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House Committee on the CCP: The Chinese Communist Party’s Threat to America

House Select Committee on the CCP

The Chinese Communist Party’s Threat to America

Tuesday, February 28, 2023

Topline

  • The Select Committee held its first hearing discussing the threats posed by China and previewing the committee’s focus for the year.
  • Multiple members asked questions about Chinese investments in the U.S. and American investment in Chinese companies, and the witnesses agreed that both practices posed economic and national security concerns.
  • Scott Paul recommended screening the outbound investments of U.S. companies in China and tightening oversight of Chinese investments in the U.S.

Witnesses

  • The Honorable Matthew Pottinger, Former US Deputy National Security Advisor
  • The Honorable HR McMaster, Former US National Security Advisor
  • Tong Yi, Chinese Human Rights Advocate
  • Scott Paul, President of the Alliance for American Manufacturing

Opening Statements

Chairman Mike Gallagher (R-Wis.)

In his opening statement, Gallagher stated that the Chinese Communist Party (CCP) has found friends on Wall Street, on K Street, in Fortune 500 C-suites, and in the public health community who are ready and willing to oppose the Committee’s efforts. He said that the strategy has worked well in the past, but the committee’s task is to ensure it does not work again. Gallagher noted the “excellent group of thoughtful legislators” assembled and argued that the U.S. cannot allow the CCP’s tech-power dystopia to prevail. Finally, he emphasized that the Committee, and the country in general, must always distinguish between the CCP and the Chinese people themselves, who have been the party’s primary victim.

Ranking Member Raja Krishnamoorthi (D-Ill.)

Krishnamoorthi noted that both Democrats and Republicans have underestimated the CCP and assumed that trade and investment would lead to democracy and greater security in the Indo-Pacific region, including in the People’s Republic of China (PRC). He said that the opposite has happened, and the CCP has strengthened its authoritarian control at home, funded a massive military buildup, and pursued economic and trade policies that undermine the U.S. economy. Finally, the Ranking Member highlighted four principles for the committee’s consideration:

  • Invest in high technology sectors of the future and boost US manufacturing (CHIPS and Science Act and Bipartisan Infrastructure Law a strong start in his opinion);
  • Deter aggression by the CCP;
  • Strengthen global partnerships and coalitions; and
  • Never engage in anti-Chinese or anti-Asian stereotyping or prejudices.

Testimony

The Honorable Matthew Pottinger, Former US Deputy National Security Advisor

In his testimony, Pottinger entered a video into the record disputing myths about the CCP and its goals. He said that the success the CCP once enjoyed in presenting itself as constructive, cooperative, responsible, and normal was one of the great magic tricks of the modern era. Pottinger said the magic is fading, however, as “we simply know too much.”

The Honorable HR McMaster, Former US National Security Advisor

In his testimony, McMaster said that the U.S. clung to the assumption that China would play by the rules and liberalize its economy for too long. He added that the U.S. and other nations across the free world underwrote the erosion of their competitive advantages through the transfer of capital and technology to a strategic competitor determined to gain preponderant economic and military power. Despite these mistakes, McMaster argued that the Select Committee can help the U.S. catch up in the competition with the CCP by holding hearings on the nature of their aggression and what is at stake. Additionally, he said the committee can help determine the combination of policies and legislation necessary to counter CCP aggression and rebuild America’s and the free world’s competitive advantages.

Ms. Tong Yi, Chinese Human Rights Advocate

In her testimony, Tong said that the U.S. needs to face the fact that it helped the CCP grow into what it has become today. She added that since the 1990s, American companies have enriched themselves by exploiting cheap labor in China, which has also enriched the CCP. She said the regime has acquired tools for its digital dictatorship from the U.S. through forced transfers, by theft, and sometimes by purchasing them but argued that it did not have to be this way. Finally, Tong said that under Xi’s rule, there is increasing oppression in China, increasing aggression outside of China, and an enormous U.S. trade deficit.

Mr. Scott Paul, President of the Alliance for American Manufacturing

In his testimony, Paul argued that the economic policies of the CCP represent a clear and present danger to the American worker, the innovation base, and national security. He said that the CCP’s goal is to dominate key industries, set global standards, seek opportunity from crisis, and weaken competitors, and he added that they have attracted American investment to do this. Specifically, Paul explained that U.S. companies’ investment in China grew from $11 billion in 2000 to $118 billion in 2021. Cheating is a core tenant of the CCP ambition, he said, including stealing IP, cyber-hacking, and piracy. He added that the result of these policies and decisions have been factory closures in America and $600 billion in IP losses alone.

Paul said that the CCP has created an impossibly cheap “China price” that masks the true cost of production and made China the world’s factory floor. He added that while Big Tech, Hollywood, sports leagues, and retail legends all say the right things in America, they are silent in China and bend the knee to the CCP. To fix these issues he recommended that the U.S. build on the highly effective semiconductor technology export restrictions, pass the bipartisan Leveling the Playing Field Act 2.0, screen the outbound investments of U.S. companies in China, tighten oversight of Chinese investments in the U.S., expand the law that bans Chinese firms from federal transit contracts to all other public investment streams, build on the CHIPS Act and infrastructure law, and suspend or revoke normalized trade relations with China. 

Question & Answer

Chinese Surveillance and TikTok

Gallagher asked Pottinger to elaborate on his concerns about TikTok, both in terms of espionage and control of the algorithm as well as potential precedent a mitigation agreement could set. Pottinger said that data privacy issues are a problem for national security and consumer privacy. He explained that the parent company of TikTok has used the app to surveil U.S. journalists to identify sources and retaliate, and he added that there is nothing in Chinese law that suggests the CCP would back off of its legislative privilege to access all of the data produced by social media platforms and other Chinese apps. He argued that TikTok and other platforms give the CCP the ability to manipulate social discourse in the U.S.

Rep. Kathy Castor (D-Fla.) asked out the CCP increasing its exports of surveillance technology. Pottinger said that the U.S. needs to counter this through defense and offense. On defense, he recommended measures to prevent these capabilities from arriving at U.S. shores. On offense, he said the U.S. needs to work on connecting the Chinese people to each other and the rest of the world.

The Trade Deficit and Loss of American Manufacturing

Krishnamoorthi asked about the events in 2000 that made U.S. manufacturing fall off a cliff and made the trade deficit rise dramatically upward. Paul explained that U.S. policy liberalized trade with China through the grant of permanent normal trade relations (PNTR), which reduced tariffs to virtually zero and opened investment into China. He said that this displaced American workers. Finally, he noted that while it is common to think of China as mostly producing goods such as t-shirts, one third of the U.S. trade deficit is in advanced technology products such as nuclear technology, bio-health, and sophisticated metals.

Chinese Investments in the U.S.

Rep. Dan Newhouse (R-Va.) asked about Chinese investments in U.S. agricultural land and assets. He added that some of these purchases are in close proximity to national security assets, and he asked if CFIUS has the authority to block these purchases. McMaster did not answer the CFIUS question directly but said that the U.S. dependency on Chinese investment gives them power and shedding light on this issue is an important step.

Rep. Dusty Johnson (R-S.D.) also asked if efforts by the CCP to buy farmland and agricultural processing facilities are attempts to gain coercive power. Pottinger reiterated the need to be careful about permitting purchases of farmland by companies beholden to the CCP, because they can be in proximity to sensitive installations. He also argued that CFIUS should approach these purchases with greater scrutiny, as mitigation measures are typically hollow.

Rep. Mikie Sherrill (D-N.J.) asked if export and investment restrictions will impact the CCP’s illegal activity. Paul said that the long-term impact is not entirely clear, but the short-term impact has been profound. He noted that there has been a screeching halt to a lot of U.S. personnel and company involvement in Chinese semiconductor manufacturing, and the addition of Japan and the Netherlands was critically important. As the U.S. enlists more allies and expands the scope of technology restrictions, Paul argued there will be a decent chance of success.

Rep. Shontel Brown (D-Ohio) asked if broader state restrictions could address some of the concerns that have been raised. Paul recommended enhancing the enforcement and scope of inbound investment reviews through CFIUS.  He also said the U.S. can restrict access to direct taxpayer investments and can carefully calibrate research and where it goes.

The Role of the Private Sector

Rep. Darin LaHood (R-Ill.) asked how Congress should respond to corporate America and global businesses that want to continue engagement with China. Pottinger stressed that it is important to keep channels open with Beijing so that Xi does not make a miscalculation but added that the U.S. should not be fooled into thinking that Beijing has any interest in collaborating to mitigate serious problems. McMaster said that public officials and corporate boards need to take a Hippocratic Oath to do no harm in three areas. First, do not invest in companies that will give the CCP a differential advantage over the U.S. militarily. Second, do not compromise the long-term viability of business and workers’ jobs in exchange for short term profits. Third, do not help the CCP perfect their tech-enabled Orwellian police state or commit genocide. He added that genocide should be an ESG issue in board rooms.

Rep. Ro Khanna (D-Calif.) asked if private industry will need to have the government as a partner and financer if the U.S. is going to re-industrialize. Paul agreed. He said this issue has been a market failure, and public financing to leverage private investment will lead to more success. He added that the CHIPS Act is an example of this.

Rep. Carlos Gimenenz (R-Fla.) asked if U.S. allies have woken up to the threats China poses. McMaster said that it is trending in the right direction, but the progress is insufficient. He noted that the person driving decoupling is Xi doing so on his own terms to create a dual circulation economy. McMaster stressed the need for a private sector response to the growing geo-strategic danger and the importance of international companies mitigating this risk.

The Debt Limit

Rep. Andy Kim (D-N.J.) asked if defaulting on the national debt would feed into a narrative that the U.S. system of government is not working well. Pottinger said that most people understand that democracies are messy, and if the process follows rules and traditions, it will not always look pretty.

Global Partnerships

Rep. Jake Auchincloss (D-Mass.) asked how Congress could structure a Trade Promotion Authority for a revised Trans-Pacific Partnership. McMaster said there need to be incentives for companies to do business in the US. He said the Indo-Pacific Economic Framework is a good start, but highlighted portions of TPP, such as data standards, that could be adopted more broadly across the region. He also added that there is not much appetite for multilateral trade agreements, so the U.S. should increase capacity for bilateral trade agreements. Auchincloss closed by stating that an updated TPA would send a very strong signal about containment of Chinese aggression.

U.S. Investment in Chinese Companies

Rep. Ashley Hinson (R-Iowa) said that her constituents’ money should not be funneled to the CCP. Pottinger said that there is already a basis for halting American investment from going into Chinese military-affiliated companies, but it is not being enforced by the Treasury Department. He added that the CCP has created incentives for Wall Street index funds to include more and more Chinese companies. Specifically, Pottinger noted that the MSCI resisted adding more Chinese companies, so the CCP threatened to withhold data and licenses to operate. After that, he said, the number of Chinese companies on these indexes increased. He argued that this is fiduciary irresponsibility.

Rep. Andy Barr (R-Ky.) asked to what extent American investors, through emerging growth index funds, public equity exchanges, and even private equity and credit investments, either knowingly or unknowingly invest in Chinese companies that threaten US national security. Pottinger replied that it is a huge amount of money, likely in the hundreds of billions of dollars. He reiterated that there has been poor stewardship of the money on the part of index providers and big money managers, who have not paid close enough attention to where money is truly flowing.

Barr also asked about the disparate lists within the Department of Commerce, the Department of Defense, and Treasury, and whether an appropriate policy response would be a surgical, direct OFAC sanctions regime that coordinates with the entity list at Commerce. Pottinger said there is no substitute for America’s capital markets. He added that it would be important to at least study why the Commerce Department has a thousand Chinese companies on its export control list, but at Treasury there are only 68 companies that Americans are prohibited from in investing in. He argued that the number should be in the tens of thousands, not 68.

Rep. Blaine Luetkemeyer (R-Mo.) noted that in 2020 there were about a thousand Chinese companies listed on the stock exchange, but as of January 9 of this year, it was down to 252. He said that one reason for the decrease is that Congress required audits every two years, and he added that he wants to reduce that to every year. He said the Committee will be looking at the issue.

Luetkemeyer asked how to deter investment in China. Pottinger said that companies will follow the guidelines if they are painted brightly. McMaster noted that the Hoover Institution is working on case studies that will illuminate how American private equity (PE) and venture capital investments have enabled the People’s Liberation Army (PLA) and how investments have enabled China to double down on state support and drive Americans companies out of business.

For more information on this hearing, please click here.

For an archive of past SIFMA hearing coverage, please click here