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Senate Finance Committee U.S.-China Trade Hearing

Senate Finance Committee                                                                                                                                                                                           

U.S.-China Relations: Improving U.S. Competitiveness Through Trade

Thursday, April 22, 2021

Witnesses

  • Michael Wessel, Commissioner, U.S.-China Economic Security Review Commission
  • Aynne Kokas, Associate Professor of Media Studies And Senior Faculty Fellow At Miller Center For Public Affairs, University of Virginia
  • Clete Willems, Partner, Akin Gump Straus Hauer & Felp LLP
  • David Baer, Chief Operating Officer And General Counsel, Element Electronics

Opening Statements
Chairman Ron Wyden (D-Ore.)
In his opening statement, Wyden said the goal of the hearing is to boost American competitiveness and level the playing field for our workers and businesses. He said this will be a bipartisan effort focusing on combating forced labor, protecting U.S. jobs, shoring up supply chains, and stepping up trade enforcement and oversight. He said the committee’s proposal will be combined with bills from other committees to form a larger package on bolstering American competitiveness. Wyden emphasized that Chinese companies compete unfairly and America’s workers have been exposed to China’s trade cheating for too long. He said America is falling further and further behind in a cold trade war. He concluded in saying the previous administration relied more on “internet muscles and tough talk” than serious economic strength, and it is now time to take a different track to address China’s cheating.

Ranking Member Mike Crapo (R-Idaho)
In his opening statement, Crapo said China is a potent challenge on many levels and that there is no need for partisan policy, just simply an American policy. In terms of competition, Crapo said we should not close off our markets or engage in protectionism. He said the way forward in a free market is to excel and strengthen our competitiveness as well as effectively leverage the use of tariffs. He said we need to cut tariffs on imports that support American manufacturing. He continued that this can be achieved via programs like the Miscellaneous Tariff Bill, through thoughtful application of the Section 301 tariffs on China, as well as reauthorizing the Generalized System of Preferences Program. In terms of innovation, Crapo emphasized the need to pursue stronger intellectual property protections. He also added that we need to negotiate new trade agreements, including at the World Trade Organization (WTO). He concluded that there is a lot of work ahead but is appreciative of the bipartisan efforts in strengthening American’s competitiveness to benefit farmers, businesses, and innovators.

Testimony
Michael Wessel, Commissioner, U.S.-China Economic Security Review Commission
In his testimony, Wessel said the U.S.-China Economic Security Review Commission is a unique bipartisan body and reflects the broad political support in this country for addressing the challenges posed by the Chinese Communist Party’s (CCP) approach. Wessel said we should stop hoping for China to change and rather accept the reality of their approach and adopt the policies that are in our best interest. He said a multilateral approach is important, but it is not the only option because our producers and workers cannot wait for allies to appreciate the impact of China’s policies and develop the will to act. He specifically noted that outsourcing has created unacceptable vulnerabilities. He said China’s government has shown its willingness to politicize and weaponize its supplies of critical products, and added that there is a critical need to treat supply chains as integral components of our national and economic security as well as vital to our critical infrastructure. He said we need to alter the trend in the pace of investment in China, as opposed to in the U.S. by American headquartered companies. He concluded in saying we need to send a strong signal to the CCP, our companies, our people, and the world that we will stand up for our interests and that we will compete, invest, and win.

Aynne Kokas, Associate Professor of Media Studies, University of Virginia
In her testimony, Kokas said she hopes to focus on five major findings. First, the U.S. corporate profit in key media sectors depends on access to the Chinese market and adherence to Chinese regulations, which shapes the U.S. digital landscape. Second, Chinese laws imperil U.S. technology investment in China. Third, Chinese firms with close Chinese government ties are rapidly acquiring a wide range of U.S.-based digital media and tech sector entities. Fourth, the Chinese financial interest in U.S. media firms is leading to censorship and disinformation. Lastly, the U.S. market’s economic dependence on China is changing how companies talk about censorship. She said with the growth of the Chinese markets, many interests have diverged and certain acquisitions have limited the U.S. technology industry. She added that U.S. firms now face financial pressure to self-censor. Kokas concluded with three policy recommendations: 1) improve U.S. technology sector competitiveness; 2) enhance U.S. and global data oversight by joining agreements that already contain data governance requirements; and 3) fund Chinese area studies.

Clete Willems, Partner, Akin Gump Straus Hauer & Felp LLP
In his testimony, Willems said U.S.-China competition will define the trajectory of the global economy for generations to come and Congress will continue to play a critical role. He offered six suggestions on how to best achieve this objective to strengthen our competitiveness. First, he said the U.S. must run faster in domestic innovation incentives around artificial intelligence (AI), 5G and 6G, among others. To that end, he said Congress should pass the Endless Frontiers Act and that the U.S. needs a proactive trade agenda, arguing Congress should renew the Trans-Pacific Partnership Agreement (TPP). Second, he would like better coordination with allies as the WTO is not constraining China’s practices and our allies should be expected to stand up to China as well. Third, Willems said we should engage with China for additional market access, consider how to move into Phase Two, and reinstate a tariff exclusion process. Fourth, he said the U.S. must not become China to beat China. Fifth, he said the government should closely align with the private sector and back industries that are facing censorship. Finally, Willem said we must be clear eyed about the China challenge and should not over legislate just to appear tough. He concluded in saying he hopes the policies outlined today will provide a better alternative to the problem at large.

David Baer, Chief Operating Officer And General Counsel, Element Electronics
In his testimony, Baer said his company Element was previously on the brink of closure, but the exclusion from the 301 tariffs leveled the playing field and allowed them to excel. Baer said their success depends on two issues completely out of their control – restoration of the 301 exclusion, and the Miscellaneous Tariff Bill (MTB). He said that although Element continues to produce to meet increasing demand from customers, it is impossible to remain competitive in the face of an overnight 12 percent tariff disadvantage to their competition, most of whom are using Chinese materials assembled in Mexico. He said without a restoration of the MTB and the 301 exclusions, Element will be forced to move production out of the U.S. which will devastate their workers and community. He said passing this bipartisan legislation will allow Element and many other companies to get back to employing hundreds of hard-working Americans in good paying jobs.

 

Question & Answer
Next Steps
Wyden touched on Kokas’ testimony, saying she spelled out how China uses its economic might to export repression around the world and asked her what first two steps the Committee should take to address this problem. Kokas said two key steps would be changing how the U.S. exchanges fund Chinese entities when they try to raise capital in the U.S. Her second suggestion was to increase reporting requirements for how U.S. firms share their data with China and Chinese partners, as well as how firms are investing in the Chinese market.

Sen. Ben Cardin (D-Md.) asked if we have adequate trade rules and remedies to deal with the competitive nature around China or if we need stronger tools in terms of governance and anti-corruption issues. Wessel said we need new authorities and that a lot more can and should be done by Congress.

Intellectual Property (IP) and Censorship
Wyden asked Wessel for a sense of the size and scope of what is being lost in terms of intellectual property and American jobs as a result of China’s unfair trade practices. Wessel said our workers have “been kicked in the teeth” because of the China trade relationship. He cited Economic Policy Institute’s research outlining that 3.7 million jobs have been lost as a result of China relations, the majority of these jobs being in the manufacturing sector. He added that in 2019, the U.S. ran a $134 billion advanced technology products trade deficit, saying we should be excelling in these products, not falling behind. His final point was in the last five years, there have been $2.4 trillion of U.S. intellectual property stolen.

Sen. John Cornyn (R-Texas) asked about foreign governments like China and Russia using censorship to block market access, thereby costing companies billions of dollars, and how Congress can address censorship problems in the trade space. Willems said censorship is a tricky issue because it is difficult for companies to push back on their own, but noted his support for Cornyn’s argument that the government needs to be able to step in and shield certain companies. Kokas suggested enhancing financial reporting of the types of investments that we see by Chinese firms within the U.S. She said it is a challenge for privately held corporations because it is difficult to understand the level of Chinese investment and data transfer that is going on. Kokas also suggested data privacy regulations at the national level.

Tariffs
Sen. Maria Cantwell (D-Wash.) asked what tools, besides the 301 exemption, the U.S. needs in order to affect policy moving forward, adding that her concern is going too far with regulation. Willems said when looking at supply chains, the U.S. should think about creating positive incentives that would ensure reliable supply chains. He mentioned providing different kinds of funding, R&D, and tax credits to make sure supply chains are partially sourced in the U.S. Willems said the U.S. should look to create standards all our allies can agree to and try to not place export restraints on each other.

Sen. Pat Toomey (R-Pa.) expressed his frustration with the Section 232 tariffs on steel and aluminum imports, asking witnesses if they believe the tariffs have undermined the U.S. ability to work with allies in confronting China’s objectionable practices. Willems said he has not been a strong supporter of the 232 action taken by the Trump administration. He said it was hurting allies key allies in Europe and specifically mentioned Japan.

Phase One and Phase Two Agreements
Sen. Chuck Grassley (R-Iowa) asked if China is living up to commitments made in the Phase One agreement, and what steps the Biden administration should take before moving to Phase Two. Willems said the structural commitments are the most important, as there were many underlying commitments and regulations China changed, leading to the issues seen in the agriculture sector. He said the additional financial services access has been good and believes China has more or less done what they said they would do. Willems said he would focus less on purchases moving forward, look more at the structural commitments, and work with allies.

Sen. Bob Menendez (D-N.J.) said Congress has no idea if China is meeting the terms set forth in the Phase One agreement and asked if there is there a way to know whether they are complying. Wessel said the United States Trade Representative has the ability to track this on a very granular basis. He added that moving forward to Phase Two, we should allow for more competitiveness where the U.S. chooses what China can buy, not the other way around.

Legislation Proposals
Menendez asked Wessel for his thoughts on the Strategic Competition Act and what more could be done to improve it. Wessel said he was unable to track all the amendments but believes the underlying issues indicate a very strong base that deserves support.

Sen. Sherrod Brown (D-Ohio) asked Wessel if he agrees that the Eliminating Global Market Distortions to Protect American Jobs Act would help fight back against unfair trade practices and protect American workers. Wessel said it will help not only the steel sector workers, but all workers across the country. He said a lot of sectors are in overcapacity, so the tools in this legislation are vital.

WTO Reform
Sen. John Thune (R-S.D.) asked if it is economically justifiable for China to continue to self-designate at the WTO and what steps the U.S. should take to accelerate WTO reforms. Willems said it does not make sense for China to be classified as a developing country because it allows them to get away with lower levels of commitments. He suggested pushing for more objective criteria that would force countries to graduate if they met that criteria, like being a member of the OECD, for example. Willems said there needs to be greater encouragement of other countries to self-regulate and show leadership.

Sen. James Lankford (R-Okla.) expressed frustration around China claiming to be an equivalent partner to the U.S. when at the WTO, they are classified as a developing country. Lankford asked what WTO reforms need to be put into place. Willems said the developing country status issue is at the top of the list and China needs to take on every commitment that the U.S. does.

Trans-Pacific Partnership (TPP)
Thune asked what the top trade priority should be for the U.S. to compete and lead in the Asia-Pacific region. Willems said the U.S. needs to renegotiate the TPP, but acknowledged that some Senators and others may have had problems with the agreement. He said if it is not viable, the U.S. should at least look at other building blocks for trade in key sectors with TPP countries.

Sen. Thomas Carper (D-Del.) asked witnesses to discuss the benefits of taking a multilateral approach to China and if they think the U.S. can somehow resume the TPP. Wessel said multilateral approaches are key, but at the same time we cannot afford to wait for our partners to step up. Kokas agreed that multilateral agreements do not move us forward as quickly as they should. She said the U.S. should look at joining multi-stakeholder technology standard organizations, like the Internet Engineering Task Force, to more hastily address the various policy challenges. Kokas and Willems both said it is important and possible to rejoin the TPP.

Anti-Money Laundering (AML)
Sen. Bill Cassidy (R-La.) asked Wessel about the money laundering of illicit dollars with licit trade, and if he knows the magnitude at which this may be occurring in trade with China. Wessel said he does not know the magnitude, but mentioned the China Commission’s hearing last week on China’s aggressive expansion with digital security which he believes has repercussions regarding money laundering, and said he will follow up with the Senator on anti-money laundering (AML) issues. Cassidy said AML requires transparency and the cooperation of both countries and asked for suggestions on how we can engage the Chinese government to cooperate with us on money laundering. Willems said finding a way to work together and partner with various international institutions would make sense.

Supply Chain Competitiveness
Sen. Bob Casey (D-Pa.) said there is a huge cost in relying on China for personal protective equipment and said they have little visibility on what vulnerabilities might exist with respect to production. He mentioned his proposal to increase visibility in supply chains, asking Wessel if he agrees with establishing outbound investment review. Wessel agreed and said Casey’s proposals allow for the flexibility to do so and gain necessary information.

Sen. Steve Daines (R-Mont.) asked Willems how we should target investments and expand upon the competitive advantages that a free market economy provides. Willems said we do not want to “just throw money out the door” and hope we beat China. He said we need to interface with the private sector directly, work with universities, and create tax credits for innovation. Willems also said the U.S. should not close off supply chains In terms of semi-conductors and minerals, Willems said if we take export control measures against China, we need to coordinate with others and pointed to Australia as a reliable potential partner.

Technology Development and the Digital Sector
Crapo mentioned that China is creating new restrictive tools to target digital companies and expressed concern that other countries might follow. He then asked what Congress can do to prevent that from happening. Willems said digital companies are our “national champions” and Congress needs to stand behind them. He said to win and compete against China, the U.S. needs to engage directly with them and push back. Looking at third markets, Willems said it is important to create international rule sets that we can all collectively enforce against China.

Sen. Catherine Cortez Masto (D-Nev.) asked what role technology development plays in the broader global competition landscape and if it would be helpful to develop a strategic posture across federal agencies to be competitive on various technologies like 5G and AI. Willems said it is a good idea for us to coordinate across agencies and have the private sector giving feedback to constantly understand what is needed. Kokas said a strategic posture is essential and one of the major critiques from our allies is the difficulty in collaborating with the U.S. because we have no clear position on our technology policy. She emphasized the importance of having aligned technology policy across different agencies for cybersecurity purposes. She concluded in saying it is necessary to create a national policy as it would help deal with Chinese acquisitions of global firms that gather data within the United States, noting that the current Committee on Foreign Investment in the U.S. (CFIUS) process does not address that.

Sen. Mark Warner (D-Va.) echoed Cortez Masto’s question and said this is an area where America “went to sleep,” believing that we would set the standards rules and protocols for technology but rather China is flooding the zone and outpacing our efforts. Warner said standards are important because it creeps into things like transparency and respect for human rights.

Warner asked how Congress can hold U.S. companies accountable to values here, when they are quietly willing to work and advance the goals of the CCP in their surveillance state. Kokas said one area where the U.S. can make a difference is passing a comprehensive data privacy framework, adding that it would strengthen consumer privacy within the U.S.

Trade-Related Aspects of Intellectual Property Rights Agreement (TRIPS)
Crapo mentioned the TRIPS agreement, saying some have argued the property waiver would amount to a forced transfer of vaccine technology to China, and would be delivering a competitive advantage to our adversaries at the taxpayer’s expense. Crapo asked Willems if he agrees with this viewpoint. Willems said he agrees and is concerned about the Biden administration’s consideration of the waiver as it would help distribute more vaccines around the world. He said while more distribution is great to combat the pandemic, IP is not the way to do it. He added that we do not need to give our technology out to China and others or waive broad portions of the IP agreement, as we can facilitate exports from the United States.

For more information on this hearing, please click here.