House Ways & Means Committee Hearing on U.S.-China Trade
House Ways & Means Committee
“U.S.-China Trade”
Wednesday, February 27, 2019
Key Topics & Takeaways
- Enforceability Mechanisms: Lighthizer said he seeks an agreement that is enforceable and addresses forced technology transfer, minimum intellectual property requirements, items involving services such as banking and electronic payments, and non-tariff barriers such as industrial subsidies and currency manipulation. Asked whether he would accept an agreement that did not include structural changes or enforceability mechanisms, Lighthizer replied “absolutely not.”
- Forced Technology Transfer: Lighthizer stated the “most important single thing” negotiations can achieve is an end to non-economic technology transfer.
- Data Localization: Lighthizer said the administration has spent an “enormous amount of time on data localization” but conceded the outcome of these negotiations “will not be what we will consider a model agreement.”
Witness
Opening Statements
Rep. Richard Neal (D-Mass.), Chairman, House Ways & Means Committee
In his opening statement, Neal said that the purpose of the hearing is to make clear what the American people need to see in a trade agreement as the administration concludes its work and Memoranda of Understanding (MOUs) with China. Neal stressed that China’s economy remains fundamentally state owned, with Chinese companies primarily called upon to serve government interests. He said American companies face formidable challenges when competing in China, such as widespread intellectual property theft and its little regard for the human rights of workers.
Neal expressed concern that, in approaching these negotiations, the current administration will use the “same, ineffective playbook” from the past. Specifically, he recalled that the administration announced that the meeting between President Trump and President Xi in 2017 resulted in breakthrough advancements, whereas upon closer investigation, the actual results fell significantly short of what was advertised. Neal credited Lighthizer as an astute trade negotiator and encouraged the Ambassador to hold out for a “good deal, a structural deal.”
Rep. Kevin Brady (R-Texas), Ranking Member, House Ways & Means Committee
In his opening statement, Brady said that Trump deserves credit for being the first president to confront China’s predatory practices “head on,” and urged his colleagues to hold China accountable for issues such as intellectual property (IP) theft. He explained that a “new era of fair trade with China” is in “everyone’s interest” and urged for a solution that is enforceable, measurable, and subject to corrective actions should it fall short of China’s stated commitments. Brady then alluded to the results of the Section 301 report, which detailed that equity caps and joint ventures prevent American companies from controlling their own operations and intellectual property when investing in Hong Kong and China, giving Chinese businesses an unfair advantage. He advocated for a bilateral investment treaty (BIT) that could address these issues, and said that the three-party initiative with the European Union (EU) and Japan holds “great promise.” Brady expressed trepidation about the effects of tariffs and called for “workable exclusion process” that would include the manufacturing industry.
Testimony
Ambassador Robert E. Lighthizer, United States Trade Representative
In his testimony, Lighthizer touted the administration’s economic and domestic policy successes before acknowledging that China’s unfair trade practices, forced technology transfer, and failure to protect intellectual property are major threats to the U.S. economy. He called for “enforced rules” to ensure that market outcomes, not state capitalism and technology theft, determine economic winners and losers. Lighthizer also credited the Section 301 investigation for generating bipartisan support for action against China and for putting the country in a position to confront China “head-on” after “decades of governmental inaction.” Lighthizer said that if both parties can reach an agreement on the issue of enforceability, it would help “turn a corner” in the bilateral economic relationship.
Question & Answer
Enforceability Mechanisms
Lighthizer stressed that the president is seeking an enforceable agreement that corrects forced technology transfer, intellectual property (IP) protection, large industrial policy subsidies, among other unfair practices in the agriculture and services industry. He said the Chinese have agreed to forego unfair trade practices in the past, but in very few cases have they kept their obligations. Therefore, he maintained, the hope is to have “specific language on specific issues” that are enforceable through a “very clear process.”
Brady asked whether the agreement with China will have measurable commitments with enforceability mechanisms and the opportunity for corrective action if needed. He stressed the need for a specific and measurable agreement in which the U.S. has the ability to take proportional action unilaterally. Rep. Linda Sanchez (D-Calif.) asked for specificity on the envisioned enforcement mechanisms of an agreement. Lighthizer said there will be a multi-level process involving monthly meetings at an office director level, quarterly vice-ministerial meetings, and semi-annual meetings at the senior ministerial level, which will involve Lighthizer. He explained that individual companies will be allowed to bring complaints to the United States Trade Representative (USTR), with the hope they can be resolved at the first or second level of decision-making, but that if an impasse is reached, the U.S. can act unilaterally.
Responding to questions from Brady and Rep. John Larson (D-Conn.) on how the administration intends to define success, Lighthizer described an outcome that is enforceable and which addresses forced technology transfer, minimum intellectual property requirements, items involving services such as banking and electronic payments, and non-tariff barriers such as industrial subsidies and currency manipulation. When asked by Rep. Stephanie Murphy (D-Fla.) whether he would accept an agreement that did not include structural changes or enforceability mechanisms, Lighthizer replied “absolutely not.”
Rep. Teri Sewell (D-Ala.) asked Lighthizer if he views Section 301 tariffs as an enforcement tool of last resort or a tool to be regularly deployed. Lighthizer said Section 301 tariffs are effective, adding he would like to work with Members on “more effective tools,” but defended the administration’s unilateral approach to addressing China’s unfair trade practices.
Reps. Tom Reed (R-N.Y.) and Darin LaHood (R-Ill.) asked which specific enforcement mechanisms Lighthizer envisions in an agreement with China. Lighthizer did not provide specifics, but confirmed that a deal “has to” include specific enforcement provisions.
Scope of Negotiations
Addressing questions from Reps. Lloyd Doggett (D-Texas), John Lewis (D-Ga.), Bill Pascrell (D-N.J.), and Larson, Lighthizer explained that the negotiations with China are an attempt to reach a settlement under Section 301 authority rather than through customary trade law. He said issues such as labor and environmental standards are covered only to the extent they involve unfair trade practices. Unlike free trade agreement negotiations that cover a host of topics, he added, the scope of these talks is much narrower and constrained by the limits of Section 301.
Intellectual Property (IP) Theft
Rep. Devin Nunes (R-Calif.) discussed the national security implications of China’s trade practices, citing an increase in the Chinese acquisition of banks, including those in the United States. He asked Lighthizer to explain the ways in which the Chinese use regulatory practices to encourage abuse and theft of IP. Lighthizer affirmed the need to protect IP, which he said can involve issues around investments, cyber theft, and employees. He announced he is negotiating a provision that would re-state, specify, and clarify cyber theft and the use of investment practices to obtain foreign technology. Lighthizer said that China has little IP protection and acknowledged that the U.S. did not attain a satisfactory outcome on this aspect of negotiations, but suggested that increasing IP protection “seems like something they want to do.” He also called on neutral parties to clearly define key things like intellectual property and trade secrets.
Forced Technology Transfer
Lighthizer stated the “most important single thing” negotiations can achieve is an end to non-economic technology transfer. He said that doing so will have a “huge impact in terms of high-end jobs” in America. Rep. Suzan DelBene (D-Wash.) told Lighthizer that the Section 301 tariffs impact cloud service providers because key inputs to their data centers are subject to the tariffs. She asked if the administration is pursuing the issues of forced technology transfer and licensing requirements, to which Lighthizer answered “yes.”
In response to Rep. Dwight Evans’ (D-Pa.) question about U.S. companies that rely on Chinese investment and capital, Lighthizer assured him that President Trump would indeed like to see Chinese inbound investment, but not at the expense of losing critical technologies. He emphasized the need to balance the two factors properly.
Data Localization
DelBene alluded to the 76 countries that, on the sidelines of the World Economic Forum in December, agreed to start negotiations on a set of open and predictable e-commerce regulations. Pointing out the stark differences in China’s digital regime from other developed economies, she warned against a risk of unintentionally “creating new digital borders” if the issue went addressed. Lighthizer agreed and stressed the importance of establishing regulations at the time a new industry emerges, saying “it’s much harder to change practices than it is to have people adopt best practices at the beginning.” He also called the United States Mexico Canada Agreement (USMCA) the “gold standard” for e-commerce rules, but acknowledged it went “too far” for some.
DelBene asked if he had pushed the Chinese to address “data localization, forced disclosure of source code, restrictions on cloud service providers and banning customs duties on electronic transmissions.” Lighthizer said the administration has spent an “enormous amount of time on data localization…data transfer…source requirements…down to the most minute details” and that they are in discussions with senior officials about “where it’s appropriate” to require source codes. He cited headway in these negotiations but conceded that this “will not be what we will consider a model agreement.”
Currency Manipulation
Rep. Earl Blumenauer (D-Ore.) argued that an agreement “about just soybeans and airplanes is not sustainable” and expressed his hope for structural changes, which he said must effectively include currency manipulation. He said it had “been claimed there’s already been a deal reached on currency” and asked whether the administration had in fact secured enforceable currency commitments from China. He also asked “what the U.S. [will] do if China is manipulating” and whether the enforcement mechanism would be “more across the board tariffs.” Lighthizer did not directly address the questions, but explained that currency manipulation is not just a problem with China, but in other parts of Asia as well. He added “We have to focus on it. We’ve spent a lot of time on currency, and it will be enforceable.”
Pascrell argued in favor of greater market access for U.S. services firms with the ability to invest and operate independently from Chinese state-owned enterprises (SOEs). He also referred to reports that a “memo of agreement on currency” has been reached and asked whether the terms of the agreement live up to the standards Lighthizer previously laid out. Lighthizer spoke generally to the “imaginative” tactics of the president in these negotiations but said that when it comes to issues like renminbi (RMB) revaluation, “those kinds of decisions are made by Treasury, not me.”
Rep. Dan Kildee (D-Mich.) cited President Trump’s campaign promise to label China as a currency manipulator and asked whether the purported deal on currency meets the standards Lighthizer previously laid out in 2010. Lighthizer restated that this is “a decision Treasury makes, not me.”
Exclusion Requests
When Rep. Jackie Walorski (R-Ind.) asked when USTR will release more tariff exclusion requests, Lighthizer said that nearly 1,000 requests had been granted to date, and that another tranche would be released soon. Walorski cited congressional support for an exclusion process to List 3 products and said List 3 is “looming out there at 4 times the size.” She asked whether USTR could “simplify things to take a load off the agency.” Lighthizer defended what he called a “fair process” while also admitting it is a “a big one.” Rep. George Holding (R-N.C.) said that one option might be to establish criteria that excludes products regulated by other U.S. agencies that already constrain ability of importers to obtain.
WTO Reform
Rep. David Schweikert (R-Ariz.) and Brady urged Lighthizer to address the need for World Trade Organization (WTO) reform, and more specifically, China’s transgressions in the body. Lighthizer emphasized the role of bilateral enforcement, saying “I would say, number one, having a – realistically, having a real enforcement process” before acknowledging “there is a role for the international bodies…And I think WTO reform is an important part of it.”
Multilateral Trade Agreements
Rep. Ron Kind (D-Wis.) asked whether the U.S. is engaged in cooperation and coordination with other nations on the China issue. He argued that “rejecting” the Trans-Pacific Partnership (TPP) “will go down as one of greatest strategic mistakes of 21st century.” He cited “strength in numbers,” and asserted that China will respond more to the broader international community rather than just the United States. Lighthizer said that “getting out” of TPP was the “right decision,” noting that the United States maintains bilateral agreements with six of the 11 TPP signatories. He said the U.S. is cooperating on “two tracks” through trilateral cooperation with the EU and Japan, as well as unilateral action, which is what led to the Section 301 investigation.
Services Industry
Rep. Don Beyer (D-Va.) said the administration’s focus is primarily on manufacturing and agriculture, despite the large number of Americans working in the services sector, which he said faces a number of trade barriers. He asked whether Lighthizer has addressed these and whether they will be remedied. Without mentioning specifics, Lighthizer affirmed the importance of the services industry, and said he has “spent a lot of time” on the issue, especially “banking, cloud computing, electronic payments,” and others.
For more information about this hearing, click here.