Washington, D.C. - Today, U.S. Senator Marco Rubio (R-FL), Chairman of the Senate Committee on Small Business and Entrepreneurship, held a hearing titled “Made in China 2025 and the Future of American Industry.” Earlier this month, he released a report by the same name, which is the first product of the Project for Strong Labor Markets and National Development from Chairman Rubio’s committee staff. A copy of the report can be found here.
Key excerpts of the hearing are highlighted below.
Rubio: “What areas has China already overtaken the U.S. on global production value chain?”
Brad Setser: “In general China still lags, I think the most important area where China is approaching if not exceeding U.S. capabilities, is when it comes to telecommunications networking infrastructure. I think there is a consensus that Huawei’s infrastructure, which to be clear, still relies on the imported U.S. components, but their networking equipment is at the top end of the market. I think in other sectors China still lags. But China has clearly grown tremendous resources at trying to catch up in semiconductor manufacturing. There is an over $50 billion national fund, and then there are multiple provincial funds that have over $100 billion collectively, that's an enormous war chest to try and catch up. I don’t think China is close to matching our capacities in aerospace, but aircraft is our leading export industry and aircraft is our leading industrial export to China. So even though China hasn’t yet caught up, their ambitions and efforts to do so should be a concern.”
Rubio: “There’s a sense, and this has been the way it has been for a long time, that the private sector should be stepping forward and doing these things on its own and that when it comes to China’s attempts to dominate high end industries that market engagement should be outside the scope of government’s role. I would ask you, Mr. Atkinson, what are the drawbacks to such an approach in light of what we’ve discussed here today, and particularly for small businesses who are caught in a nation against nation economic competition, this is not a small U.S. business competing with a small Chinese business to see who has a better idea. This is a small or midsize business who is trying to innovate and compete against a potentially small firm backed up by a nation state with the second largest economy, soon to be largest gross economy in the world. That’s not a fair fight, so what are the drawbacks of not having some level of government engagement, not industrial policy where we are doing the same things they are doing, but the sort of things we’ve discussed today—allowing them access to the U.S. government, being their customer, that sort of thing?”
Robert Atkinson: “So Senator I think you hit the nail right on the head. There’s two big challenges that a small and even large firm would have. First is that you really have very little access, you can’t go to a Chinese court because they are just not going to decide in your favor. We’ve seen that in case after case where the Chinese court always decides in favor of the Chinese company and against the U.S. company. The second big issue is that you are dealing with cases where, for a small company, who do they talk to, where is the place in the government where they go? And we really have to have better systems in the U.S. so that any small company can get the right access in government and then get action taken on their behalf and that right now is very haphazard. You’re lucky if you can find the right person, and you’re lucky if that person then will take your case sort of wend its way through the government. We don’t have a whole of government approach to help small companies be able to deal with this.”
Rubio: “Mr. Rush, let’s talk about that Made in Space which got seed funding from the Small Business Innovation Research Program (SBIR) with NASA and Department of Defense, correct? I guess my question to you is could you have done what you did without it and what role did it generally play in taking you to where you are today?”
Andrew Rush: “I would say from a broad perspective Made in Space would not be the company it is today without SBIR and without the support from NASA and other government agencies in various ways. We took to heart that seed funding mantra, however, we want to be commercial and government. In the aerospace industry, there are a lot of folks who are exclusively government. And we see the value of being both. But in some many ways, the infrastructure that exists in aerospace and in space specifically, is enabling of this innovation. Without the International space station, we wouldn’t have been able to for single millions of dollars demonstrate and productize the products we have. It would have cost magnitudes more money to do it. SBIR is a really important part, but it is not the end of it, right? Having those on ramps into commercial utilization, encouraging small businesses to look elsewhere besides just the government. As well as saying, you know, as well as encouraging and introducing small businesses to other parts of the government that might benefit from the technology’s underdevelopment in SBIR, I think would be prudent.”
Rubio: “And to me, the whole notion about providing opportunities for new entrance into the field is critical, obviously because of the nation-state competition, but also because of a concerning trend line we’ve seen in terms of business investment in innovation where you’ve seen a significant percentage of profits increasingly returned to shareholders, which is not inherently evil, but it’s happening in many cases at the expense of being reinvested into research and development to pursue new lines of work.
“Part of it is creating demand so that there is attractiveness for that investment to happen, but the other is when you have a small innovative idea somewhere, giving them the opportunity to be successful, especially if it's a larger market place presence not doing that, these programs seem pretty critical. Especially if we can prioritize how we use these programs to key industries that are critical to our future, and I would say this Made in China 2025 and the ten industries there are a good starting point for the kinds of places that we need to be supporting, at least with these opportunities. There has been talk about, Mr. Setser I wanted to ask, what on the WTO, it’s an imperfect tool, not that it’s a useless tool, but there’s some imperfections in using it when it comes to China. What does their unique state-driven economic structure, what challenges does that pose to the ability to use the WTO to address all of its behaviors? Again, not implying that it’s useless, but there are some impediments to using because of how they’re structured, is that correct and if you could talk about that a little bit?”
Setser: “Yes, I’d be happy to do so. One of the aspects of China 2025 that is sort of right out there and in the open and in your face are these market share targets. They look like quotas on imports, but they’re not structured as quotas on imports. They’re informal documents out of China’s state planning process that somehow gain force in the Chinese system without being legally binding because China owns such a large share of, I mean China’s government owns such a large share of the economy.
“Take aircraft, it’s sort of the obvious one, the three major airlines are all state owned. Hainan Airlines is not state owned, but it’s parent company relies on financial backing. China doesn’t need to have a formal quota on how many aircrafts it imports, it just needs to send instructions through various channels to the companies at the commanding heights of the Chinese economy and you can effectively be shut out of the Chinese market without necessarily having a clear cut WTO violation. With subsidies, we’ve discussed some of the difficulties. You have to wait a long time in order to show that there has been a material damage to you before you can formally bring the case, if you’re still in business.
“But there is also a problem identifying a subsidy, it needs to be a specific subsidy and in the Chinese system, it is hard to identify the specific subsidy when everything, in a sense, is subsidized. So if there is a state supported investment fund, we would all think that’s a subsidy, but unless you can prove that the investments were made on non-commercial terms, you don’t necessarily have a case. So it’s that difficulty in applying the WTO’s rules to the Chinese system, which have created this plethora of problems for us, as we try to sell into the Chinese market.”
Atkinson: “I will just say quickly, a story a couple of years ago, when I was talking to the chief counsel of a fortune 100 company, he was explaining to me that the Chinese were systematically stealing their technology. He went and had a face to face with the minister who was relevant to that area and he was told by the minister-- the chief counsel said ‘if you don’t stop this, we are going to bring a WTO case.’ And the minister said to him, looking him right in the face, ‘if you bring a WTO case, you’ll never sell another product of yours in China again.’ And needless to say, they didn’t bring a WTO case.”
Rubio: “With a lot of talk a lot about Huawei, and we’re hearing now the concerns about telecommunication infrastructure around the world, what we’re seeing now is despite these concerns, numerous places where their telecom presence is pushing back on locking them out and one of the things we’ve learned is that the existing equipment and the network relies upon the annual or biannual software updates and upgrades that belong to Huawei. And so if in fact if they take this public position, they are going to go through an incredibly disruptive moment in which they are going to have to rip out all that stuff, they are going to have to go through a period of time where they don’t have the latest update as they transition to a non-Chinese company is incredibly disruptive for a Western company who has to answer to shareholders and general public.
“So the leverage, we should not underestimate the leverage they hold, not just about bringing actions, but about the fact that despite something being damaging to the national interest or even the long term future of a company, the leverage in the short term is enough, either denying the market access or denying them access to software upgrades—that’s critical. It’s almost in some ways like arms sales. When you buy a nation’s weapons systems, you’re tied a the hip for a significant period of time because of spare parts and training, and the upgrades to it.
“So my last question, I think that while we are focused on the small business community in this committee—that’s our jurisdiction—and all of the trade talk really focuses on the big picture of trade and the big numbers, small businesses are the ones that would pay the biggest price, especially down the chain on it of trade, and they don’t get nearly as much attention or coverage in the financial stations on television and the like. Most of them are not publicly traded so they are also not being speculated upon constantly in the Wall Street Journal, CNBC, or the like. My biggest concern in these trade negotiations that are largely focused on the overall trade imbalance--having a deal that basically deals solely with concessions that were China promises to purchase more American agricultural--more soybeans--which would be great. I want our soybean farmers to be successful, but it doesn’t deal with the overwhelming majority of other aspects of our trade relationship, especially for the long term. So to what extent would trade balance focus concessions such as that address our economic imbalance, especially for small businesses within the scope of what we’ve discussed here today, if that’s all the deal did is find more balance in the big picture number but didn’t really deal with the intricacies of individual industries, particularly those like yours Mr. Rush and others who are outside the scope of such a concession?”
Bonnie Glaser: “I think it’s important to look at the full scope of problems that businesses have in China. And they really begin, not with forced technology transfer to be honest with you, if you look at the Amcham survey that just came out of U.S. companies that are in China, and if you look at surveys of U.S. companies that export to China you’ll actually find it’s pretty low on the list. They’re really concerned about market access, and there’s a lot of things there that we can do instantly that we can put pressure on China that need to be part of this deal. So in this recent Amcham survey 53% percent of the companies that were surveyed said we need to increase the transparency, predictability, and fairness of the regulatory environment. So this is all really about non-tariff barriers for them. And then IP protection is number two.
“So we have to look at various ways that I think we can deal with these set of things. From what I heard about USTR Lighthizer’s testimony this morning, it sounds like we’re going back to where we were in 2015, 2016, where we were negotiating in strategic and economic dialogue a series of things that China could do to protect intellectual property, open up market access. If they actually did all of these things, it would be a step in the right direction. If all we do is get promises on paper and then the Chinese buy L&G and agricultural goods then we will have squandered what I think is an enormous amount of leverage that actually President Trump has tried to build.”
Rubio: “I would just say that the concessions that you’re talking about go at the heart of their industrial strategy. I mean in essence we’re asking them to walk away from key components of what they intend to do.”
Atkinson: “I would actually argue that forced tech transfer is more important than that. There’s a reason companies don’t always put it on a survey. For example there’s a recent academic study that showed there were 6,000 new international joint ventures in China. Another study that showed that Chinese companies have gotten significant intellectual property from joint ventures. Not just the company that was the joint venture tech transfer partner but their other companies in that same industry. So a lot of good evidence that forced tech transfer has made a big improvement. And Senator to your point under international economics there’s a notion of a division of labor. We’re a rich country, we have a lot of intellectual property assets, we should be specializing in high value added technology based products. Other countries specialize in more commodity based products. The idea that we would somehow balance our trade by selling only oil and gas and some commodity products, I think violates what the international trade theory says. We should be the ones that are leading the world in high technology, high value added products. So I think that any trade deal that would settle for just a trade deficit reduction would be a mistake.
Setser: “Let me add a very concrete issue, which could be at the center of negotiations. China maintains procurement lists for medical equipment. Procurement lists that favor products made in China. If U.S. firms were free to transfer technology, they could potentially qualify for those procurement lists by producing in China. That is better than not selling at all to China. But it would be even better if products made in the U.S. could be freely purchased by Chinese hospitals. That would support more small business here at home. Top in medical devices have historically been an important U.S. export strength. And I personally think addressing those barriers to U.S. exports need to be at the center of our trade agenda. The other point to make is that China’s own economy is a point of weakness. There is a risk, at least in my judgment, that if China doesn’t put its own economy on a sounder basis, China could be tempted to go back to an export based model. While our current trading relationship with China is far from perfect, we would be much worse off if China reversed the rebalancing that has taken place after the global financial crisis, went back to looking to exports to support its growth and then many small businesses would face even larger challenges.”Rubio: “At the basic core of this is it’s nearly impossible to make something somewhere else and then sell it inside China and it is very difficult to invest and produce in China for the Chinese market unless you joint venture with someone in China where hence you run the risk of having your intellectual property stolen. So the first point is its very difficult to impossible in most key industries to make it somewhere else and send it in. So if you’re not even in there they can’t steal your IP, they could obviously from here but you can’t force the transfer. But if you do get in and they allow you in then you run the risk that within a number of years once they figure out how to do it, they put you out of business. And that’s at the crux and that’s what we’re going to ask them to change. And I think that’s a heavy lift, but most concerning of, all for small businesses.”