBML national security strategy.
Such a strategy would mobilize a TBML Interagency Task Force to
prioritize, investigate and counter TBML threats; enhance information
and intelligence sharing across sectors; harness distributed ledger
technologies that help secure tracking of trade and standardized export
data and invoices; support increased trade data for private-
sector and academic research that help to better understand the
challenges and inform further policy reforms; and help foreign partner
countries strengthen their technical expertise and capacities to
identify, prosecute, and curtail TBML across borders.
Support public-private partnerships such as those being
advanced by ICAIE that leverage information sharing and federated
machine learning to illuminate illicit networks in the shadow economy,
and enable actionable intelligence to law enforcement communities for
judicial action against illicit economies and crime convergence
finance.
sanctions and holding china accountable
If diplomacy does not work, or if the Chinese Government is not
committed to confidence-building measures to work with the United
States to counter illicit economies, we must not shy away from
sanctioning China, including blacklisting it for the continued flooding
of U.S. markets with deadly opioids and counterfeits, stealing trade
secrets, infringing on American intellectual property rights, the
global laundering of dirty money, and cybersecurity crimes.
Building on policies denying safe haven to, and tracking
illicit financial flows of, kleptocrats and designated criminals and
terrorists, the U.S. may also want to consider banning entry \1\ into
U.S. ports maritime ships that fly flags of convenience (FoC) that do
not provide beneficial ownership information to CPB prior to entering
U.S. waters and which contravene the spirit of the Corporate
Transparency Act and Anti-Money Laundering Act of 2020, where such
ships may be involved in facilitating illicit activities, trafficking
counterfeits, smuggling contraband, bribery, and evading sanctions.
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\1\ The United States has similarly done after 9/11 to enhance port
security to protect against a dirty bomb being delivered by a ship; and
when the US banned entry for any single-hulled tanker after the Exxon
Valdez oil spill.
ATTACHMENT 1.
[GRAPHIC NOT AVAILABLE IN TIFF FORMAT]
__
Prepared Statement of Jane Nakano, Senior Fellow, Energy Security and
Climate Change Program, Center for Strategic and International Studies
Chair Warren, Ranking Member Cassidy, and distinguished members of
the Subcommittee on Fiscal Responsibility and Economic Growth, thank
you for the opportunity to appear before you to discuss the rise of
Chinese competitiveness in energy technology sectors and its
environmental and climate implications.
China's emergence as a globally competitive force in energy
technology sectors is a complex and evolving story. The country is the
largest producer and consumer of coal as well as the top official
financier and exporter of coal-fired power plants in the world. At the
same time, the country is a leading exporter of clean energy technology
components, as well as the preeminent force along the supply chains for
many minerals important for such technologies today. The rise of China
as a manufacturer and exporter of a range of energy technologies has
been fueled by their government's long-term commitment towards
investing in public research and development capacity, and nurturing
manufacturing clusters in these sectors. The lagging state of
environmental protections as well as weak climate considerations have
also aided China's emergence in various energy technology fields. While
China may continue to manufacture and export carbon-intensive energy
projects, the country is also a major manufacturer and exporter of
energy technologies that have more limited emissions profiles. My
testimony focuses on the status of the Chinese position in select
energy technology sectors and their climate implications.
coal-fired power generation
In his speech to the United Nations General Assembly in September
2020, President Xi Jinping of China announced the country's intent to
achieve carbon neutrality by 2060. Moreover, at the Leaders' Summit on
Climate in April, Xi reaffirmed his earlier commitment to peak the
country's emissions by 2030, and announced China's intent to begin
phasing down coal consumption in the latter half of this decade. These
are undoubtedly welcomed developments.
However, coal continues to be a major source of China's energy
supply as well as a focus of energy infrastructure exports and
financing. While the share of coal-fired power generation has been
declining in line with the country's official reduction targets,
domestic construction has not ceased. In 2020, China built 38.4
gigawatts (GW) of new coal-fired generation capacity domestically.
What's more, China is a major financier and exporter of high-carbon
energy projects in the world. While China has provided its energy-
related official development finance to a variety of fuel sources and
technologies, the portfolio has historically been carbon-intensive.
Since 2000, China's two global policy banks--the China Development Bank
and the Export-Import Bank of China--have financed over $51.6 billion
worth of coal projects globally, or about 21 percent of their total
energy related financing.\1\ Although the share of coal financing under
the Belt and Road Initiative (BRI) has declined since its peak at 46
percent in 2015, it still accounted for 27 percent in 2020.\2\
---------------------------------------------------------------------------
\1\ Boston University Global Development Policy Center, ``China's
Global Energy Finance,'' https://www.bu.edu/cgef/#/all/EnergySource.
\2\ Christoph Nedopil Wang, ``China Belt and Road Initiative
Investment Report 2020,'' The Green Belt and Road Initiative Center,
January 21, 2021, https://green-bri.org/china-belt-and-road-initiative-
bri-investment-report-2020/.
A combination of the desire of the Chinese Government to address
excess manufacturing capacity at home, the capacity of leading Chinese
policy banks to support coal-fired power plant exports, as well as a
wave of coal-finance bans/restrictions by multilateral development
banks and other major investors have propelled Chinese banks to become
a major source of financing for coal-fired power plants in the world.
Coal-fired power plant export has allowed China to find work for its
laborers and export plants that no longer met domestic environmental
regulations.\3\ Unlike its peers in the advanced, industrialized
countries, China's leading policy banks are not obligated to abide by
the Organization of Economic Cooperation and Development (OECD) Sector
Understanding on Export Credits for Coal-Fired Electricity Generation
Projects that restricts coal-fired power finance. In fact, these
official Chinese institutions merely subject their coal-fired power
official development finance to existing host market environmental
regulations.\4\ Moreover, Chinese policies governing the environmental
aspects of their overseas investments are much weaker than those
governing their domestic investment.\5\
---------------------------------------------------------------------------
\3\ Council on Foreign Relations, ``China's Belt and Road:
Implications for the United States,'' Independent Task Force Report No.
79, Council on Foreign Relations, 2021, p. 57.
\4\ Bo Kong and Kevin P. Gallagher, ``The New Coal Champion of the
World,'' Energy Policy 155 (2021) 112334, March 11, 2021.
\5\ Kelly Sims Gallagher and Qi Qi, ``Chinese Overseas Investment
Policy: Implications for Climate Change,'' Global Policy (2021) doi
10.1111/1758-5899.12952.
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solar and wind power\6\
---------------------------------------------------------------------------
\6\ Portions of this section are adapted from Sarah Ladislaw, Ethan
Zindler, Nikos Tsafos, Logan Goldie-Scot, Lachlan Carey, Pol Lezcano,
Jane Nakano, and Jenny Chase, ``Industrial Policy, Trade, and Clean
Energy Supply Chains,'' February 2021, a report by the CSIS Energy
Security and Climate Change Program and Bloomberg NEF, https://csis-
website-prod.s3.
amazonaws.com/s3fs-public/publication/
210224_Ladislaw_Industrial_Policy.pdf?DRja.V6axwy
BE_PV6Chmdi5k2VqOq33n.
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China's strong export position has come to extend to other energy
technologies including those with much more limited emissions profiles,
such as solar and wind power. The government's support to develop these
industries included generous feed-in-tariffs and robust credit to new
equipment makers by China's development finance institutions. By the
early 2010s, Chinese manufacturing of solar and wind equipment was
booming, driving down the equipment prices and facilitating their
deployment in advanced, industrialized economies.
In solar PV value chains, China leads the world in the
manufacturing of polysilicon and wafers, accounting for two-thirds of
the global polysilicon manufacturing capacity (regardless of factory
location) and over 90 percent of the global wafer manufacturing
capacity today. Even in the segments where China is less dominant, such
as solar cell and module manufacturing, leading Chinese companies are
vertically integrated, allowing them to exert better cost control and
manage output certainty. For example, Chinese companies own about 72
percent of the world's module manufacturing capacity (regardless of
factory location) today.
Chinese presence is less dominant in wind power supply chains as
the industry preference for larger projects to drive down costs has led
the components to be heavier and costlier to ship, thus encouraging
supply chains to grow near demand centers. Nonetheless, China is home
to about 40-60 percent of the global manufacturing capacity for key
wind power components, such as nacelles, wind towers, turbines, and
gearboxes.
electric vehicles and batteries\7\
---------------------------------------------------------------------------
\7\ Portions of this section are adapted from Sarah Ladislaw, Ethan
Zindler, Nikos Tsafos, Logan Goldie-Scot, Lachlan Carey, Pol Lezcano,
Jane Nakano, and Jenny Chase, ``Industrial Policy, Trade, and Clean
Energy Supply Chains,'' February 2021, a report by the CSIS Energy
Security and Climate Change Program and BloombergNEF, https://csis-
website-prod.s3.
amazonaws.com/s3fs-public/publication/
210224_Ladislaw_Industrial_Policy.pdf?DRja.V6axwy
BE_PV6Chmdi5k2VqOq33n.
---------------------------------------------------------------------------
China is beginning to establish a commanding position in the
electric vehicle (EV) sector too. Today, the country is the largest EV
market in the world. Notably, China has been focused on expanding local
manufacturing capacity in every phase of
lithium-ion battery and EV production, rather than overall EV sales
numbers the way many western leaders in the EV industry have. As a
result, China has also emerged as a leading producer of key EV
components, such as cathodes, anodes, and separators. While the market
is more diverse in the final stages of battery production given the
legacy production capacities in Japan and South Korea for battery
cells, and new facilities in Europe and the United States, cell
manufacturing remains concentrated in China.
A host of policies and actions, including demand and supply
incentives, public procurement, and R&D (research and development)
funding, has propelled the rise of China's EV sector. Since EVs were
identified as one of seven ``strategic emerging industries'' in 2010,
and as a key target industry under the Made in China 2025 plan, China
has deployed multiple measures to support the sector. For example,
under the Energy-Efficient and New-Energy Vehicles Industrial Plan
2012-2020, China focused both on research and development work on EVs,
especially to drive down battery costs as well as to improve
performance, and on a mass rollout of EVs. The Chinese government spent
a large sum of public R&D funding through national labs and
universities, developed a few leading companies in each stage of EV
battery value chain so as to avoid overcapacity issues, accelerated EV
demonstration, and led the development of charging infrastructure.
While China has rebalanced its spending towards R&D and government
procurement in the recent years, direct purchase subsidies also played
a major role in expanding EV sales.
minerals\8\
---------------------------------------------------------------------------
\8\ Portions of this section are adapted from Jane Nakano, ``The
Geopolitics of Critical Minerals Supply Chains,'' March 2021, a report
by the Center for Strategic and International Studies, https://csis-
website-prod.s3.amazonaws.com/s3fs-public/publication/
210311_Nakano_Critical_
Minerals.pdf?DR03x5jIrwLnNjmPDD3SZjEkGEZFEcgt.
A key factor underpinning China's competitiveness in these clean
energy technologies is its commanding position along the supply chains
for rare-earth minerals and other minerals as well as metals that are
vital to clean energy technology components, such as wind turbines,
photovoltaic cells, and EV batteries. China has cultivated its mineral
wealth and developed mid- and down-stream capabilities through various
industrial policies. For example, China accounts for roughly two-thirds
of global production of rare-earth elements. Where it lacks access to
minerals, China has invested in mining and upstream projects abroad.
For example, limited in cobalt resources, China has invested in cobalt
mines and participated in cobalt smelting projects in the Democratic
Republic of the Congo, which accounts for nearly two-thirds of cobalt
production in the world; China has come to account for about 70 percent
---------------------------------------------------------------------------
of the global cobalt refining capacity.
China made it a priority to ``develop research and production of
advanced rare-earth applications and new materials (e.g., permanent
magnets and lasers) for domestic consumption and export'' as early as
in the mid 1980s, under the seventh National Five-Year Plan for Rare
Earth Industry (1986-1990). By 1985, there already were more than 300
public research institutes and university research centers in China
working on research projects related to rare-earth mining, smelting,
and applications. Moreover, export and production quotas were among the
measures that helped to grow their materials industry.\9\
---------------------------------------------------------------------------
\9\ The export quota, introduced in 1999, ended following a World
Trade Organization (WTO) dispute settlement panel ruling against China.
China's rare earth production quota, introduced in 2006, remains in
effect.
As China's own demand for minerals for advanced energy technology
production rises, China has introduced plans, such as the National
Mineral Resource Plan for 2016-2020, to establish the country's
capabilities to safeguard its supply chains against various causes of
potential supply disruptions. More recently, in January 2021, China
introduced draft Regulations on Rare Earth Management. The regulations
would reinforce the protection of what the government regards as the
``prized resources [with] irreplaceable significance for the upgrade of
traditional industries, and the development of emerging
industries,''\10\ by strengthening the approval process for mining and
processing projects, as well as the rare-earth trade.
---------------------------------------------------------------------------
\10\ Liu Zhihua and Liu Yukun, ``China to step up protection of
rare earth resources,'' China Daily, January 16, 2021, https://
global.chinadaily.com.cn/a/202101/16/WS60023d3aa31024ad
0baa3039.html.
The country's preeminence in the mineral supply chains came with a
high environmental cost, however. The mining and processing of rare
earth elements use a variety of chemical substances and generate
significant quantities of waste. In China, rare-earth ore is commonly
laced with radioactive materials, such as thorium, and the separation
process requires large amounts of carcinogenic toxins, such as
sulphates, ammonia, and hydrochloric acid.\11\ Without proper
environmental protections, such mineral extraction and process can be a
source of soil and water contamination. There have been a numerous
Chinese and western academic and journalistic accounts of environmental
and health damages from these mining activities in China. While China
began a large-scale mining of these minerals in the mid-1980s, it was
not until the mid-2010s that the government introduced stringent
environmental regulations, including technical standards and
specifications for rare-earth mining processes.\12\
---------------------------------------------------------------------------
\11\ Jonathan Kaiman, ``Rare earth mining in China: The bleak
social and environmental costs,'' The Guardian, March 20, 2014, https:/
/www.theguardian.com/sustainable-business/rare-earth-mining-china-
social-environmental-costs.
\12\ Hongqiao Liu, et al., ``Rare Earths: Shades of Gray,'' China
Water Risk, June 2016, pp. 37-38, https://chinawaterrisk.org/wp-
content/uploads/2016/08/China-Water-Risk-Report-Rare-Earths-Shades-Of-
Grey-2016-Eng.pdf.
---------------------------------------------------------------------------
nuclear\13\
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\13\ Portions of this section are adapted from Jane Nakano, ``The
Changing Geopolitics of Nuclear Energy,'' Center for Strategic and
International Studies, March 2020, https://csis-website-
prod.s3.amazonaws.com/s3fs-public/publication/
200416_Nakano_NuclearEnergy_UPDATED%
20FINAL.pdf.
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Nuclear energy is also a sector where China is emerging as a global
technology supplier, following a remarkable expansion of its domestic
nuclear power generation fleet. Between 2011 and 2019, China brought 35
reactor units online at home, 10 units more than all of non-Chinese new
units combined worldwide. Although the Fukushima accident tempered its
original, robust expansion vision, China's installed nuclear capacity
targets remain strong. Per the country's 14th 5-year plan (2021-2025),
China will have a total installed capacity of 70 GW by 2025, overtaking
France (61 GW), as the second largest in the world behind the United
States (96 GW).
Thus far, China's only destination for its nuclear power plant
exports is Pakistan. China is pursuing multiple deals in its effort to
become a global leader in nuclear power, however, by combining ``good
enough'' technologies with attractive financing. Again, not bound by
OECD regulations, China has offered financing that is large (in total
amount provided), cheap (with low interest rates) and long-lived (with
long repayment periods). China's most active export efforts underway in
the United Kingdom and Argentina suggest that China uses financing and
a willingness to execute projects others find unattractive as a lever
to land additional nuclear projects that can advance its interest.
China's rise as a global supplier of nuclear energy technology has
profound implications from nuclear safety and nonproliferation, as well
as geopolitical perspectives.
conclusion
More needs to be done to address China's financing practices for
energy exports that have market distorting effects against cleaner
energy sources and technologies, as well as energy technologies that
are manufactured by advanced, industrialized democracies like the
United States. The United States should work more closely with
multilateral development banks and fellow OECD member governments to
remedy the lack of international mechanisms to reign in China's public
high-carbon financing and export practices.
Also, while China's contribution to reducing the costs of low-
emission technologies is undeniable, their practices in mining and
processing minerals that are key to clean energy technologies warrant
closer evaluation from the environmental, social, and governance
perspectives. Concurrently, our over reliance on Chinese supplies of
these minerals and metals needs to be remedied.
Fundamentally, however, the United States needs to do more to
enhance its energy technology competitiveness. The effort to promote
American global competitiveness will benefit from the U.S. government
playing a strategic role in creating more demand for these
technologies, investing in research and innovation, and providing a
supportive environment for their manufacturing to thrive. The
government also has an essential role to play in strengthening the
supply chains for minerals and metals that underpin our clean energy
economic activities.
Being competitive in energy technology sectors means preserving a
strong innovation eco-system, rebuilding a manufacturing base, and
securing supply chains. Moreover, being competitive in clean energy
technology sectors is not simply about doing our share in reducing
emissions. These technologies are no longer niche and they already
account for hundreds of billions of dollars in investment and consumer
spending, with strong outlook for further growth.\14\ The endeavor
therefore has a strategic value to our Nation as competitive clean
energy sectors can augment the U.S. position in the global economy.
---------------------------------------------------------------------------
\14\ Nikos Tsafos, Lachlan Carey, Jane Nakano, and Sarah Ladislaw,
``Reshore, Reroute, Rebalance: A U.S. Strategy for Clean Energy Supply
Chains,'' Center for Strategic and International Studies, May 2021,
https://csis-website-prod.s3.amazonaws.com/s3fs-public/publication/
210519
_Tsafos_Reshore_Reroute.pdf?oIS49QNCeuHW43Hqwm83aOuBEuxfVqbx.
______
Prepared Statement of Hon. William E. Spriggs, Ph.D., Professor of
Economics, Howard University; and Chief Economist, AFL-CIO
Thank you, Chair Elizabeth Warren and Ranking Member Bill Cassidy,
for this invitation to give testimony before your committee today on
the issue of our Nation's crisis. I am happy to offer this testimony on
behalf of the AFL-CIO, America's house of labor, representing the
working people of the United States; and based on my expertise as a
professor in Howard University's Department of Economics.
My testimony today will discuss gaps in U.S. infrastructure
compared to our leading trading partners. Many of these gaps do not
require Federal fiscal resources but do require updating our
institutions and legal structures to meet the challenges of the 21st
century. The current crisis of the COVID pandemic highlights our need
to improve. While Congress has reacted swiftly and admirably with aid
to support the economy, on many dimensions the U.S. was less resilient
than our leading trading partners and is set to have major challenges
ahead we can avoid.
Because of Congress, and now the leadership of President Biden, the
American Rescue Plan (ARP) has been well received by those who compare
global economic activity. The International Monetary Fund (IMF) and the
Organisation for Economic Co-operation and Development (OECD) revised
their forecast upward for this year and next based on the passage of
the ARP. And, given the importance of the U.S. economy to global
economic growth, this changed their optimism for a faster global
recovery. Yet, they both still see a full recovery more than a year
away.
Thanks to the rapid deployment of vaccines in the U.S., American
hospitalization and death rates from COVID plummeted, and after being
far above the rest of our trading partners, we have finally now
surpassed them in having lower rates of severe outcomes from COVID.
That has allowed U.S. economic activity to accelerate, and buoyed by
the ARP's support of American households, helped accelerate our job
growth. But, even if we maintain this current record setting pace of
hiring, it will still be more than a year to get employment back to
normal levels.
So, given we are still in the path of recovery, we should focus on
lessons learned and make changes to sustain the recovery and make our
economy more resilient. Several of the changes that Congress improvised
to fix our labor market safety net show key gaps the U.S. faces
relative to our competitors. Our labor market regulations are clearly
out of date. The scale at which we needed our labor institutions to
work only highlight how on a regular basis the resiliency we need is
not present.
Among our leading trading partners, we have a lower level of
workers covered by collective bargaining agreements. Last year, during
the pandemic, while we lost jobs across almost all industries, within
industry, relatively more non-union than union jobs were lost, so the
share of workers in unions rose. The presence of a collective
bargaining agreement helped firms in two ways. One is that by having a
partner with whom they could negotiate, firms could retain workers and
share the responsibility of making decisions on how to adjust hours and
pay and safety conditions. The other is that for some industries, like
the airlines, it meant management and workers could present a consensus
view to Congress and policymakers on the best way forward to maintain
an orderly slowdown of business and keep maximum flexibility to allow
for the fastest restart. Within the trade context itself, researchers
have found that similarly, the response of industries with stronger
collective bargaining structures led to fewer jobs lost in the face of
the China trade shock of this century, than in industries with lower
union density.\1\ Union workers are, generally, more satisfied with
their working conditions than non-union workers,\2\ and this helps with
worker retention; a problem firms are struggling with as the economy
reopens. And when comparing labor market performance of OECD nations,
the OECD's research shows that stronger central bargaining systems
outperform weak systems in wages, employment and gender and younger
workers labor outcomes, primarily because they are better at smoothing
economic shocks and reducing inequality.\3\ Updating our National Labor
Relations Act to address changes in the workplace since the 1940s, such
as by passing the PRO Act, is key.
---------------------------------------------------------------------------
\1\ Robert Baldwin finds that during the Japanese import boom,
1977-1987, trade impacted less-than-college-educated union workers more
than non-union workers, but from 1987 to 1997, trade had no different
impact on jobs losses for union or non-union workers. Robert Baldwin,
The Decline of U.S. Labor Unions and the Role of Trade (Petersen
Institute: Washington, 2003). Alhquist and Downey find that between
industries, those with higher union density fared better than lower
union density industries in the face of the China trade shock. Though
within manufacturing, union workers suffered more losses. John S.
Ahlquist and Mitch Downey, ``Import Exposure and Unionization in the
United States,'' https://ccd.ucsd.edu/_files/papers/Ahlquist
DowneyTradeUnionsApril2019.pdf.
\2\ Richard Freeman, David Blanchflower and Alex Bryson, ``Unions
Raise Worker Well-being,'' https://european.economicblogs.org/voxeu/
2020/blanchflower-bryson-unions-wellbeing.
\3\ OECD, Negotiating Our Way Up: Collective Bargaining in a
Changing World of Work (OECD Publishing: Paris, 2019).
Our unemployment insurance system was clearly outdated and
overwhelmed. It was designed primarily to deliver income support to
manufacturing workers during business cycles prompted by inventory
cycle busts. Yet, in February 2020 we had roughly the same number of
restaurant workers as manufacturing workers and lost more restaurant
jobs than the size of our nondurable manufacturing workforce in 2
months. But in a normal economy, fewer than 10 percent of restaurant
workers receive unemployment benefits.\4\ Going forward, losing the
changes Congress enacted on this temporary basis, the system will be
more fragile, exposing greater risk on the macroeconomy and reducing
the resilience of individual households to economic shocks.\5\ The low
wages of too many workers made them too precarious, and additions to
State benefits were necessary. Several studies show the extra benefits
did not slow people returning to work,\6\ but did help ensure cash
balances for all households by income quintile and race.\7\ Those steps
are key to the economy having a speedy recovery. The U.S. stood out
among our trading partners because they leveraged their stronger labor
market institutions to implement job retention programs, keeping
workers and employers attached.\8\ A higher minimum wage, as most of
our trading partners have, would make more families resilient.
---------------------------------------------------------------------------
\4\ U.S. Bureau of Labor Statistics, Characteristics of
Unemployment Insurance Applicants and Benefit Recipients News Release,
November 7, 2019, https://www.bls.gov/news.release/archives/
uisup_09252019.htm.
\5\ Josh Bivens, Melissa Boteach, Rachel Deutsch, Francisco Diez,
Rebecca Dixon, Brian Galle, Aliz Gould-Werth, Nicole Marquez, Lily
Roberts, Heidi Shierholz and William Spriggs, Reforming unemployment
insurance: Stabilizing a system in crisis and laying the foundation for
equity (Economic Policy Institute: Washington, June 2021), https://
files.epi.org/uploads/Reforming-Unemployment-Insurance.pdf.
\6\ Arindrajit Dube, ``Aggregate Employment Effects of Unemployment
Benefits during Deep Downturns: Evidence from the Expiration of the
Federal Pandemic Unemployment Compensation,'' NBER Working Paper 28470
(National Bureau of Economic Research: Cambridge, February 2021),
https://www.nber.org/system/files/working_papers/w28470/
w28470.pdf?orgid=19
7&utm_att1=moneyorgid=197&utm_att1=money.
\7\ JPMorgan Chase and Co. Institute, Financial outcomes by race
during COVID-19, Research Brief (JPMorgan Chase Institute: Washington,
June 2021) https://www.jpmorganchase.com/content/dam/jpmc/jpmorgan-
chase-and-co/institute/pdf/financial-outcomes-by-race-during-COVID-
19.pdf.
\8\ OECD, OECD Employment Outlook 2021: Navigating the COVID-19
Crisis and Recovery (OECD Publishing: Paris, July 2021).
Another shortcoming the U.S. labor market faced is our lack of paid
leave, either paid sick days or paid family leave. With the recent
resurgence of COVID in many States, dealing with lost pay from
hospitalizations will continue to be a challenge for too many
Americans. And our lack of paid family leave will continue to keep too
many workers out of the labor market. Labor force participation for
women fell to 54.6 percent in April 2020, its lowest level since late
1985, and has only rebounded to its levels of 1988. Coupled with our
lack of a Federal policy ensuring access to child care, the U.S. sticks
out among our trading partners for remaining to have labor regulations
designed for a male dominated manufacturing world. In 2018, the U.S.
ranked 10th among G20 economies for women's labor force participation,
and 6th among the G7 economies, only ahead of Italy.\9\ Given the aging
of the American population, it is imperative that the U.S. adopt the
leading recognized policies that support women's labor force
participation, or our economic growth will stall faster.
---------------------------------------------------------------------------
\9\ OECD and ILO, Women at Work in G20 countries: Progress and
Policy action [Paper prepared under Japan's G20 Presidency (2019)],
https://www.oecd.org/g20/summits/osaka/G20-Women-at-Work.pdf.
These shortcomings were laid bare by the COVID crisis. They show on
the macroeconomic level how destabilizing our labor market institutions
are. To be competitive on a global level, we need to understand how, on
a local labor market level, crises have been occurring throughout this
century. In addition to updating our labor regulations, we need to
expand our vision of what we need for trade adjustment assistance. A
consensus has developed from research that trade in this century has
had a devastating impact on those local labor markets that faced the
greatest low wage and low labor standard competition from trade.\10\
This was true of workers in those communities, and the destabilizing of
sources of high wage jobs had a bigger impact on Black workers. Trade
Adjustment Assistance needs to give additional focus to supporting
communities that are impacted by trade with the tools to engage active
labor market policies, especially adding youth job and training
programs.
---------------------------------------------------------------------------
\10\ See for example: David Autor, David Dorn and Gordon Hanson,
``The China Syndrome: Local labor market effects of import competition
in the United States,'' American Economic Review 103, No. 6 (October
2013): 2121-2168; and William Spriggs, Nyana Browne and Bethel Cole-
Smith, ``China Import Penetration and U.S. Labor-Market Adjustments''
(May 2021), https://economics.howard.edu/sites/
economics.coas.howard.edu/files/2021-06/Impact_of_China_Trade
_Shock_on_Black_Employment___May_2021.pdf.
And, to remain competitive in the 21st century, the U.S. needs to
go back to find its future. In the middle of the 20th century, the U.S.
made massive investments in supporting American students getting
broader access to, and completing, higher education. It propelled us to
be number one among OECD nations, and yielded American dominance of
computer technology innovations at the end of the 20th century. In the
20th century, America pioneered in free college education or highly
subsidized financing of higher education loans, including substantial
loan forgiveness, to achieve that competitive advantage.\11\ But, in
the 21st century we reversed course, raised the cost of student
borrowing, and dramatically cut public support of higher education
transferring the bulk of financing higher education from State provided
funds to instead burden student tuition revenue. The result is a crisis
of student debt for Black and Latino students and low-income students
that are now most of America's potential college students.\12\ To
maintain U.S. leadership we must increase our college graduates among
the groups with the lower the college attainment.
---------------------------------------------------------------------------
\11\ John Bound and S. Turner, ``Going to War and Going to College:
Did World War II and the GI Bill Increase Educational Attainment for
Returning Veterans?'', Journal of Labor Economics 20 No. 4 (October
2002): 784-815; K.W. Olson, ``G.I. Bill and Higher Education: Success
and Surprise,'' American Quarterly, 25 No. 5 (December 1973): 596-610;
P.E. Flattau, J. Bracken, R. Van Atta, A. Bandeh-Ahmadi, R. de la Cruz
and K. Sullivan, The National Defense Education Act of 1958: Selected
Outcomes (Science and Technology Policy Institute, Institute for
Defense Analysis: Washington, 2006), https://
d1wqtxts1xzle7.cloudfront.net/8411877/NDEA
%20D3306-FINAL.pdf?1328607798=&response-content-
disposition=inline%3B+filename%3DThe_
National_Defense_Education_Act_of_19.pdf&Expires=1624918411&Signature=Qc
oluWInYlBJNs
SytaaindfPmeNyLVNkIv0-M92kzq2wOjQn.
\12\ M. Mitchell, M. Leachman and M. Saenz, State Higher Education
Funding Cuts have Pushed Costs to Students, Worsened Inequality (Center
on Budget and Policy Priorities: Washington, 2019); J. Bound, B. Barga,
G. Khanna and S. Turner, ``A Passage to America: University Funding and
International Students,'' American Economic Journal: Economic Policy 12
No. 1 (February 2020): 97-126.
I have emphasized American workers in my testimony. Clearly, to be
competitive America must have 21st-century physical infrastructure:
safe roads, bridges, reliable clean energy public transportation and
clean drinking water, up-to-date school and university buildings and
laboratories. But, as we look to the 21st century, we cannot forget
America's true competitiveness lies in its people and our ideals as a
Nation. This century sees old challenges of American democracy on the
rise: fascism and the state-controlled economy of China. Our previous
leadership was attained by having a government that bet on the American
people and invested heavily in Americans. Unfortunately, not always all
Americans and not all Americans equally. But this century we must
---------------------------------------------------------------------------
strive to do better, and this time invest in all Americans.
And we must lead by being the beacon on human and labor rights, as
the global champion of democracy. To be competitive in this century we
must advance and broaden the right to vote: those States that have
started attacking the right to vote are the States that are not
investing in K-12 public education or reversing course to invest in
higher education or in this pandemic crisis ensure expanding access to
health insurance. Here at home democracy is important to economic
growth, as it is globally.
And we must protect and lead in labor rights, to show other nations
that is the way to more sustainable economic growth. That means paying
those incarcerated the Federal minimum wage, at least; and adopting far
more ILO conventions so we can pull other countries forward in our
trade agreements to raise the global floor instead of getting us all in
a race to the bottom. And that means, again raising the global floor,
by insisting there is level playing field between nations and
corporations when it comes to paying a fair share of taxes. Without
that revenue, we cannot have all nations make the investments in
health, education and labor standards we need so the rules of global
competition are rules that raise the world, instead of lowering
American standards.
So, to be competitive, let us build our roads, but let us not lose
focus on strengthening Americans. Let us lead by example as a Nation,
to define the rules of global competition.
______
Questions Submitted for the Record to Hon. William E. Spriggs, Ph.D.
Questions Submitted by Hon. Ron Wyden
Question. In the past, U.S. infrastructure policies focused on
short-term repair and bare-bones maintenance of our physical
infrastructure, instead of smart, bold, long-term investments. When it
comes to human services infrastructure, we have seen a similar lack of
investment in the safety net programs and training programs that
support our workforce.
Can you discuss the importance of the U.S. taking bold action to
invest in both physical and human services infrastructure, and how
these significant investments today can pay off in the future?
Answer. Since the 1950s when the United States made a significant
investment in laying out a commitment to a Federal interstate highway
system and in a massive increase in the infrastructure of select
universities' science and research capacities, our investments have
been concentrated on the maintenance of what was
cutting-edge 20th-century infrastructure. We are now in the 21st
century. That means we must have the backbone of 21st-century
infrastructure.
Infrastructure is government investments that increase the
efficiency of the marketplace by increasing the return on private
investment. Government investment is complimentary to private
investment. The government investment ensures that there is a universal
``on ramp'' for key investments the private sector can build on to get
people and products to market. In the 21st century, the backbone is
different than in the 20th century. Our challenges are different.
In the mid-20th century, we made a massive increase in human
capital investments. In 1946, fully half of all our college students
attended a small set of our finest institutions free, because of the
huge investment in the human capital of the ``greatest generation''
made using the GI Bill. We followed by making it possible for students
to attend college by creating a capital market for student loans,
including forgiving the debt of those who pursued careers in public
education in the sciences and foreign languages. This gave our business
community a huge leg up. They could benefit from a significant pool of
highly trained workers that let them develop and implement new
technologies to scale. With a large pool of highly educated workers,
the United States had a workforce that could invent, develop and
manufacture the transistors, printed circuits, and solid-state
electronics that fueled the computer age and America's advantage in
those technologies.
Today, we must continue that commitment. But we must do more. That
20th-
century investment was heavily slanted to developing a workforce of
white males. We need to fully develop our entire workforce.
The United States ranks sixth of the seven largest economies in
women's labor force participation. Our businesses need access to the
talents of what has become half our workforce. That means in the 21st
century we cannot ignore the need to invest in the care economy that
can make it possible for more people to be active in the paid labor
force. On their own, businesses cannot make the investment to create
childcare and elder care options available to scale. That ``on ramp''
to access the human resources of our Nation is as necessary as a deep-
water port is to accommodating modern ocean freighters.
Further, our Nation's commitment to opportunity and equality that
was the hallmark of the post-World War II economy, meant we could
freely rely on the market to function for the details of human capital
investment for the specifics. Labor unions could negotiate workplace
specific skills training and reward systems. This makes passage of the
Richard Trumka Protecting the Right to Organize Act imperative. Public
investment at the State and local level made educational opportunity
affordable to the emerging middle class created by a host of policies
that included easy access to education and training. This was combined
in the middle of the 20th century with our aggressive steps to
dismantle the barriers that white supremacists constructed through then
legal segregation that denied equal educational resources.
Our reversal to our commitment to equality has resulted in a much
smaller purchasing power for the middle class and the shrinking of the
middle class and our cutting investment in public higher education has
revealed that in the 21st century we are on a path to scarce, not
abundant, supplies of highly skilled workers. So, we must also expand
the set of institutions where we invest. And correcting that by
investing in the Historically Black Colleges and Universities that were
passed over is part of that strategy. We also now know, the vital role
of the care economy in providing the kick-start to elementary school
education. So, we must invest in early childhood education to both
level the playing field that will increase our supply of skilled
workers, and to free women to enter the paid workforce.
Clearly, in the middle of the 20th century we realized that the
12th grade education that was needed to produce autoworkers, flight
mechanics, x-ray technicians would not be adequate for an age of
computers. That is more abundantly clear today. So, we must expand and
renew our vision of the basic skills needed for a 21st-century
workforce. That means expanding the affordability of higher education
and increasing access points to help education and training beyond high
school. This is merely a renewal of commitment made from 1940 to the
1970s to previous generations.
In the 20th century, an interstate highway system was needed to
increase the efficiency of our transportation network. The ``last
mile'' problem of getting goods to people and markets, required a
highway system for trucks. But, in the 21st century the new highway is
an information highway. Businesses need a fast thoroughfare to get high
speed Internet information to and from consumers, and the potential to
tap into workforces that can be spread across the country. So, we must
commit to a massive increase in our investment in broadband Internet.
Finally, we clearly understand the result of building up carbon
emissions threatens human life. The earth will continue, but humans
will be like dinosaurs, unable to sustain the species with life as we
know it on planet with higher temperatures, greatly reduced arable land
for crops and livestock, and rising sea levels that will remove large,
populated areas. Businesses will not be able to absorb the huge
uncertainties of more frequent and powerful storms and flooding, and
the ever-present threat of wildfires.
We must make investments that can let us transition to a new
economy that is sustainable. This investment must be done in a
coordinated way to allow for a just a transition. Only through
government action can the change in the economy be engineered to
accommodate the reallocation of resources from carbon dependent
industries so workers and communities can get the investments they need
to keep good jobs and economically viable communities. Those ``wiser''
investments include investment in public and mass transportation, that
expands job opportunities, including rural communities. Failure to act
will doom farmers, rural America, those living in coastal communities
and those in the path of hurricanes, tornadoes and drought caused
disasters to lose. Workers who make their living in food processing,
farming, timber products and fishing will all lose jobs as the
environment stresses the land and sea. People living in our coastal
cities will lose their properties to rising seas. We must engineer a
transition that can stall, and hopefully reverse global warming, to
create clear paths for those who produce carbon to benefit most from
new technologies and new energy sources. This can all be done with
proper vision and proper investment choices.
Question. The coronavirus pandemic has illustrated critical faults
in our economy. It has shown how an unexpected crisis or economic
downturn can set workers back in ways that can be difficult to recover
from. Your testimony focused on the gaps in U.S. policy that, if
filled, could make our economy more resilient and supportive for
American workers.
Please expand on the top three policy actions the Federal
Government could take to ensure workers are better supported during the
next crisis. How will those actions ensure a more resilient economy
going forward?
Answer. The most glaring problem Congress confronted was our
inadequate unemployment insurance system. Touted as being an
``automatic stabilizer,'' clearly our unemployment system, when
confronted with a large influx of unemployed workers, was wholly
inadequate. It covered too few workers and had an income replacement
rate that could hardly be called ``insurance.'' Our States had failed
to make the proper investments to create an information infrastructure
adequate to the size of our workforce. The system currently contains
incentives for States to retreat from making the system robust.
Instead, the current system rewards States for making the system less
``automatic'' and encourages them instead to reduce those covered and
to limit their ``insurance.'' Several States ahead of this crisis had
already limited their programs, and more have legislation pending to
reduce coverage and benefits more.
Congress should be congratulated for its rapid response to this
crisis and its transformation of the program. A very key element was
increasing the replacement rate of benefits. For those workers who have
low savings levels this was crucial. Workers with low cash savings, use
less of their unemployment checks to keep up their buying power.
Instead, they increase their savings to try and stretch the
unemployment checks. The lack of savings is disproportionately a burden
for Black and Latino households. This is a direct effect of Black and
Latino workers lower earnings and higher probabilities of being
unemployed during economic downturns; and the substantial racial wealth
gap--true for Black and Latino households of all income levels. In this
downturn, because the disproportionate share of the unemployed were
Black or Latino, the added benefit was crucial to sustain the buying
power in low-income neighborhoods and protect the cash flow of
businesses in those communities. The result was that employment in
businesses in low-income neighborhoods was protected better than in the
past. When the economy takes a huge downturn, and the key function of
the unemployment insurance is to be an automatic stabilizer of
aggregate demand, it is important that the unemployment insurance
system adopt to account for the liquidity problems of low-income and
low-wealth households.
The unemployment system also fails to adequately cover part-time
employees. The use of an earnings test, instead of an hours worked
test, to determine who is eligible to receive benefits left too many
workers outside the regular State unemployment insurance system
benefits. This has clear racial and gender equity issues, that have
been well documented, and were glaringly clear this downturn.
The second glaring inequality was the painfully slow recovery of
Black employment. Though Black workers did not suffer the same
proportionate loss of jobs as some other communities, they did suffer
such a slow recovery, that they quickly became the set of workers left
most vulnerable. For most of the recovery, the unemployment rate of
high school dropouts has been lower than the Black unemployment rate
(averaged for all education levels) and lower than the Black
unemployment rate for Black workers with associates degrees. Despite
claims that companies were desperately looking for workers, the Black
unemployment rate climbed 2 months at the beginning of this summer. Our
national enforcement of anti-discrimination in employment must take
clear center. And it is vitally important to bolster anti-
discrimination in hiring for infrastructure projects to ensure we do
not repeat the way that highway construction in the 1950s exacerbated
racial inequality.
Finally, a major problem encountered in helping Americans was the
uneven level of access to banking that was revealed. This was true
among small businesses trying to access the Payroll Protection Plan,
and to families that needed to receive their various benefits through
the IRS. It was also clear that the Federal commitment to a robust
information infrastructure for the IRS was almost as woeful as the
State level investment in the unemployment insurance system. A bigger
investment is needed in the IRS's data infrastructure. We will continue
to have needs to deliver timely aid to Americans as wildfires threaten
America's great Pacific Northwest, and hurricanes ravage our Gulf Coast
states. Improved access to banking, whether through Postal Savings
Banks, improved Community Reinvestment Act enforcement or other means
and a better infrastructure at the IRS would make implementing programs
that could prevent fraud could be implemented quickly and efficiently.
Unfortunately, as we see the painfully slow implementation of the
renters' assistance program to prevent evictions, there are serious
consequences to these gaps.
______
Prepared Statement of Hon. Elizabeth Warren,
a U.S. Senator From Massachusetts
Good afternoon. Welcome to the hearing before the Subcommittee on
Fiscal Responsibility and Economic Growth. I am very pleased to be
working with Ranking Member Cassidy on this hearing on ``Defending and
Investing in U.S. Competitiveness.''
So how does America compete in a global economy? For too long, the
answer has been some variation of ``help giant corporations make the
most money.''
Big multinational corporations have no loyalty to our Nation. They
say quite openly their loyalty is to their shareholders, and about 40
percent of the shareholders of publicly traded companies aren't
Americans. These multinational corporations pursue profits--even if
those profits come at a cost to American workers or to our environment.
It is not the job of the United States Government to work to boost
profits of big multinationals that have no particular loyalty to the
United States. Instead, the goal of economic competition should be to
make our domestic economy strong and to raise the standard of living
for the American people. That means investing in American jobs and
American workers. And here's the best part: if we give American workers
the tools they need, they can compete with anyone, including global
economic rivals like China.
Economic competition is also political competition. Fair
competition can produce and spread the best ideas. We have a chance to
show China and the whole world that an American approach that invests
in and empowers workers is the most effective way to compete.
There are two aspects of global competitiveness that I'd like to
focus on in this hearing. The first is that, in order to compete in a
global economy, American workers need to have a fair set of trade
rules--which they do not have right now. Our existing trade rules have
undercut our workers, promoted offshoring and a global race to the
bottom in labor and environmental standards, and that is because, for
decades, the U.S. Trade Representative has represented big
multinational corporations while workers, environmentalists, and other
parts of the diverse American economy were pushed to the side, with
their interests and concerns given second-class status. That needs to
stop. U.S. trade policy needs structural reforms to ensure that it
reflects the interests of all Americans, not just a handful of
corporations trying to maximize short-term profits.
The second reason why workers are struggling against international
competition is that we have failed to make critical domestic
investments in our workforce. We know that American workers--given the
right tools--can out-compete China and every other country in the
world.
China offers a clear counter-approach. It fundamentally devalues
and disempowers its workers by barring them from organizing, by
pressing ethnic minorities into forced labor camps, by making migrant
workers second-class citizens, and by leaving working families to go it
alone on child care. This has helped China cut production costs in the
short term, but there are long-term costs. The Chinese Government
recognizes that such an approach cannot build an innovative workforce,
a strong middle class, or sustainable economic growth. Now China is
desperately trying to invest in its human capital to fuel development,
especially given its aging population, recognizing that these
investments are crucial to China's future.
This is the moment for the United States to step up. We can and we
must do better for our workers. It is the right thing to do, it is the
competitive thing to do, and it is the only way to build a strong
future for our Nation and our people.
Specifically, our investments in green technology should center on
good jobs and building a top-quality workforce. My Build Green and Buy
Green bills would do exactly that. These bills and other clean energy
investments with strong labor provisions should be included in the
infrastructure package that Congress is working on now. Doing so is
good for the environment, good for the economy, good for workers and
their families.
Similarly, we need to give American workers the security they need
to be able to do their jobs and care for their families. Universal,
high-quality, affordable child care and early education is an
investment in our current and our future workforce--working parents and
their children--and a far better way to compete with China than endless
expansion of our spending on the U.S. military. We need $700 billion
for child care in the infrastructure bill. It is a critical way to
improve our global economic competitiveness.
Finally, I was glad to see President Biden's executive order last
week which takes critical steps to promote competition, strengthen
antitrust enforcement, and tackle consolidation and anticompetitive
practices. Reigniting competition will make markets work better for
American families and workers, at the same time that it bolsters U.S.
competitiveness.
I am looking forward to discussing these issues today and working
with my colleagues and the administration to make sure that America's
workers can compete in a global economy.
______
Communications
----------
Center for Fiscal Equity
14448 Parkvale Road, Suite 6
Rockville, MD 20853
[email protected]
Statement of Michael G. Bindner
Chairman Warren and Ranking Member Cassidy, thank you for the
opportunity to submit these comments for the record to the Committee on
this topic.
For many years, trade policy has focused mostly on cheap prices over
plentiful jobs. Selling products gathers income while making them
incurs cost. Advocating for or against tariffs provides campaign chairs
a valuable resource to cultivate donors and hold them hostage in the
face of changes.
The status quo will continue until the Dollars and Treasury Notes lose
their status as world money and the premium investment for bond
holders. Unless action is taken to raise taxes on those who we would
otherwise borrow from, they will continue to privately be fine with
increasing debt. The actual obligation to repay the debt is a function
of income tax paid (FICA creates assets, not debt). Please see the
first attachment for more information on who owes and owns the debt and
why it qualifies as class warfare.
Replacing tariffs with border-adjustable value-added taxes is also
donor bait. Unless VAT enactment is broad-based as part of a tax reform
that leaves most families off of the tax rolls, industries will pour
money into campaign coffers to try to get exemptions for their
products. Please see the second attachment for more about how trade
policy and tax reform interact.
VAT enactment's advantage is that incurring such taxes without inviting
retaliation. Raising tariffs invites trade wars, as our recent
experience proves. The biggest improvement in our trade policy is the
recent change in Administrations. Our current President will not pursue
gunboat trade policy and will make infrastructure happen without having
an elusive infrastructure week.
Trade is an area where climate change must be addressed. Global warming
requires a global solution. On warming in general, there is no doubt
that it is man-made. While there was a warm period around the first
millennium, we came to it gradually.
Industrialization may have ended what is called the Little Ice Age, but
that warming is sudden and has dire consequences. We do not know that
it will stop the way it did in the Middle Ages, indeed, it is not
likely to, which makes these hearings vital. Starting with the coasts,
there will be sea level rise. The flooding shown in Vice President
Gore's latest film shows how bad it is getting.
The wealthy don't seem to care about sea level rise, because they have
flood insurance. The most basic step to at least get wealthier
taxpayers on board (including the upper-middle class) is to cap flood
insurance benefits to a level where beach houses properties can no
longer be insured. Even that small step could never be enacted. Too
many donors have beach houses.
Our economic system is the problem. Until we move to something more
cooperative, the well-off will turn their economic power into political
power.
Without a technical solution (like fusion, which Koch et al. are slow-
rolling) all the incentives in the world will not stop plutocrats from
scuttling every attempt at regulating emissions. Historically, unless
people start dying from the air, as they are in China and did in
Pennsylvania from the smog, nothing gets done. The river had to be
actually burning in Cleveland before anything was done.
Expanding freight rail should be a big part of that story. It saves
energy and emits less carbon. While this will impact long-haul
trucking, a growing economy, fueled by families with more money, will
more than make up the difference in short-haul delivery.
Many ports will need to change configurations to expand freight rail
and reduce reliance on long-haul trucking. This is a luxury problem.
Such problems are a perfect object for expanded federal assistance to
our railroad infrastructure. Either loans or grants should fit the
bill. Higher motor vehicle fuel taxes can help transport goods as well
as people.
A carbon value-added tax (rather than a simple carbon tax embedded in
the price) will better allow consumer choice for both consumers and
distributors. Polluters will only accept carbon taxes as an alternative
to direct regulation. If we dropped fuel efficiency standards and
imposed carbon taxes instead, I suspect that car makers and the energy
industry would jump on board.
Some level of regulation, like some level of social welfare, helps save
business owners from themselves. One need only remember the smog that
blanketed Beijing during their Olympics to see what happens from
minimal regulation. China is now going all in on renewable energy. Will
we learn the same lesson?
We have the capacity to do both. Regulations need to be ramped up AND
Carbon Value-Added Taxes need to be enacted to fund infrastructure and
research into technical solutions like Helium-3 fusion and electric
cars which receive computer control and power from a covered roof
deck--preferably one topped with grass.
I use the term carbon value-added tax (CVAT) because energy prices are
tax inelastic. When energy is needed, it is purchased, especially for
transportation. Unless gasoline taxes approach $4 per gallon, people
simply fill up their SUV's and cope with the price changes. There is
plenty of space to increase gas taxes before consumers change their
behavior.
Because energy expenses are inelastic, price information needs
invoicing to help make intelligent choices and to educate the public on
the necessity for these taxes. Nothing wakes people up like seeing
something on an invoice.
The Fair Tax, the Green New Deal, Carbon Taxes, and Goods and Services
(Credit Invoice) Taxes all assume some sort of subsidy to hold poor
families harmless--some kind of rebate or prebate. Many even believe
that levying such taxes could be a good way to increase household
income to for poorer families, which would also produce economic
growth. I agree that subsidizing families will increase growth, however
I submit that the best way to do so is through either existing
subsidies or wages.
Recent changes to the Child Tax Credit are the best trade
infrastructure we can hope for, although a higher minimum wage is even
more desirable. People need more money to buy imported goods and to go
back into the labor force. There are many discouraged workers, some of
which turn to less than legal means to earn an income. It is time to
allow them back into the light. Work does not meet the needs of many
workers. Now is the time to change this.
Increasing the Child Tax Credit, making it permanently refundable and
establishing a carbon VAT should all be elements of comprehensive tax
reform. The nation has already taken steps on the journey to reform in
passing the American Rescue Plan Act. Reform should be bipartisan so
that it has staying power. One possible point of compromise is to end
the requirement for all but the wealthiest to file income tax.
Our tax reform plan is designed to provide adequate income and services
to families (both with increased minimum wages and child tax credits)
through employer-paid taxes, funding government services through a
goods and services tax, separating out taxation of capital gains and
income from income to an asset value added tax and higher tier
subtraction VAT collections on wage income up to the $340,000 level and
above, with additional personal income taxation for incomes over
$425,000. Please see our third attachment for details.
Thank you for the opportunity to address the committee. We are, of
course, available for direct testimony or to answer questions by
members and staff.
Attachment One--Debt as Class Warfare, September 24, 2020
Visibility into how the national debt, held by both the public and the
government at the household level, sheds light on why Social Security,
rather than payments for interest on the public debt, are a concern of
so many sponsored advocacy institutions across the political spectrum.
Direct household attribution exists through direct bond holdings,
income provided by Social Security payments and secondary financial
instruments backed with debt assets. Using the Federal Reserve Consumer
Finance Survey and federal worker and Social Security payment and tax
information, we have calculated who owes and who owns the national debt
by income quintile. Federal Reserve and Bank holdings are attributed
based on household checking and savings account sizes.
Responsibility to repay the debt is attributed based on personal income
tax collection. Payroll taxes create an asset for the payer, so they
are not included in the calculation of who owes the debt. Calculations
based on debt held when our study on the debt was published,
distributed based on the latest data (2017) from the IRS Data Book show
a ratio of $16.5 of debt for every dollar of income tax paid.
This table shows a summary level distribution of income, national debt
and debt assets in three groupings based on share of Adjusted Gross
Income received, rather than by number of households. This answers the
perennial question of who is in the middle class.
------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
Amounts (Billions)
-------------------------------------------------------------------------------------------------------------------------------
Descending Cumulative Millions of Millions of Held by
Percentiles Returns Filed Returns Paying Income Tax Gross Debt Federal Held in Held in Assets Net of
Tax AGI Paid (Factor) Reserve and Held in Bonds Personal Government Debt Liability
16.55 Banks Accounts Debt
------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
All returns total 143.3 99.4 10,937 1,601 26,500 5,238 4,222 3,854 5,384 (7,802)
------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
Top 5% IRS, 8.5% CPS, $208,053 7.2 7.2 3,995 947 15,671 2,926 3,693 2,411 294 (6,347)
------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
5%-25% IRS, 8.5%-37.2% CPS, 28.7 28.3 3,566 432 7,146 1,399 529 1,046 1,238 (2,934)
$83,682
------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
Bottom 75% IRS, 62.8% CPS, $0 107.5 63.9 3,375 223 3,683 913 - 397 3,852 1,479
------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
The bottom 75% of taxpaying units hold few, if any, public debt assets
in the form of Treasury Bonds or Securities or in accounts holding such
assets. Their main national debt assets are held on their behalf by the
Government. They are owed more debt than they owe through taxes.
The next highest 20% (the middle class), hold few bonds, a third of
bond-backed financial assets and a quarter of government held
retirement assets.
The top 5% (roughly 8.5% of households) own the vast majority of non-
government retirement holdings and collect (and roll-over) most net
interest payments. This stratum owns very little of retirement assets
held by the government, hence their interest in controlling these
costs. Their excess liability over assets is mostly attributable to
internationally held debt. Roughly $4 Trillion of this debt is held by
institutions, with the rest held by individual bond holds, including
debt held by members of this stratum in off-shore accounts.
Source: Settling (and Squaring) Accounts: Who Really Owes the National
Debt? Who Owns It?, available from Amazon at https://www.amazon.com/dp/
B08FRQFF8S.
Attachment Two--Trade Policy
Consumption taxes could have a big impact on workers, industry and
consumers. Enacting an I-VAT is far superior to a tariff. The more
government costs are loaded onto an I-VAT the better.
If the employer portion of Old-Age and Survivors Insurance, as well as
all of disability and hospital insurance are decoupled from income and
credited equally and personal retirement accounts are not used, there
is no reason not to load them onto an I-VAT. This tax is zero rated at
export and fully burdens imports.
Seen another way, to not put as much taxation into VAT as possible is
to enact an unconstitutional export tax. Adopting an I-VAT is superior
to it's weak sister, the Destination Based Cash Flow Tax that was
contemplated for inclusion in the TCJA. It would have run afoul of WTO
rules on taxing corporate income. I-VAT, which taxes both labor and
profit, does not.
The second tax applicable to trade is a Subtraction VAT or S-VAT. This
tax is designed to benefit the families of workers through direct
subsidies, such as an enlarged child tax credit, or indirect subsidies
used by employers to provide health insurance or tuition reimbursement,
even including direct medical care and elementary school tuition. As
such, S-VAT cannot be border adjustable. Doing so would take away
needed family benefits. As such, it is really part of compensation.
While we could run all compensation through the public sector.
The S-VAT could have a huge impact on long term trade policy, probably
much more than trade treaties, if one of the deductions from the tax is
purchase of employer voting stock (in equal dollar amounts for each
worker). Over a fairly short period of time, much of American industry,
if not employee-owned outright (and there are other policies to
accelerate this, like ESOP conversion) will give workers enough of a
share to greatly impact wages, management hiring and compensation and
dealing with overseas subsidiaries and the supply chain--as well as
impacting certain legal provisions that limit the fiduciary impact of
management decision to improving short-term profitability (at least
that is the excuse managers give for not privileging job retention).
Employee owners will find it in their own interest to give their
overseas subsidiaries and their supply chain's employees the same deal
that they get as far as employee ownership plus an equivalent standard
of living. The same pay is not necessary, currency markets will adjust
once worker standards of living rise. Attachment Three further
discusses employee ownership.
Over time, ownership will change the economies of the nations we trade
with, as working in employee-owned companies will become the market
preference and force other firms to adopt similar policies (in much the
same way that, even without a tax benefit for purchasing stock,
employee-owned companies that become more democratic or even more
socialistic, will force all other employers to adopt similar measures
to compete for the best workers and professionals).
In the long run, trade will no longer be an issue. Internal company
dynamics will replace the need for trade agreements as capitalists lose
the ability to pit the interest of one nation's workers against the
others. This approach is also the most effective way to deal with the
advance of robotics. If the workers own the robots, wages are swapped
for profits with the profits going where they will enhance consumption
without such devices as a guaranteed income.
Attachment Three--Tax Reform, Center for Fiscal Equity, March 5, 2021
Individual payroll taxes. These are optional taxes for Old-Age and
Survivors Insurance after age 60 for widows or 62 for retirees. We say
optional because the collection of these taxes occurs if an income
sensitive retirement income is deemed necessary for program acceptance.
Higher incomes for most seniors would result if an employer
contribution funded by the Subtraction VAT described below were
credited on an equal dollar basis to all workers. If employee taxes are
retained, the ceiling should be lowered to $85,000 to reduce benefits
paid to wealthier individuals and a $16,000 floor should be established
so that Earned Income Tax Credits are no longer needed. Subsidies for
single workers should be abandoned in favor of radically higher minimum
wages.
Wage Surtaxes. Individual income taxes on salaries, which exclude
business taxes, above an individual standard deduction of $85,000 per
year, will range from 6.5% to 26%. This tax will fund net interest on
the debt (which will no longer be rolled over into new borrowing),
redemption of the Social Security Trust Fund, strategic, sea and non-
continental U.S. military deployments, veterans' health benefits as the
result of battlefield injuries, including mental health and addiction
and eventual debt reduction. Transferring OASDI employer funding from
existing payroll taxes would increase the rate but would allow it to
decline over time. So would peace.
Asset Value-Added Tax (A-VAT). A replacement for capital gains taxes,
dividend taxes, and the estate tax. It will apply to asset sales,
dividend distributions, exercised options, rental income, inherited and
gifted assets and the profits from short sales. Tax payments for option
exercises and inherited assets will be reset, with prior tax payments
for that asset eliminated so that the seller gets no benefit from them.
In this perspective, it is the owner's increase in value that is taxed.
As with any sale of liquid or real assets, sales to a qualified broad-
based Employee Stock Ownership Plan will be tax free. These taxes will
fund the same spending items as income or S-VAT surtaxes.
This tax will end Tax Gap issues owed by high income individuals. A 26%
rate is between the GOP 24% rate (including ACA-SM and Pease surtaxes)
and the Democratic 28% rate. It's time to quit playing football with
tax rates to attract side bets. A single rate also stops gaming forms
of ownership. Lower rates are not as regressive as they seem. Only the
wealthy have capital gains in any significant amount. The de facto rate
for everyone else is zero.
The mutual fund exemption will be repealed. It is the biggest tax
shelter is the use of money market funds to accumulate capital gains
and income without taxation. This practice must end if salary surtaxes
no longer include non-salaried income. 75% of such funds are held by
the top 10% of households as measured by the 2019 Survey of Consumer
Finance by the Federal Reserve. I suspect the other 20% are held by
high income retirees. The working class will not be harmed. Applying
the Pareto Rule to higher income households leaves the top 1450
households with 30% of wealth. The proof of this proposition is the
shareholders list of Berkshire Hathaway.
Subtraction Value-Added Tax (S-VAT). These are employer paid Net
Business Receipts Taxes. S-VAT is a vehicle for tax benefits, including
Health insurance or direct care, including veterans' health care
for non-
battlefield injuries and long-term care.
Employer paid educational costs in lieu of taxes are provided as
either employee-directed contributions to the public or private
unionized school of their choice or direct tuition payments for
employee children or for workers (including ESL and remedial skills).
Wages will be paid to students to meet opportunity costs.
Most importantly, a refundable child tax credit at median income
levels (with inflation adjustments) distributed with pay.
Subsistence level benefits force the poor into servile labor. Wages and
benefits must be high enough to provide justice and human dignity. This
allows the ending of state administered subsidy programs and
discourages abortions, and as such enactment must be scored as a must
pass in voting rankings by pro-life organizations (and feminist
organizations as well). To assure child subsidies are distributed, S-
VAT will not be border adjustable.
The S-VAT is also used for personal accounts in Social Security,
provided that these accounts are insured through an insurance fund for
all such accounts, that accounts go toward employee-ownership rather
than for a subsidy for the investment industry. Both employers and
employees must consent to a shift to these accounts, which will occur
if corporate democracy in existing ESOPs is given a thorough test. So
far it has not. S-VAT funded retirement accounts will be equal-dollar
credited for every worker. They also have the advantage of drawing on
both payroll and profit, making it less regressive.
A multi-tier S-VAT could replace income surtaxes in the same range.
Some will use corporations to avoid these taxes, but that corporation
would then pay all invoice and subtraction VAT payments (which would
distribute tax benefits. Distributions from such corporations will be
considered salary, not dividends.
Invoice Value-Added Tax (I-VAT). Border adjustable taxes will appear on
purchase invoices. The rate varies according to what is being financed.
If Medicare for All does not contain offsets for employers who fund
their own medical personnel or for personal retirement accounts, both
of which would otherwise be funded by an S-VAT, then they would be
funded by the I-VAT to take advantage of border adjustability. I-VAT
also forces everyone, from the working poor to the beneficiaries of
inherited wealth, to pay taxes and share in the cost of government.
Enactment of both the A-VAT and I-VAT ends the need for capital gains
and inheritance taxes (apart from any initial payout). This tax would
take care of the low-income Tax Gap.
I-VAT will fund domestic discretionary spending, equal dollar employer
OASI contributions, and non-nuclear, non-deployed military spending,
possibly on a regional basis. Regional I-VAT would both require a
constitutional amendment to change the requirement that all excises be
national and to discourage unnecessary spending, especially when
allocated for electoral reasons rather than program needs. The latter
could also be funded by the asset VAT (decreasing the rate by from
19.5% to 13%).
As part of enactment, gross wages will be reduced to take into account
the shift to S-VAT and I-VAT, however net income will be increased by
the same percentage as the I-VAT. Adoption of S-VAT and I-VAT will
replace pass-through and proprietary business and corporate income
taxes.
Carbon Value-Added Tax (C-VAT). A Carbon tax with receipt visibility,
which allows comparison shopping based on carbon content, even if it
means a more expensive item with lower carbon is purchased. C-VAT would
also replace fuel taxes. It will fund transportation costs, including
mass transit, and research into alternative fuels (including fusion).
This tax would not be border adjustable.
Summary
This plan can be summarized as a list of specific actions:
1. Increase the standard deduction to workers making salaried income
of $425,001 and over, shifting business filing to a separate tax on
employers and eliminating all credits and deductions--starting at 6.5%,
going up to 26%, in $85,000 brackets.
2. Shift special rate taxes on capital income and gains from the
income tax to an asset VAT. Expand the exclusion for sales to an ESOP
to cooperatives and include sales of common and preferred stock. Mark
option exercise and the first sale after inheritance, gift or donation
to market.
3. End personal filing for incomes under $425,000.
4. Employers distribute the child tax credit with wages as an offset
to their quarterly tax filing (ending annual filings).
5. Employers collect and pay lower tier income taxes, starting at
$85,000 at 6.5%, with an increase to 13% for all salary payments over
$170,000 going up 6.5% for every $85,000--up to $340,000.
6. Shift payment of HI, DI, SM (ACA) payroll taxes employee taxes to
employers, remove caps on employer payroll taxes and credit them to
workers on an equal dollar basis.
7. Employer paid taxes could as easily be called a subtraction VAT,
abolishing corporate income taxes. These should not be zero rated at
the border.
8. Expand current state/federal intergovernmental subtraction VAT to a
full GST with limited exclusions (food would be taxed) and add a
federal portion, which would also be collected by the states. Make
these taxes zero rated at the border. Rate should be 19.5% and replace
employer OASI contributions. Credit workers on an equal dollar basis.
9. Change employee OASI of 6.5% from $18,000 to $85,000 income.
______
Fortive Corporation
6920 Seaway Blvd.
Everett, WA 98203
425-446-5000
https://fortive.com/
We appreciate the opportunity to provide comments on the hearing before
the Senate Finance Committee, ``Defending and Investing in U.S.
Competitiveness,'' particularly as these goals implicate tax and
economic policies that stand to impact the U.S. business community
domestically and abroad. We offer our commentary in the hope that it
will assist the Committee in its ongoing efforts to draft tax
revisions, provide additional context as to how certain proposals will
impact Fortive Corporation (``Fortive,'' ``We''), and highlight the
impacts of the proposals on the Committee's goal of promoting U.S.
competitiveness.
Furthermore, we refer to the proposals issued thus far in the White
House's American Jobs Plan (released March 31, 2021) and the Treasury
Department's General Explanation of the Administration's Fiscal Year
2022 Revenue Proposals, commonly referred to as the Green Book
(released May 28, 2021), collectively throughout the following as the
``Administration's Proposals.''
Fortive is a provider of essential technology for business customers
that helps them accelerate progress in their critical workflows across
diverse set of global industries. Headquartered in Everett, Washington,
Fortive earns approximately $5 billion in annual revenue and proudly
employs over 11,000 highly skilled individuals in all U.S. states and
the District of Columbia.
Fortive businesses are leaders across their respective industries,
driving breakthrough innovation in three segments: Intelligent
Operating Solutions, Advanced Healthcare Solutions, and Precision
Technologies. Fortive's Intelligent Operating Solutions segment
provides software and advanced instrumentation solutions to ensure
safety and compliance, improve energy efficiency, and optimize
performance. Our Advanced Healthcare Solutions segment provides
advanced technologies to help healthcare providers ensure critical
safety standards are met, medical instruments are operating at peak
performance, and complex procedures are followed accurately in a
dynamic environment. The Precision Technologies segment provides
precise and reliable solutions to technical challenges in food and
beverage production, semiconductor and electronics manufacturing, next-
generation communications, and clean energy.
Recognizing how critical robust infrastructure is to the U.S. economy,
we support the current legislative efforts to invest in necessary
improvements. We appreciate such investments will provide opportunities
for U.S. businesses, like Fortive, that provide essential technologies
utilized in infrastructure projects. We recognize that to invest in
infrastructure, revisions to tax and economic policy must be
considered. With that in mind, we firmly believe that the Congress and
its Committees should maintain focus on broad goals that will benefit
the community of highly innovative, U.S.-headquartered companies with
an approach of ``Keep, Create, and Capture''. Such an approach to
potential U.S. tax revisions will ensure the U.S. will continue to
support domestic economic prosperity by enhancing business growth,
creating jobs, stimulating innovation, and expanding the United States
tax base, to the benefit of the country and its citizens.
To that end, Fortive proposes to the Committee the following
principles, which we believe will help achieve the purported goals
identified by this hearing of investing in and defending U.S.
competitiveness:
(i) Ensure the U.S. keeps or retains valuable assets and
activities, including U.S.-based intellectual property (IP), critical
manufacturing, high-value-added services, research and development
(R&D), and supply chain.
(ii) Incentivize the creation and growth of valuable, domestic IP
and associated high-value jobs and services.
(iii) Foster an environment that supports the ability of U.S.
businesses to capture high value assets and activities that are
currently outside of the U.S. in a cost-effective manner.
With that approach in mind, we provide the following comments and
suggestions in connection with certain aspects within the proposed
themes for tax revision released thus far.
I. Foreign-Derived Intangible Income (FDII) and Other R&D Incentives
Our experience as a taxpayer is that the FDII deduction has provided a
compelling incentive for keeping and expanding within the United States
valuable, taxable economic activities that otherwise might not have
remained in the United States. To that end, the FDII regime has proven
to be an effective tool for keeping economic activities in the United
States, including R&D conducted by highly skilled U.S. employees, which
has been one of the long-standing, bipartisan goals of Congress.
The Administration's Proposals have questioned the effectiveness and
incentives created by FDII, focusing on certain fact patterns that have
been perceived as creating undesired results. The Administration's
Proposals would repeal FDII and replace it with a much narrower
incentive for R&D; leaving behind current incentives to other types of
activities and functions that can be equally valuable to R&D (e.g.,
highly skilled services provided to support global operations).
We agree that R&D incentives, such as an enhanced credit, will be
effective in creating new value-driving assets. FDII and R&D incentives
should complement each other to keep and create value, while protecting
the United States tax base.
Fortive's position: Retain FDII and the valuable incentives that keep
investment in highly valuable functions and assets in the United
States. Where necessary, Congress should consider implementing
targeted, limited revisions to the FDII regime addressing fact patterns
perceived as undesired. Additional R&D incentives must be considered by
Congress to further create taxable valuable activities in the United
States.
II. On-Shoring of IP and Other Value-Driving Assets
In addition to maintaining the FDII regime, Fortive also identifies the
need to address both policy that imparts penalizing action for positive
behavior and other effective incentives that could assist in greater
capture of value-driving assets and subsequent taxable income in the
United States.
Specifically, certain elements of existing tax law penalize U.S.-
headquartered multinationals like Fortive for taking proactive steps to
onshore to the United States high-value assets and functions. For
example, a foreign income ``exit'' tax related to tested income-
generating activities (i.e., subject to the GILTI) may not be fully
creditable in the United States, thereby resulting in double-taxation
and creating barriers to the inbounding of high-value assets and
functions to the United States.
Fortive's position: With the purpose of capturing an increased tax
base, Congress should consider creating measures to facilitate
efficient distributions of IP and other high-value assets and functions
into the United States; for example, allowing for such distributions to
be a return of basis and utilizing an available tax attribute. Further,
Congress should consider including such transactions in the general
basket, when they would otherwise be captured in the GILTI basket. This
proposal would address the current unintended penalty a U.S. company
faces when they do not receive full foreign tax credit, thus facing
double-taxation, when on-shoring valuable assets.
III. Global Intangible Low-Taxed Income (GILTI)
The GILTI was enacted in 2017 as part of the TCJA, enhancing the United
States' anti-deferral regime and capturing the great majority of
foreign earnings of certain foreign corporation of U.S.-headquarter
multinationals.
The GILTI is currently determined on an annual basis, without any
opportunity for adjustments based on timing differences and without any
opportunity for the carry-forward of foreign taxes to prevent double-
taxation. Considering the wide base of the GILTI, certain changes in
the Administration's Proposals can exacerbate the competitive
disadvantages faced by domestic companies relative to their foreign
competitors.
Under the Proposal, GILTI would be calculated on a jurisdiction-by-
jurisdiction basis. For Fortive (and other U.S.-headquartered
multinationals), this would result in added complexity and increased
compliance cost. Further, the year-by-year calculation requirement of
the GILTI and disallowance of adjustments for timing differences
(related to earnings (losses) and foreign taxes) are expected to result
in double taxation and an increased tax cost to U.S.-headquartered
corporations in doing businesses in most foreign countries, reducing
competitiveness of U.S.-headquartered corporations.
Fortive's Position: The country-by-country determination of the GILTI
must be reconsidered and properly weighted against its costs to
taxpayers and expected adverse impact on the competitiveness of U.S.-
headquartered corporations relative to their non-U.S. peer companies.
In addition, Congress should consider allowing for adjustments related
to timing differences within the GILTI regime.
IV. SHIELD
The Administration's Proposals would repeal the TCJA's Base Erosion
Anti-Abuse Tax (BEAT) and replace it with a regime named ``stopping
harmful inversions and ending low-tax developments'' (SHIELD). The
SHIELD would apply to financial reporting groups with greater than $500
million in global annual revenues. The SHIELD would disallow deductions
by reference to all payments made or deemed made to ``low-taxed
members'' of the taxpayer's financial reporting group. Notably, the
SHIELD does not carve out cost of goods sold (COGS), effectively
treating it as a deduction rather than a reduction to gross revenue. If
captured by the SHIELD, the COGS disallowance can result in double
taxation by effectively recasting U.S.-headquartered companies as
inverted companies.
Fortive's position: Congress should minimize the potential for double
taxation when considering the SHIELD. COGS should be treated as a
reduction to gross revenue and not as a deduction that may be subject
to disallowance. In addition, deductible payments that are included in
income under the subpart F or GILTI regimes should be carved out from
the SHIELD regime.
V. Interest Deduction Limitations
Existing tax law, found under Sec. 163(j), includes provisions that
limit the deductibility of interest expense over certain thresholds.
Companies, like Fortive, face strategic cash-management decisions when
making significant investments, such as building new manufacturing
sites, investing in large-scale R&D, or making business acquisitions.
Given the anticipated increase in the baseline U.S. federal income tax
rate, taxpayers will face a direct impact to their cash position that
will complicate and potentially deter such investment decisions.
Fortive's position: Congress should consider offering relief on
interest deduction limitations to provide taxpayers with treasury
management flexibility to make U.S. investments in light of the cash
impact of an incremental federal tax rate.
VI. Conclusion
In sum, our aforementioned suggestions are rooted on the principles to
keep, create and capture IP and other high-value assets and functions
in the United States. These suggestions are respectfully intended to
assist the Committee and Congress in achieving their objective to
strengthen the global competitiveness of U.S.-headquartered companies
like Fortive who continue to invest in innovation, high-skilled jobs,
and services within the United States. We believe this principled
approach will facilitate economic growth, whilst increasing the U.S.
tax base and collections for Treasury. We sincerely thank the Senate
Finance Committee for taking the time to consider our principled
approach to tax policy of keep, create, and capture.
If you have any questions regarding our comments or need more
information, please contact Jenn Bowers, VP Tax at
[email protected] or 425-446-5000.
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