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House Ways & Means Hearing on U.S.-China Trade

House Ways & Means Committee

“U.S.-China Trade and Competition”

Wednesday, February 26, 2020

Key Topics & Takeaways

  • Phase One Agreement: Republicans on the committee defended the Phase One agreement and the Trump Administration’s trade efforts while Democrats criticized both. Stratford noted that there is a fundamental disconnect between the U.S. and China in how we view the role and use of trade. He continued that if China is not willing to fundamentally alter their economic and industrial systems, the U.S. must continue to think creatively on how we approach this issue as Chinese companies no longer regard the U.S. as a reliable supplier.
  • World Trade Organization: Stratford stated that the WTO is not equipped to deal with the ability of China to identify certain industrial sectors where they want to lead and then align various arms of the state behind this goal. Stratford praised the Phase One agreement for including new and innovative enforcement mechanisms but noted that as this is a new approach, we will have to see how it works in practice.

Witnesses

  • Tim Stratford, Managing Partner, Covington and Burling LLP Beijing Office
  • Thea Lee, President, Economic Policy Institute (EPI) and Commissioner, U.S.-China Economic and Security Review Commission
  • L. Rafael Reif, President, Massachusetts Institute of Technology
  • Owen Herrnstadt, Chief of Staff, International Association of Machinists and Aerospace Workers (IAM)
  • Tim Dufault, Dufault Farms
  • Richard Guebert Jr., President, Illinois Farm Bureau

Opening Statements 

Chairman Richard Neal (D-Mass.)

In his opening statement, Neal provided historical background on China’s rapid economic growth as well as their failure to align with international norms. While he acknowledged his initial optimism regarding the Trump Administration’s confrontational approach to managing the U.S.-China relationship, he stated that the Phase One agreement fails to secure the more significant, structural commitments that need to be addressed to level the playing field for U.S. workers and companies. Neal highlighted the increasing threat of the coronavirus and the possibility that it may impact China’s purchasing commitments. He then criticized the Trump administration for continuing to provide bailouts for farms instead of securing critical structural changes. He concluded by emphasizing the need for consensus-based trade agreements and negotiations, highlighting the successful bipartisan passage of the United States-Mexico-Canada Agreement (USMCA).

Ranking Member Kevin Brady (R-Texas)

In his opening statement, Brady praised the Trump administration for securing the Phase One agreement. He specifically highlighted that this agreement contains real and enforceable commitments from China to end unfair trade practices and level the playing field. He then outlined key priorities for a Phase Two agreement that include subsidies, cyber issues, state-owned enterprises and cross-border data flows. He concluded that while all of China’s unfair trade practices must be addressed before all tariffs can be lifted, Congress and the Trump administration must minimize any and all unintended consequences to American farmers, manufacturers and consumers.

Testimony 

Tim Stratford, Managing Partner, Covington and Burling LLP Beijing Office

In his testimony, Stratford outlined the three different types of issues that U.S. trade negotiators must address when dealing with China: 1) issues on which China has previously made commitments but has not fully delivered on its promises; 2) issues on which no commitments have been made but where existing measures and practices stand in the way of fair and reciprocal trade; and 3) systemic issues that are rooted in China’s economic model. He noted that all three of these issues create uneven competitive conditions for producers and service providers from other countries and that the approaches and tools that the United States has relied on over the past two decades to address these issues have proved themselves to be increasingly deficient. He stated that the Phase One agreement secured commitments from China in five critical areas: 1) intellectual property; 2) technology transfer; 3) agriculture; 4) financial services; 5) and currency. He continued that while this agreement represents real progress, the Phase One deal fails to address issues such as digital trade, technology licensing, and cybersecurity regulation as well as the systemic issues born out of the differences in the economic models of the U.S. and China. He concluded by emphasizing the need for close coordination and communication between all levels of government and the private sector in order to make progress on trade as “there is no modern precedent for two countries to be at the same time each other’s main economic partner and major military and geopolitical rival.”

Thea Lee, President, Economic Policy Institute (EPI) and Commissioner, U.S.-China Economic and Security Review Commission

In her testimony, Lee first commended the Trump Administration for their departure from the status quo in embracing a more confrontational approach with respect to China. She then criticized the Phase One agreement for squandering the leverage gained via the use of tariffs as well as its failure to address the key structural issues at the core of the U.S.-China economic relationship such as currency manipulation, industrial subsidies, state-generated overcapacity, state-owned enterprises and workers’ rights. She stated that the U.S. must develop and implement a long-term economic strategy in order to counter the centralized state planning of China. She continued that U.S. trade enforcement measures should prioritize good jobs, workers’ rights, democracy, environmental compliance and consumer safety over outsourcing and short-term profits. Lee concluded that the U.S. should use its purchasing power to pursue the following objectives: 1) strengthen the ability of U.S. producers and workers to compete over the long term by leveling the playing field with respect to currency, subsidies, unfair pricing, workers’ rights, environmental policies, and consumer safety; 2) engage in medium- and long-term strategic planning; and 3) coordinate with allies to develop and enforce fair international rules

Rafael Reif, President, Massachusetts Institute of Technology

In his testimony, Reif stated that the U.S. must increase investment for research in key technology areas and enhance the capacity to get the most utility out of that investment in order to counter the Made in China 2025 program. He specifically recommended that any future U.S. strategy focus on three elements: 1) a sustained research program targeted at technologies that are critical to future U.S. prosperity and security; 2) a concerted effort to ensure that the U.S. has the talent and human capital to succeed in key areas of research; and 3) policies that accelerate the U.S. capacity to get new ideas into the marketplace. He continued that the Committee has a role to play in crafting tax policy that can be used to spur innovation and encourage incentives for longer-term investment in key areas. He concluded that while the United States’ edge in science and technology has served as the foundation for prosperity in this nation, this superiority will increasingly be whittled down unless the U.S. invests in human capital and key technology areas.

Owen Herrnstadt, Chief of Staff, International Association of Machinists and Aerospace Workers (IAM)

In his testimony, Herrnstadt highlighted that the forced transfer of technology and production to China has resulted in a decline of the U.S. industrial base in four ways: 1) jobs that may be associated with the transfer of technology and production are lost; 2) the skills that accompany the transfers are lost; 3) future jobs are lost as China utilizes the transfer from the U.S. to create and strengthen their own companies that directly compete with U.S. entities; and 4) the technology and production that would have led to more U.S. jobs through the development of innovative products is lost. He continued that the U.S. cannot rely solely on tariffs to increase our competitiveness with China. Herrnstadt stressed the need for an all-government, comprehensive effort that satisfies international trade rules. He concluded that this strategy should ensure the health of the U.S. manufacturing sector and remove the incentives for companies to outsource work to other counties.

Tim Dufault, Dufault Farms

In his testimony, Dufault summarized his experience as a fourth-generation farmer and the owner/operator of his family farm. He outlined how the current state of trade relations between the U.S. and China has negatively impacted his business operations. He emphasized that farmers want to make their money in the markets and do not want to rely on government payments to stay afloat. He concluded that the U.S. needs to end the trade war to keep American farmers globally competitive.

Richard Guebert Jr., President, Illinois Farm Bureau

In his testimony, Guebert emphasized that farmers want to earn their living from the marketplace and that without access to overseas markets and the 96 percent of consumers who do not live in the U.S., farmers cannot remain competitive. He noted that while there is still work to be done, he supports the Phase One agreement as a critical first step in securing fair trade and a level playing field.

Question & Answer

Phase One Agreement

Generally, Republicans on the committee defended the Phase One agreement and the Trump Administration’s trade efforts while Democrats criticized both.

Specifically, Democrats on the committee emphasized the need to address fundamental trade issues via a multilateral approach as opposed the U.S. going at it alone. In this context, Stratford added that many countries around the world believe that only the U.S. can stand up to China on trade. Various panelists noted that India and the countries of West Africa are viable partners for investment and securing fair trade with China.

In response to a question from Neal, Lee reiterated that the leverage gained via the use of tariffs should be used to address the outstanding systemic issues of currency misalignment, workers’ rights and industrial subsidies. Stratford noted that there is a fundamental disconnect between the U.S. and China in how we view the role and use of trade. He continued that if China is not willing to fundamentally alter their economic and industrial systems, the U.S. must continue to think creatively on how we approach this issue as Chinese companies no longer regard the U.S. as a reliable supplier.

Throughout the question and answer period, Herrnstadt responded to several member questions by emphasizing that the Phase One agreement would have been much more effective if it dealt with subsidies, human rights, currency misalignment, as well as the transfer of technology and production.

Rep. Earl Blumenauer (D-Ore.) criticized the Phase One agreement for not “putting America first” and failing to address any items related to workers’ and human rights, specifically referencing the systemic targeting and detainment of the Uyghur population by the Chinese government. He continued that the Phase One agreement is deficient as it was not secured in a multilateral dialogue and it is difficult to enforce.

In response to questions from Reps. Kenny Marchant (R-Texas) and Brady, Guebert noted that he is both appreciative and supportive of the enforcement protections for agricultural products outlined in the Phase One agreement. He continued that Phase Two must address biotech and secure the reduction of tariffs on other agricultural commodities as well as steel and aluminum.

World Trade Organization (WTO)

In response to a questions from Reps. Tom Reed (R-N.Y.) and Jackie Walorski (R-Ind.) on the role of the WTO in the U.S.-China trade relationship, Stratford stated that the WTO is not equipped to deal with the ability of China to identify certain industrial sectors where they want to lead and then align various arms of the state behind this goal. Stratford then praised the Phase One agreement for including new and innovative enforcement mechanisms but noted that as this is a new approach, we will have to see how it works in practice. He concluded that he believes that these enforcement provisions represent a significant improvement over the WTO’s dispute settlement framework.

Rep. David Schweikert (R-Ariz.) outlined his concern regarding the fragility of concentrated supply chains. Stratford agreed and stated that the diversification of supply chains is critical, especially for the pharmaceutical sector, but added that in his view, the WTO is not necessarily the correct forum to address this problem.

5G & Future Investment

Neal referenced Huawei in the context of the ongoing debate regarding 5G and asked what actions the U.S. could have pursued to preempt this security risk. Reif responded that we need to incentivize increased cooperation between government, industry, and research universities. He continued that we now need to turn our focus to future technologies and the growth of human capital.

Rep. Brian Higgins (D-N.Y.) stated that technology is changing the global economic order. He noted that China is a bad actor but that they have strategically invested in their own growth and nation building, specifically as it relates to technology. He concluded that the U.S. must embrace a more proactive strategy as opposed to the “defensive” trade stance that we currently promote.

Office of the United States Trade Representative (USTR)

Rep. Stephanie Murphy (D-Fla.) stated that Congress, and this Committee, should hear testimony from the USTR and that she would consider withholding appropriations if there is a refusal to appear and answer questions.

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